Thank you for standing by. Welcome to the RADCOM Ltd. Third Quarter 2019 Results Conference Call. [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, November 7, 2019. On the call today are Yaron Ravkaie; RADCOM's CEO, Eyal Harari, CEO of RADCOM North America; and Amir Hai, 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 on 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 a number of risks and uncertainties, including, but not limited to, the company's statements about its 2019 revenue and other performance guidance including statements that are anticipated gross margins, statements about the company's strategy, growth leadership position, opportunities and momentum, visibility, headcount and backlog. Statements about continued investment in research and development and statements about the future of NFV, industry trends and the future market conditions, including 5G deployment and future plans of industry participants and customers. The company does not undertake to update forward-looking statements. The full safe harbor provisions, including 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 be referring 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, non-GAAP results provide information that is useful in assessing RADCOM's core operating performance and in evaluating and comparing our results of operations consistently from period to period. The presentation of this additional information is not meant to be considered as 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, which are included in the quarter's earnings release, which is available on our website. I would like to repeat the information about the presentation. If you have not downloaded yet, you may do so through a link on the Investors section of RADCOM's website at www.radcom.com/investor-relations. Now I would like to turn over the call to Yaron. Please go ahead.

Thank you, operator, and thank you all for joining us today. By now, I assume you've seen the press release issued earlier today regarding upcoming changes to RADCOM's management. As reported, effective January 1, 2020, I will transition from my role as CEO to the company's Board of Directors. It's been nearly 4 years since I first joined RADCOM as CEO. During this time, the company has grown and our technology has significantly advanced. During this period, we have established RADCOM as a world-leading provider of NFV service assurance and Network Intelligence solutions. We are now seeing the fruits of our efforts with new key engagements and expanding deployments with existing customers. We're set up today to take advantage of current and future market conditions, and we expect the rollout of 5G to spark the adoption of our platform and solutions. With this I look forward to my role on the Board of Directors and actively participating in shaping the company's strategy as we aim to capture more business as 5G adoption increases. Eyal Harari will be replacing me as CEO after many years with RADCOM, including his role as CEO of RADCOM North America and as COO of the company. Eyal has partnered with me over the last 4 years running the company, and this transition has been part of our succession planning. Eyal has made significant contributions to RADCOM's success, including leading the company's NFV strategy and has been instrumental in a close relationship with AT&T and other key customers. With Eyal's experience over the years and our shared journey together, I'm confident in Eyal's ability to lead the company forward as the industry transitions to 5G and virtualized solutions. I will now turn the call over to Eyal for a few comments, after which we will get to the quarterly update and results. Eyal?

Thank you, Yaron. As Yaron mentioned, the past 4 year has been transformative for RADCOM as we shifted to cloud native solutions and offered first-to-market NFV solution and to critical customers such as AT&T and Rakuten Mobile. During this period, we have assembled a strong and experienced team that has developed the most advanced virtualized solutions. I want to thank Yaron for being a great partner and a leader during this years. I am pleased that we will be able to continue to work together as he joins the Board of Directors. I look forward to stepping into the role of CEO in such exciting times for RADCOM. I believe we are well positioned for continued growth as the pace for 5G adoption picks up and as virtualization solutions become industry standard. Yaron?

