RADCOM Ltd. — FY 2016 Form 20-F
Period note: This is an annual report for the fiscal year ended December 31, 2016, not a standalone fourth-quarter filing. Financial amounts below are U.S. dollars; income-statement and cash-flow figures are annual.
Business context and reporting period
RADCOM provides service-assurance and customer-experience software for communications service providers. Its MaveriQ platform supports physical and virtualized networks, including NFV. The year’s results were strongly affected by the AT&T deployment, sold and delivered through Amdocs under a multi-year engagement. The company reports one operating segment and prepares its financial statements under U.S. GAAP.
Key financial metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $29.510 million | $18.673 million |
| Gross profit / margin | $20.528 million / 69.6% | $14.347 million / 76.8% |
| Operating income (loss) | $1.123 million | $(0.369) million |
| Net income (loss) | $1.915 million | $(0.923) million |
| Operating cash flow | $9.451 million | $1.884 million |
| Cash and cash equivalents at year-end | $42.886 million | $8.727 million |
| Working capital | $38.854 million | $9.643 million |
| Total assets | $54.568 million | $20.135 million |
| Total liabilities | $14.425 million | $10.272 million |
| Shareholders’ equity | $40.143 million | $9.863 million |
Revenue rose approximately 58%. Project revenue increased to $17.534 million from $0.622 million, while products and related services fell to $8.642 million from $15.500 million; warranty and support increased to $3.334 million from $2.551 million. Gross margin contracted as project-related development and customization labor, third-party hardware, and inventory write-offs increased. No interest-bearing debt is identified in the balance-sheet figures presented; current and non-current liabilities include operating and employee-related obligations.
Operating cash flow increased substantially. Investing activities used $1.331 million, primarily for equipment, while financing activities provided $25.693 million, including $21.279 million net proceeds from the May 2016 share offering, $3.329 million from option exercises, and $1.085 million from warrant exercises. The share offering issued 2,090,909 shares at $11.00 each. Share-based compensation was $2.471 million, a non-cash expense.
Material changes versus prior periods
- RADCOM returned to operating and net profitability after losses in 2015; FY 2014 had net income of $0.726 million.
- Revenue mix shifted sharply toward projects associated with the AT&T engagement. The filing attributes the project increase and product-revenue decline to execution of the Amdocs arrangement.
- Gross margin fell to 69.6% from 76.8%; operating expenses increased 32% to $19.405 million. General and administrative expense rose to $4.523 million from $2.393 million, principally due to salaries and share-based compensation.
- Cash increased by $34.159 million, supported by operating cash generation, approximately $19.2 million of payments received from Amdocs, and the public offering. The offering and equity exercises increased the share count.
- North America generated $19.167 million of revenue, versus $1.018 million in 2015. The United States and Philippines customers represented 62% and 17% of 2016 revenue, respectively.
Outlook, risks, contingencies, and unusual items
- Management expects NFV adoption to gain momentum in 2017 and beyond, and plans to continue investing in NFV, LTE, VoLTE and customer-experience capabilities and expand sales efforts among leading CSPs. The filing provides no numerical revenue or earnings guidance.
- Management said available capital and expected operating cash flows should meet liquidity needs for at least the next 12 months; elsewhere, the filing states resources are expected to cover obligations through at least the end of March 2018. Additional financing or spending reductions may be needed if sales or spending differ materially from projections.
- Customer concentration is significant: the AT&T engagement recognized $18.310 million, or 62% of revenue, and the two largest customers together accounted for approximately 79%. Changes, delays, acceptance requirements, or loss of a major project could materially affect results and cash collection.
- The engagement was conducted through Amdocs, whose director included controlling shareholder and RADCOM director Zohar Zisapel. Related-party transactions also include office leases and other services; the company states these were on terms no less favorable than those available from unaffiliated parties.
- Project revenue is recognized using percentage of completion based on labor effort; other sales may be deferred pending substantive customer acceptance. Estimates, project execution, and acceptance timing can affect reported revenue and margins.
- RADCOM disclosed approximately $43.6 million of contingent royalty obligations to Israel’s Innovation Authority, generally payable from qualifying product revenue, and $0.366 million to the BIRD Foundation. It also described a historical Innovation Authority dispute over royalty calculations; the company believes amounts due were paid or accrued but says the authority may not accept its position.
- A Latin American customer had previously sought refunds and damages after terminating an agreement. RADCOM stated that a potential loss was not considered probable; the termination led to inventory and related-cost write-offs in 2014. The filing reports no legal proceedings.
- Other risks include unproven NFV market timing, competition, foreign-exchange exposure (with no hedging in place), inventory obsolescence, supplier dependence, Israeli regional and regulatory risks, and execution risks from workforce growth. Management and the auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether AT&T/Amdocs project revenue, cash receipts, customer acceptance, and multi-year maintenance terms support repeatable revenue and cash flow.
- How much revenue and profit depend on the two largest customers, and whether the 2016 project mix and lower gross margin persist.
- Whether the stated liquidity runway remains adequate after operating costs, working-capital needs, lease commitments, and project obligations.
- The potential timing and amount of Innovation Authority royalties, and any resolution or change in the historical royalty-calculation matter.
- Share dilution from the 2016 offering, option and warrant exercises, and outstanding equity awards, alongside future share-based compensation expense.
- Progress toward NFV adoption and execution of customer deployments; management’s outlook is qualitative, and the filing gives no numerical 2017 guidance.