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Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Ltd. Results Conference Call for the Third Quarter of 2023. All participants are present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded and will be available for replay on the company's website at www.radcom.com later today. On the call are Eyal Harari, Radcom's CEO; and Hadara Rahav, Radcom's CFO. Please note that management has prepared a presentation for your reference that will be used during the call. If you have not downloaded it yet, you may do so through the link in the Investors section of RADCOM's website at www.radcom.com/investor-relations. Before we begin, I would like to review the safe harbor provision. Forward-looking statements in the conference call involve several risks and uncertainties, including, but not limited to, the company's statements about its full year 2023 revenue guidance, the potential to scale up to a midsized software company, levels of gross margin further increases to revenues and profitability in 2024 operating and stock-based compensation expenses, headcount, expectations regarding continued rollouts in the 5G market and investments in networks, sales opportunities, pipeline, momentum, potential and expected growth, the effects of the war on Israel, its expectations with respect to investments in research and development and sales and marketing, as well as grants from the Israel Innovation Authority, deployment of its 5G solutions in multiple cloud environments and the potential benefits to its clients, the potential of the company's product with respect to artificial intelligence and generative AI and customer satisfaction. The company does not undertake to update forward-looking statements. The full safe harbor provisions, including the risks that could cause actual results to differ from these forward-looking statements are outlined in the presentation and the company's SEC filings. In this conference call, management will refer to certain non-GAAP financial measures, which are provided to enhance the user's overall understanding of the company's financial performance. By excluding certain noncash stock-based compensation expenses, acquisition-related expenses and amortization of intangible assets related to acquisitions. Non-GAAP results provide information helpful in assessing RADCOM's core operating performance and evaluating and comparing the results of its operations consistently from period to period. The presentation of this additional information is not meant to be considered a substitute for the corresponding financial measures prepared in accordance with generally accepted accounting principles. Investors are encouraged to review the reconciliations of GAAP to non-GAAP financial measures included in the quarter's earnings release available on our website. Now, I would like to turn over the call to Eyal. Please go ahead.
Thanks, operator. Good morning, everyone, and thank you for joining us for third quarter 2023 earnings call. I wanted to start by commenting on the terrorist attack on October 7 and the situation in Israel. The RADCOM family is appealed by the attack and wishes to extend our depeest sympathies and condolences to those affected. This was the worst attack in Israel 75 years history and has been felt on a global scale, with victims from at least 30 nations affected by this strategy and over 240 people kidnapped, our heart is with them and we hope they will come home safely. We also pray for the victims, their families and their loved ones. We emphatize with every individual impacted and strongly condemn the act of violence that have occured. We are confident in Israel strengths that will not let terror win. I want to thank all of our customers, partners and stakeholders for their unwavering support and best wishes, and we are grateful for their continued confidence in RADCOM. Our operations in Israel continue without interruption, and we are attending to our employees and their families' needs and well-being. Our business continuity plan has been activated. And while we are closely monitoring the situation, our Israel office is fully operational and running on all cylinders. Looking at the broader picture, most of our workforce is outside of Israel, so we don't expect these events to impact our overall businesses. As a software company, our operations are in the cloud, which means we are agile and can adapt to the evolving situation. Our global support center spend multiple regions are all running as planned. We continue fulfilling our customer commitments provided 24/7 support and focusing on growing the business. We remain still fast in our commitment to driving the company forward. Our team continues to work diligently to fulfill our obligation for 2023 and pave the way for 2024. I want to express my appreciation for their hard work and devotion. Turning to Q3 results. The positive business momentum for the first 6 months continued in the third quarter of 2023. We achieved record quarterly revenues of $3.2 million, up double-digit percentage and delivered 17th consecutive quarter of year-over-year revenue growth. Net income in the third quarter reached a 6-year high, and we continue to improve our gross margin. Strong team execution led to good financial performance, driving revenue growth and improving our bottom line. We believe that during the fourth quarter of this year, revenue