Thank you, Eyal. Eyal, I wish you all the best in your new role. Let's now turn to the financial results for the third quarter of 2019. We are pleased to report increased revenue this quarter of $9.4 million as we continue the upward momentum that we have seen this year. This growth reflects the progress made in adding Rakuten Mobile as a significant strategic customer as well as our strong relationships with our current customer base, such as AT&T, Globe and others. As we announced at the beginning of October, we signed a multi-agreement with PJSC VimpelCommunications, a wholly owned subsidiary of VEON. VimpelCom is a top-tier operator in Russia with over 50 million customers under its Beeline brand. VimpelCom is a very innovative customer-oriented company, operating in a highly competitive environment. So they need to monitor all their services at scale in a highly automated, cost-efficient way. We will provide our virtualized solution and integrate it into VimpelCom's virtualized platform, so they can monitor their services automatically and ensure the highest level of customer experience to their subscribers. Also, we continue to make progress on our deployment with Rakuten Mobile. Where we are deploying our fully virtualized RADCOM network intelligence solution for the world's first end-to-end fully virtualized mobile network. This partnership emphasizes and strengthens our position as a market leader for virtualized assurance and has gained lots of attention within the telecom industry. Our advanced technology and virtualization know-how provide operators with unparalleled capabilities to enhance their customer experience as they transition to NFV and 5G. In addition, we continue to have a healthy relationship with AT&T as we deliver cutting-edge software releases and provide support for the evolution of their advanced cloud network. AT&T continues to proceed rapidly with its transition to the cloud, which is a critical component of 5G rollout and future service and innovation. With AT&T and Rakuten, undertaking the most exciting NFV transformation in the industry, we are proud that RADCOM is playing a central role in both of these transformations as we continue adding more and more advanced technology and capabilities into our virtualized assurance portfolio. As we plan for 2020 and with the progress already made this year, we expect to enter 2020 with high visibility and backlog and a strong potential for growth. Our strategy is to continue investing in R&D to capitalize on the increasing momentum which we expect to see with the migration to 5G. In light of our relationship with AT&T, the execution of our contract with Rakuten for the world's first fully virtualized network, current market conditions and our results today, our current revenue guidance for this year is between $31 million and $33 million. With that, I will turn the call over to Amir Hai, CFO, will discuss the financial results in detail. Amir, please go ahead.

Thank you, Yaron, and good morning everyone. Please turn to Slide 6 for our financial highlights. To help understand the results, I will be referring mainly to non-GAAP numbers, which exclude share-based compensation. Revenue for the quarter were $9.4 million, up by 10% year-over-year. As a reminder, our quarterly revenue can become lumpy due to specific project milestones. Our gross margin for the quarter was 65.7% on a non-GAAP basis. This lower than usual gross margin affects product mix, including more hardware than usual due to specific projects. Note that our gross margin depending upon the level of revenues and revenue mix. Our gross R&D for the quarter on a non-GAAP basis, increased to $4.5 million from $3.7 million in the third quarter of 2018. This increase results from our continuous investment in R&D to maintain and extend our technological leadership and capabilities. The R&D level for this quarter is approximately the same in the previous 2 quarters. Also, during the third quarter, we received $597,000 from the innovation authority compared to $528,000 in the third quarter of 2018. Other results of our net R&D for the quarter was $3.9 million, an increase from $3.2 million in the [indiscernible] last year. Sales and marketing expenses for the quarter were $2.6 million on a non-GAAP basis, an increase from $2.3 million in the first quarter of 2018. This increase is primarily attributable to [indiscernible] commissions. G&A expenses for the quarter on a non-GAAP basis totaled $812,000 compared to $647,000 in the third quarter of 2018. G&A expenses were approximately the same as in the previous 2 quarters. Also, during the third quarter, we received $597,000 from the Israeli innovation authority compared to $528,000 in the third quarter of 2018. Net loss for the quarter on a non-GAAP basis was $1 million or a loss per share of $0.07 per diluted share compared to a net income of $1 million or $0.07 per diluted share for the same period last year. On a GAAP basis, as you can see on Slide 5, we reported a net loss for the quarter of $1.7 million or a loss per share of $0.12 per diluted share compared to a profit of $634,000 or $0.05 per diluted shares of last year. At the end of the third quarter of 2019, our headcount was 259. We expect our headcount to remain around the, currently in the near term. Turning to the balance sheet. We have a healthy cash balance, which places us on a solid footing to execute on the opportunities in front of us. Our cash and cash equivalents and short-term bank deposits at the end of the quarter were $68.1 million, as noted on Slide 9. I will now turn the call back to the operator for your questions. Yaron will make closing remarks after the Q&A session.

[Operator Instructions] The first question is from Bhavan Suri of William Blair.

This is Matt [indiscernible] on for Bhavan. First off, Yaron, it's been great working with you and hope to continue to speak with you in the future. And Eyal congrats on the move to CEO. So first, as far as the revenue run rate, we've seen it step up in the quarterly revenue run rate over the past couple of quarters, the guidance suggests a step down in Q4. Just curious if you could flush out what's been driving that step up? That's just kind of coming from layering in Rakuten or other customers as well? And what assumptions are behind the step down expected in Q4 as far as the quarterly run rate goes?

