Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Limited 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 Hadar 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 mid-size 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 in 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 products 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 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 non-cash 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 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 our third quarter 2023 earnings call. I want to start by commenting on the terrorist attack on October 7th and the situation in Israel. The RADCOM family is appalled by the attack and wishes to extend our deepest sympathies and condolences to those affected. This was the worst attack in Israel's 75-year history and has been felt on a global scale, with victims from at least 30 nations affected by this tragedy 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 empathize with every individual impacted and strongly condemn the acts of violence that have occurred. We are confident in Israel’s strength that will not let terror win. I want to thank all 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 tending 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 Israel, so we don’t expect these events to impact our overall business. 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 centers span multiple regions and are all running as planned. We continue fulfilling our customer commitments, providing 24/7 support, and focusing on growing the business. We remain steadfast in our commitment to driving the company forward. Our…

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 eight for our 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-digits, with year-over-year growth of 10%. This resulted in non-GAAP net income for the quarter of $2.4 million, a six-year high. At the same time, we continue to take a deliberate approach to managing our expenses with a strong focus on innovation and investing in business efficiently. Our gross margin on a non-GAAP basis in the third quarter of 2023 was 75%. Please note that our gross margin may fluctuate between the quarters depending on the revenue mix. We expect that the fourth quarter will remain at a similar level. Our gross 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 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…

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.

Hi. It's [indiscernible] for Arjun. Just a couple questions for you guys. You talked about overall the directions clear in the market, that 5G rollout is here. But can you talk about maybe how the pace is varying depending on the different sides and locations and what you guys are seeing there?

Hi. Good morning. 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 triples both for this quarter and also if you look on the nine 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 remark, 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 pace. While there are some operators going slow, there are many more operators that are invested 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 APIs very, very consistently.

Okay. Thanks for the color on that. 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. 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 three years as we feel that our cloud platform is unable to gain a lot of more value from the insurance platform we built. What we see that operator today are mainly looking for cost sizing and improving efficiencies. The only way to do it is to replace labor intensive work with automation. So most of our AI efforts across the platform are to see how we can increase the operator efficiency 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 collected from the network by our monitoring capabilities and we leverage the AI technology to analyze them in real time and provide automation processes to close the loop and improve the network and by that gain goes to goals. And as I mentioned, I will elaborate more next quarter once we share more about our 2024 plans.

All right. Perfect. Well, that's it for me. Thank you, guys. Congrats again on the quarter.

Thank you.

The next question is from Alexander Henderson of Needham & Company. Please go ahead.

Great. Thanks. And 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 2024 timeframe 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 trending to improve as the revenue goes. 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 incremental revenue. What we are seeing now is depending as you recall on our revenue mix and it trends that similar higher level is what we are looking for on the long run. This being said, on the 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 was driving us with the 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 in 2024? It sounds like a good outcome.

It's very hard to estimate exactly because there 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 what we are heading.

Okay. Then on the OpEx side, can you remind us of what percentage of your cost structure is shekel 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 Israe?

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% of our cost is based on shekels, something in this range.

So, have you guys done any hedging or are you [indiscernible] on that?

No. Typically, most of our cash is in U.S. dollars and we did in the past from time-to-time some very short and edging if required, but currently we are mainly leveraging the shekel weakness and part of what helps us to continue for profitability.

With given guidance, is there any reason to believe that it is going to be any more than 4% or 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 rates look like in the 2024?

Again, we are still building our work in for 2024, as we speak, 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 expectations, but the important part in this stage is that all things are trending very consistently, 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 are generating solid cash, interest rates are rising. Is there some charge or something of that sort in that line that causes it to come down to $240,000 quarter to quarter?

So, Alex, can you repeat the question, I couldn't hear you well.

I'm 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 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 fluctuated a 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, I believe the current level is a good estimation for what we expect in the near future. I think it's usually due to both the changes in interest rates and some foreign exchange that we are exposed to. And so, most of the -

I'm surprised that interest rates declined, I thought interest rates were going up, but okay, any thoughts on the tax line? Last question for me.

Hadar?

Sorry. Can you repeat?

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 fourth [ph] quarter in the year 2024.

All right. Thanks. I appreciate your time. And nice, Brent [ph].

Thank you Alex.

This concludes the RADCOM third quarter 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.