growth and profitability improvements will continue and extend into 2024 as we provide operators with AI-powered analytics to ensure excellent customer experiences. This reinforce our guidance as we expect to deliver a fourth consecutive growth here in 2023 and scale up a midsized software company for the first time in the company's history. Turning to our customers. We have made good progress in our existing and new accounts, thanks to our focused team performance. With the additional accounts activities increased by further customer expansions during the year, our existing teams scale to meet their higher demand and continue to provide value and deliver cutting-edge software releases to our customer base. Turning to the 5G market. We see operators continue to roll out 5G and invest in their networks. The market direction is clear, while the pace may vary. We are engaged in multiple opportunities at different stages of maturity. These engagements include mix of new and current customers as operator continued their 5G transformation. Therefore, we increased our investment in sales and marketing to meet the expected demand for our carrier-grade solutions. A couple of weeks ago, Open Signal published in its latest mobile experience report on a highly competitive Japanese market. It showed that just 3.5 years after launching Rakuten mobile efforts to deliver high-quality, easily accessible mobile services have been validated by expert research. The report stated that the country's newest operator performs highly in several key measures. DISH announced another world first, setting a significant simultaneous [indiscernible] downlink speed in the United States. DISH can offer faster 5G speed and lower latency delivering better customer experience for the heavy application like video conferencing and uploads. Also, AT&T recently delivered strong results in the United States with solid 5G growth as they continue to invest in best-in-class 5G connectivity and enhance the largest wireless network in North America. In all these examples, we believe Assurance solutions are vital in managing the complexities, ensuring subscribers receive excellent customer experiences and enjoy high-quality services. So we continue to invest in R&D to enhance our product portfolio and provide customers with the best-in-class assurance solutions to help them drive their networks forward and innovate. Operators play in a highly competitive market, especially in the current economic climate as there are pressure to control costs and streamline their processes, this trend leads them to rely on assurance to improve efficiencies across their operations. This could generate new opportunities for RADCOM as they turn to the next-generation cloud technology to optimize cost and roll out 5G. We continue to work within the 5G cloud ecosystem. We offer potential customers integration with all 3 leading public cloud providers, Amazon Web Services, Microsoft Azure and Google Cloud. In previous calls, I mentioned the importance of generative AI or GenAI, and all the leading public cloud providers or hyperscalers are emerging as having a pivotal role in the GenAI ecosystem. We see an opportunity to bring our unique telco-centric assurance skill set to have these hyperscalers boost their push into the cloud space. The team is already working hard on embedding GenAI technology into our solutions, to enable innovations to help operators manage their networks more dynamically and efficiently through AI and automation. We hope to share some of those exciting updates in the fourth quarter. Turning to our pipeline. Our pipeline continues to be healthy, offering further scope to grow the business with new and existing logos. Demand for our advanced assurance solutions continue to be strong, boosted by the integration of continual unique technologies that has enriched our cloud-focused portfolio. So we continue investing in the sales and market to create more sales engagement that can need additional multiyear contracts and increase our market share. We continue to deliver innovative solutions and enhance our software with additional automation, intelligence and AI-based capabilities to bring value and expand use cases for our customers as 5G technology moves forward. Over the last 10 months, we have announced multiple innovative capabilities and features to our solution. Our product strategy is making network more intelligent and autonomous through our AI-powered analytics. As we begin our internal product work plan discussions for 2024 and beyond, we use those 2 pillars to guide our strategy that continue to drive the growth and transformation of the company. We will expand on this in our fourth quarter and the full year results. To summarize, we have made good progress in advancing our business performance, increasing revenues and improving profitability while seeking sustainable growth. We believe this positive momentum will continue in Q4 and beyond as we innovate and deliver value to our customers. Our pipeline continues to be healthy, offering growth opportunities with new and existing logos. Our progress in our overall business strategy demonstrates the value of our solutions and the strength of our business model. Therefore, we reiterate 2023 revenue guidance of $50 million to $53 million. With that, I would like to turn the call over to Hadar, our CFO, who will discuss the financial results in detail.