So first of all, thanks. And for sure, we know we'll be in touch and I think Eyal will continue to fill me and see me. I would say that we're making very good progress also with Rakuten project. We have the stable revenue that's coming from AT&T. All of that, and Rakuten now representing a full quarter it stepped up the revenue. And we have, of course, some other healthy activity from our other key customers, including Globe Telecom, et cetera. So as for the guys in finishing the year, it's not now. I think, to do the math and hundreds of thousands of dollars. Remember that we're dependent on project milestones and things that will happen. So there's no like real, for sure, downward momentum in the business. So we see an upward momentum. And any modeling between quarters is just influenced by our reverick. In general, I think what you should take from this call is that we have a very good year. The year is not done yet, but till, to date, we have a very good year from a booking perspective, and as you saw in the prepared remarks and also in the PR that we released we'll be entering 2020 with a very nice revenue backlog. And I think you need to be patient as we set up to guide. Eyal will guide 2020, when we finish the year. And I think as we see it now, we're gearing up for growth here for next year. So everything looks positive. We're building on top of everything that we're doing, a healthy pipeline, good performance this year, exactly like we want to see in the business.

Right, right, absolutely. Okay. And just one follow-up. If I remember correctly, obviously, you guys have talked about 5G as being the sustainable long-term driver for virtualized part of this business. But if I remember correctly, the Beeline deal with VimpelCom is for 3G and 4G networks and not for 5G. Just wondering when you look at your pipeline, how much of that is being driven by virtualization of 3G and 4G networks versus next-gen 5G at this point?

Beeline is basically contracting us to do all of their network. So the way to look at Beeline, is we will be doing everything. They'll be basically swapping their existing vendor with us. And at this stage, we're starting the planning stage, and primarily it's probably not going to impact this year, okay? I'm saying it with a grain of thought but the way that we're looking at it, the main impact, the financial impact of Beeline will be for next year's revenue. And I think you'll see it as we finish the planning and show you the plan for next year. When you look at the market and you look what's driving demand, we see that more activity around 5G. Remember that last year, we came from a slowdown end of last year. So it's not like everybody is like issuing and tomorrow morning, we'll have 20 contracts but we see a pickup of activity as the carriers are starting to roll out 5G. The way that they're rolling it out, they're rolling it out first 5G, which is basically a building block on top of the 4G network. So they're rolling out like 5G radio and staying with doing some changes to the 4G [indiscernible], and that way, they're giving the very high speed, but it's still not the end result of 5G architecture. We now see more pipeline activity and discussions with the customers, both, by the way, existing and new logos, around the 5G evolution, by the way, short term and long term. So it gives us a good engagement and good starting point for the coming quarters that we expect to see this increase, and we expect the pipeline to turn into business as they roll out this technology. So we might still see next year, someone coming in. And I think you remember me talking about this in the past and saying, okay, look, I have my current legacy technologies obsolete, I've been running it, I don't know, for 5 year, 7 years, whatever. And I want to do a refresh. I mean, we might see a refresh and the [indiscernible] to support 4G, 3G, 2G, I think we see disappear, and we're going to use the 2G frequencies for 5G, maybe even the 3G frequencies for 5G. So all of this will be our world and to connect all of this, just remember that we live in a hybrid world, telcos outside of Rakuten, which is what makes Rakuten special and exciting. Outside of Rakuten and, we'll see, we are starting to see some activity, perhaps some others experimenting with maybe becoming a Greenfield operator. If you're not a Greenfield operator, then you're rolling out 5G, you're rolling out it together with your current network and you will want assurance that chose you end to end. That's, I think, how everything fits together.

The next question is from Alex Henderson of Needham & Company

I'm getting a little bit of static on my line. I hope that's not my phone line. But I was hoping you could talk a little bit about the structure of the trials that you've got in place? How many companies are currently in that pipeline? Any sense of scaling within that pipeline? And then the other question, obviously, the third quarter was a little bit more slanted towards hardware. That sounds like it's more of the legacy products than the 4 pure software products. To that extent, should we expect a rebound to a more normalized gross margin with more of a software mix in 4Q.

Okay, Alex. We hear you fine, by the way. So static is not on our side. Let's start maybe from the second question. This quarter, we had, first of all, just a recap on the way that the company operates. We have one product. We know how to install it. It's an NFV-based product. It's fully virtual, and this is the product that we have with all of our key customers, including customers that haven't migrated to, fully to virtual. Now specifically, this quarter. And then what do we do? We just take the same software, and we provide the, something in the business model that we operate with some of our longer-standing customers. We also ship them a regular cost servers, and we install the software on that. And we even install it in cloud, part of it in a cloud fashion that for us, it's easier to maintain, et cetera. So that's what's happening technically. Now financially, what does this mean? It means that you might see a quarter, we're shipping just regular like HP sales or [indiscernible] sales, Dell sales or something like that to customers and the margins on those servers are very low. Basically, almost like a pass-through. And that takes the gross margin down. And that's been going on for a while now. And this quarter, we had such an event, and this you see. It's not any, of course, evidence or something in the strategy of the company on the contrary. Now specifically, here, we do expect next year to have less of this because what we see is our current customers that are still using this model have started to migrate to virtual, and we've already migrated some of their network to virtual. So we expect the growth as their traffic growth in next year, not to shift them servers, we might still have occasions here and there, but less than this year, and you will see a trend that we all like in the right direction of increased gross margin. And the question of what do we see from a pipeline perspective. I would say that...

Before you go on, the fourth quarter comment, is it going to rebound in 4Q? You talked about gross margins for next year, but you didn't address the fourth quarter.

Yes, it's going to rebound. When we look at the activity with the customers and pipeline, et cetera, just to give you a feel with our size of the company in the Tier 1. At any given time, we have around a handful of trials and the engagements going on that are real engagement, okay? That's our lab and trials and things like that. Now I think you've seen in the past that it's very hard to understand in this market. And I still, unfortunately, don't have the best crystal ball. What will be the sales cycle? And how we would advance some of them? From the past situation, we saw some of them advance. And by the way, VEON is one of them. And it took a lot of time. It was in the pipeline for a long time. I'm not going to give too much color, why? It's their own buying process. And I can tell you that we've talked about it in the past. Rakuten Mobile was very, very fast because their need was fast. What we're going to do. We're going to very closely work with the customers. And as this 5G momentum grows, okay? We're hopeful that it will shorten the sales cycle, but we don't know yet to-date.

So if I could, the contract that you did with Rakuten. Their network launched, as I understand in October. So just launching now. I assume that the majority of that deploy occurred over the summer in order to set up that network. And it sounds like VimpelCom is more of a 2020. So is that part of the reason that the timing of that launch that is sequentially down a little bit in the fourth quarter. And to that extent, how are those structured? Are they structured as subscriptions? Or are they structured as onetime payments? So can you talk a little bit about to what extent those 2 contracts are ongoing revenue at a steady rate or whether there's growth to them or what?

Okay. Let's start from Rakuten. Rakuten is a multiyear engagement and one of the asset with the world it looks. And it's as close as possible that you can get in our world to a subscription model. And this is my recommendation. This is how you should model it. This is how we're modeling it. It's a stable revenue and with potential upside to grow that recurring revenue on a recurring basis. And we're at the tail end of receiving some additions to the contracts that are meaningful, and there's also additional positive activity going on with Rakuten that can increase the relationship with them and the relationship with them is meaningful. They have become our number 2 customer. So that's Rakuten. The revenue...

Stop there for a second. So to the extent that Rakuten is targeting 170 million population and just launched the network. If they add subscribers, is there certain levels of additional subscribers that then culminate in revenue sharing? Or is it just a subscription based on footprint and features, how does it scale up?