Thank you, Eyal, and good morning, everyone. To help you understand the results, I will refer mainly to non-GAAP numbers, excluding share-based compensation, acquisition-related expenses and amortization of intangible acquisition assets. Now, please turn to Slide 8 for the financial highlights. We achieved record revenues in the third quarter, reaching $13.2 million, representing a 17th consecutive quarter of year-over-year revenue growth and an increase from 12.4% in the second quarter of 2023. Third quarter revenue grew by double digit with year-over-year growth of 10%. This resulted in non-GAAP net income for the quarter of $2.4 million, a sixth year high. At the same time, we continue to take a delivered approach to managing our expenses with a strong focus on innovation and investing in the business efficiently. Our gross margin on a non-GAAP basis in the third quarter of 2023 was 75%. Please note that our gross margin will fluctuate between the quarters depending on the revenue mix. We expect that the fourth quarter will remain at a similar level. I will go to R&D expenses for the third quarter of 2023 on a non-GAAP basis were $4.3 million, a decrease of $302,000 compared to the third quarter of 2022. We received a grant of $104,000 from the Israel Innovation Authority during the quarter compared to $187,000 in the third quarter of last year. As a result, on a non-GAAP basis, our net R&D expenses for the third quarter of 2023 were $4.2 million compared to $4.5 million in the third quarter of 2022. We expect the Israel Innovation Authority grant in the fourth quarter to remain at a similar level. Sales and marketing expenses for the third quarter of 2023 and were $3.4 million on a non-GAAP basis, an increase of $524,000 compared to the third quarter of 2022. G&A expenses for the third quarter of 2023 were $952,000 on an non-GAAP basis, similar to the third quarter of 2022. Operating income on a non-GAAP basis for the third quarter of 2023 was $1.4 million compared to income of $5 million for the third quarter of 2022. The increased revenue drove this quarter. Our financial income for the third quarter of 2023 was $1 million, mainly due to interest rate income on short-term bank deposits. Net income for the third quarter of 2023 on a non-GAAP basis, was $2.4 million or a net income of $0.15 per diluted share compared to a net income of $1 million or net income of $0.06 per diluted share for the third quarter of 2022. On a GAAP basis, as you can see on Slide 7, our net loss for the third quarter of 2023 was $0.3 million or a net loss of $0.02 per diluted share. This compares to a net loss of $0.4 million or a net loss of $0.02 per diluted share for the third quarter of 2022. This quarter, we recognized stock-based compensation expenses in the amount of $2.5 million compared to $1.2 million in the first and second quarters of the year. The increase in the third quarter resulted from a change in for future rate estimation that led to a onetime expense this quarter of $1.2 million. This estimation change reflects the company's success in retaining its key employees and the efficiency of the RCU grand plan from October 2021. We expect the stock-based compensation expenses in the fourth quarter to be similar to previous levels. At the end of the third quarter of 2023, our headcount was 301. We expect our headcount to rise slightly in the fourth quarter. Turning to the balance sheet. As shown on Slide #11, our cash, cash equivalents and short-term bank deposits as of September 30, 2023, were $78.6 million. That ends our prepared remarks. I will now turn the call back to the operator for your questions.
Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions]. The first question is from Arjun Bhatia of William Blair. Please go ahead.
It's Faith on for Arjun. Just a couple of questions for you guys. You talked about overall, the direction is clear in the market that 5G rollout is here, but can you talk about maybe how the pace is bearing depending on the different sizes and locations and what you guys are seeing there?
So I think the most important to emphasize is that we see that we are able to continue our revenue growth with another consecutive quarter of double-digit improvement to our revenue. And you can also see the immediate impact on our bottom line. We see that our net income about tripled, both for this quarter and also if you look on the 9 months. We see that if the market is progressing even in the current pace, we are able to continue our growth, and we are still very optimistic with the 5G development as we see, as I mentioned in my previous remarks, that operators see 5G strategically. While overall pace is varying between customers, we see that as an industry, there is more and more activity in this space. While there are some operators go slow, there are many more operators that are investing now in 5G. So it's a matter of timing like always in telco. I think the most encouraging part for us is that we are managing to grow and continue to improve our performance KPIs very, very consistently.
Okay. And then just another quick one. I know you guys called out you're working on embedding more AI solutions across the platform, and you're going to be announcing these in the next quarter or so. But if you had to talk high level where the general priorities are and what are customers asking for, where do these kind of concentrate across your platform?
So RADCOM invested in AI in the last 3 years as we feel that our cloud platform is an enabler to gain a lot of more value from the insurance platform we built. What we see that operators today are mainly looking for cost savings and improving efficiencies. The only way to do it is to replace labor-intensive work with automation. So most of our efforts across the platform are to see how we can increase the operator efficiencies by taking actions that are today done manually and automate them and close the loop as possible to gain not only the better efficiency and cost, but also when you do it with AI, you can gain much better quality that affects the customer experience. So we have the huge advantage that we have a lot of data sets selected from the network by our monitoring capabilities, and we leverage the AI technology to analyze them in realtime and provide automation processes to close the loop and improve the network and by that, again, those 2 goals. And as mentioned, I will elaborate more next quarter once we share more about our 2024 plans.