It scales up if they launch 5G. And if they launch more technologies. It's unlimited to Japan for the hotel subscribers. So as they add more subscribers, it's not going to generate more revenue for us. If they do launch, which they have a desire to launch beyond Japan, then it will add significantly more revenues to us. Now, okay. VEON, it's a little bit complicated because we haven't gone through the full planning stage, but we expect the revenue to materialize primarily in the next 2 years. It's more of a traditional license and maintenance model. As we migrate to more of a cloud trust model, and I mentioned this, I think several times. We are not going to be religious on it. And if a customer forces us or really in fixed and having a license model, we will remain flexible to work with. So that's what's standing behind this, although I expect more and more to say. New logos coming with a subscription model because of the fact that it's cloud software, et cetera, and they get the benefit of a cloud model, which is ongoing releases and getting the latest and greatest all the time, and they basically get RADCOM as a partner for the subscription period for the multi-year period. And you'll see this milestones basically split on this. And you can, and it will contribute. We didn't disclose the numbers, contribute a percentage of the revenue going up next year and into the year after.

So if we excluded VimpelCom, was it reasonable to think that your revenues would be fairly steady and that, that's all upside to the 2020? Or is it, do you have some things in pongs and some declining, some are increasing? And then the other piece of that question is what happened to the other Tier 1 in the U.S. that you guys were talking to?

Okay. So specifically, I would say that the company, with the bookings that we did this year, and with the main contracts that we have with our, with the feasibility, which is very good as we enter next year. Even without VimpelCom, we'll be growing and with VimpelCom we will be growing more, and you'll see it when we come out with the numbers. And when we look at the North America, and remember that we won a North America customer, they are going in active discussions with them. But they're going through a major reassessment of their strategies, 5G and NFV. So we don't know the outcome of that yet and how it's going to impact 2020 and beyond. We will be recognizing very small amounts of revenue this year from them. Primarily, going through a full re-planning of their strategy. So I feel there are a bit, that there are significantly behind, and I think it's impacting us. They can also shift to become a big potential a positive surprise next year, but I'm cautiously until they finish that effort and we're engaging with them, and we figure it out, things like that. Outside of that, there are ongoing activities in all continents, whether, including North America, and we'll see this materialize into our pipeline activities with new logo.

Great. And just one last question. How many 10% customers did you have in the quarter?

In quarter 3. Three.

Great, great. And Yaron, I appreciate working with you over the time. And Eyal I'll look forward to working with you even more closely as we go forward.

[Operator Instructions]. The next question is from Josh Goldberg of G2 Investment Partners.

Listen, I just wanted to first recognize publicly everything you have done in the last 4 or 5 years. When you started this company had one customer in the Tier 1 [indiscernible] contract. In the last 4 years, I think I believe you've landed 5 more Tier 1s, one more in the U.S., 2 in the Europe are now [indiscernible], including VimpelCom in Europe. And it just is an indication of what you're able to do, when it wasn't easy. People were not buying 5G equipment. The last 5 years, now they are. Now they're just starting to roll. And I just really wanted to thank you and really how much you committed and drove this business to a sign that it was nowhere near this 5 years ago. And don't mean to bring this up as well, but the stock is significantly undervalued versus where it was just a couple of weeks ago. So, I just want anyone who's hearing this call to recognize how much you did and how much you provided to this company to put it on such solid footing with a big backlog entering 2020 when all these 5G operators are looking for a solution, and you've proven yourself to be the number one solution in the market. I don't know if you wanted to maybe talk a little bit about what you're seeing in the future, now that you're on a Board of Directors. And if you can as well, maybe we can hear a little bit from Eyal about what he sees in the next 12 months as well just so you can introduce him [indiscernible] the company to the investors.

Okay. So first, Josh, thanks so much for the kind words and the color for the company and I'm sure you'll continue to see me and feel me, et cetera, and everybody will. It's not by chance that I'm joining the Board of Directors, both on a personal level and of course, on a professional level. The journey, while the company is like a significantly different and much better company than from, before 2015. And there's still a lot to do, as you mentioned, and it's going to be very exciting times for RADCOM. Hence, I'm going to continue to invest my personal time and all my expertise to continue this journey. So that's from my angle. I would say that when you look at it from, how the journey that we've done, we went and we took a gamble back in 2013, that gamble turned out that we were visionaries that when you are a visionary the gamble also can turn out the other direction. That we are visionaries, and we were able to foresee that this migration to virtual before other players in the market. That got us to the position that we won AT&T, it wasn't by chance. Okay? And AT&T, together with AT&T and the fact that we have a long-term contract, whether to start and really gain the real-world expertise, the kinds of expertise that you need in the telecom market in order to do this major shift in technology. I think when you hear the investment cause and you try to understand what's happening in the company. AT&T is 150 million subscribers strong, okay? One, if not the largest network in the world. Okay. And RADCOM, which was back in 2015, how many people were we? 100?

120.

120 people who were able to land it based on the superior technology. Since then, and since AT&T took this position that they are going to be very innovative and they're going to push the entire industry along and really set the pace because in this industry, the network, the traditional equipment providers were fighting the change to change to virtual because it was cannibalizing themselves. They took this very strong stand in pushing this along. And over the course of the, of this, we're able to really get to a technology that's second to none, okay? So what we're able to do with the product today and where AT&T and all of our R&D investment took us is really amazing. And not by chance. We won the second logo significant logo, which we talked about in North America. Unfortunate, but also shows you that when you're dealing with the tough transformation, you need a very innovative company to help you and work with it. But they had problems on the overall network and how they're transforming and resetting the strategies. I'm positive that we will see activity come back with them because what fixed AT&T fixed them too and more to come on that. And then this year, this amazing win with Rakuten Mobile, okay, that they looked when they chose the technology, they looked at the entire market. And by the way, they also didn't look only the traditional players of our direct competitors. They also looked at very innovative approaches of how to do the assurance and how to launch, et cetera, things like that. So I think when we look now at where the company is positioned, we got AT&T continue to work with us and scale with us. We have major customers like Globe that…

Yes, maybe, first of all, Josh, thank you. As you know, I know the company, I know the team, I know what we can do. I believe that we have a very healthy situation today, and we can definitely grow the company moving forward in 5G, and I'm excited with this new journey as the CEO of the company. So give me the time to plan 2020 before we pull some color on what we expect there.

Okay, great. If you can just give me or give us some comfort on this backlog that I think you talked, about, where do you have visibility towards some growth in 2020 besides our pipeline because we know pipelines do come and go?

I think the way that you will need to look at it is that without new bookings we're already going to grow in 2016, 2020, sorry. So we're very comfortable. So you do the numbers, okay, we're at 31 to 33, we see already a number higher than that, that is already contracted, and we don't need to sell beyond that. Adjust for that number. Of course, we're selling, yes.

Do you think that you're going to need to use your cash at all to buy acquisitions of any sort? Or do you feel like your product set is ready for next year without the cash usage?

Look, it's a good question, and we've been asked over the quarter. The company is in a very strong cash position. The primary reason we wanted and we still want is very strong cash position. And everybody needs to understand that we deal directly with the Tier 1 telcos in the world. And when you're a company without a strong balance sheet, you cannot do business with them. They're afraid that you'll disappear in the course of a couple of quarters. And I think you will see the numbers, we're not going to disappear. And this is the comfort level. This is what we need to give them. That's a comfort level. Now and I'm separating the cash from the desire to look at M&A. I can tell you that we are keeping our eyes open. And in some cases, we are doing some call it discovery and corporate development activity, but it's a discovery phase, to see if we can accelerate growth through M&A, and it can have any flavor that we will need. So there's nothing to report today. But I can tell you that we're keeping our ears and eyes open. And once in a while, we look at the company, and we get our thinking straight, et cetera.

There are no further questions at this time. I would now like to turn the call over back to Yaron for closing remarks. Please go ahead.

Okay, thank you. So as you heard on today's call, we've made very good progress to date. The company is strong and growing with a very healthy balance sheet, a strong backlog. With this solid foundation for continued success, we'll be transitioning the company over to Eyal's very capable hands, while at the same time, staying very involved to my Board position. I will enjoy working with interacting with all of you and expect RADCOM to continue doing great things. This ends our prepared remarks. I will now turn the call back to the operator.

This concludes the RADCOM Ltd.'s Third Quarter 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect. With this, I look forward to my role on the Board of Directors