All right. Perfect. Well, that's it for me. Congrats again on the quarter.
The next question is from Alex Henderson of Needham & Company.
Great. Eyal and team, I just wanted to express my hearts with you guys relative to this horrific terrorist attack on your country. And I hope all your employees and family are safe. Looking at the model, I think you commented that you expect gross margins to be similar to the third quarter in the fourth quarter. That's quite a bit higher than recent quarters and kind of above the normal range. Can you talk a little bit about what in the mix is causing that and whether that's something that we should see persist into the '24 time frame? Or will the mix regress back to more like a 72.5% type number that you've posted in a number of historical quarters.
So Alex, as you know, we -- and as we mentioned before, we see our gross margin is tending to improve as the revenue grows. We create some efficiencies that allow us to improve with scale, also the gross margin. And we are a software company, and this allows us to be very profitable with the incremental revenue. What we are seeing now is depending, as you recall, on our revenue mix and trends that similar higher level is what we are looking for in the long run. This being said, on a quarter-by-quarter, there might be some fluctuations, and we expect to vary between the range of the 70% to 75%, most -- but trending to the 75-ish range as the revenue continues to grow. And this, again, a comment below what's driving that with a significant improvement of our profitability, which is starting to be very sizable.
Great. So it's logical then that we're going to have a 74-ish type margin here for the year. Is it reasonable to think that we're at least 74 and 24 -- it sounds like a good [indiscernible].
It's very hard to estimate exactly as there are might be some fluctuations. But you see what our performance in the last couple of years, you see the trend, and I think this is where we are heading.
Okay. Then on the OpEx side, can you remind us of what percentage of your cost structure is shackle based? And what portion is outside of Israel. Obviously, the shekel weakness is setting up for a pretty easy set of compares on the OpEx in Israel.
So about 40% of our employees are based in Israel. Most of them are high-paid employees. So I believe around 60% or so 60%, 65% of our cost is based on sheke something range.
So have you guys done in this hedging? Or are you [indiscernible].
Typically, most of our cash is paid in U.S. dollars. And we did in the past from time to time some very short hedging if required. But currently, we are mainly leveraging the shekel weakness and part of what helps us to continue to improve profitability.
Given guidance, but is there any reason to believe that is going to be any more than 4%, 5% growth in OpEx because given the shekel level, it's a pretty good offset to any spending growth? And what do you think the merit raises look like into '24?
Again, we are still building our workmen for 2024 as we speak. We are -- if I look strategically, as mentioned, we keep our R&D in similar levels, and we continue to incrementally increase our sales and marketing as we see additional opportunities, and we want to have better coverage. Of course, foreign exchange fluctuations are not something we can expect. I guess once we have the 2024 plans, we will have better modeling and expectations, but the important part in this stage is that all things are trending very consistent in the revenue growth, the profitability, the gross margin. So I think we can get a good sense of the model for the company and where we are heading.
Going down on the income statement, I was a little surprised the interest income declined quarter-to-quarter as you're generating solid cash interest rates are rising. Is there some -- is there some charge or something of that sort in that line that caused it to come down to $240,000 quarter-to-quarter?
Sorry, Alex, can you repeat the question? I couldn't hear you well.
Sorry, the interest income line declined $240,000 quarter-to-quarter. Given rising interest rates and rising cash balances, I would have thought it might have gone in the other direction. Can you talk to why that occurred? Was there a charge or some offset? And do we expect it to recover sequentially in the December quarter back to the June quarter level.
So interest rates fluctuate bit, and they were lower in the previous quarter compared to the quarter before. We see also in the net income, also the changes in some of the foreign exchange that we have in some of our customer debt and so on. So overall, we believe this current level is a good estimation for what we expect in the future, particularly is entirely due to both the change of interest rates and some foreign exchange that we are exposed to. So most of..
But I was surprised as interest rates declined to interest rates were going up. But okay. And any thoughts on the tax line? Last question for me.
The?
Yes. Any change in tax expectations going forward? I've heard that there are some increases in euro taxes coming down the pike that you're operating in certain geographies that might impact you anything?
No, we expect the same level of expense in the fourth quarter and the end in 2024
All right. Thanks. I appreciate your time.
This concludes the RADCOM Third Quarter 2023 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.