RADCOM Ltd. — FY2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone 2018 Q4 filing; quarterly results are not clearly provided in the filing text. RADCOM supplies cloud-native network intelligence and service-assurance products for communications service providers (CSPs), including NFV and 5G-related solutions. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
Key financial results
| Metric | FY2018 | FY2017 | Change / context |
|---|---|---|---|
| Revenue | $34.1 million | $37.2 million | Down about 8% |
| Gross profit / gross margin | $25.2 million / 74.0% | $26.7 million / 71.8% | Margin improved as cost of revenue fell faster than revenue |
| Operating income (loss) | $(3.5) million | $2.6 million | Operating margin: (10.2)% versus 7.0% |
| Net income (loss) | $(2.4) million | $2.9 million | Basic and diluted loss per share: $(0.18) |
| Cash from operating activities | $(1.9) million | $(10.6) million | Use of cash moderated, primarily reflecting working-capital movements |
| Cash and cash equivalents | $62.0 million | $22.6 million, plus $40.0 million short-term deposit | 2017 combined cash and deposit was $62.6 million; the deposit matured in 2018 |
| Working capital | $76.9 million | $74.8 million | Increased |
| Total assets / shareholders’ equity | $89.5 million / $78.5 million | $91.9 million / $76.4 million | — |
Revenue mix: Product and related-services revenue rose to $13.5 million from $7.5 million; project revenue fell to $12.2 million from $26.2 million; warranty and support rose to $8.3 million from $3.6 million. The project decline mainly reflected completion of certain AT&T deployment phases. Research and development expense, net of grants, rose 54% to $13.9 million; sales and marketing expense increased to $11.4 million, while general and administrative expense fell to $3.4 million.
Liquidity and debt: Management said existing capital resources and operating cash flows were expected to meet liquidity needs for the next 12 months, while noting it might raise additional funds in 2019 or reduce discretionary spending. The balance sheet lists no financial borrowings; liabilities were $11.1 million, primarily payables, accruals, deferred revenue and severance. Contractual obligations included $2.1 million of operating leases and $0.8 million of open purchase orders. Operating cash use improved from 2017, but remained negative.
Material changes and business concentration
- Revenue declined despite higher product and support sales because project revenue dropped by about $14.0 million.
- AT&T-related revenue was $16.3 million, or 48% of total revenue, versus $24.5 million, or 66%, in 2017. The filing also says the two largest customers represented about 66% of 2018 revenue, down from 78% in 2017.
- Gross margin increased by about 2.2 percentage points, but operating expenses grew 18.6%, led by higher R&D investment and staffing. R&D headcount, including contractors, rose to 116 from 89.
- RADCOM adopted ASC 606 using the modified retrospective method. Adoption increased reported 2018 net income by about $406,000 compared with the prior accounting basis and reduced opening accumulated deficit by about $337,000. Prior-year figures were not restated.
- The company ended 2018 with 233 employees and contractors and reported 13,699,727 ordinary shares outstanding.
Outlook, risks and unusual items
- Management reported growing CSP interest in NFV, but said the 2018 transition pace was slower than anticipated; customer decisions, designs, budgets and deployment timing remain uncertain. Management expected 5G deployment could increase NFV demand, but provided no numerical 2019 revenue or earnings guidance in the supplied filing text.
- On March 29, 2019, RADCOM entered new AT&T agreements: a three-year framework agreement with two one-year options, a three-year solutions agreement with certain committed orders during its first two years, and a three-year support and maintenance agreement. The filing does not provide a clear dollar value for the commitments.
- Customer concentration is a major exposure: the AT&T engagement and a small number of other CSPs account for substantial revenue. Delays, cancellations, customer spending reductions or changes in contract terms could materially affect results.
- The company disclosed an approximately $48.4 million contingent royalty liability to Israel’s Innovation Authority (IIA), subject to royalties on relevant product revenue. The IIA previously alleged royalty-payment miscalculations for 1992–2009; RADCOM said it believes amounts were paid or accrued correctly, but the IIA’s acceptance of its position is uncertain. A further $381,000 contingent obligation to the BIRD Foundation was disclosed.
- RADCOM reported $2.1 million in 2018 share-based compensation. It expected adoption of lease accounting in 2019 to recognize lease assets and liabilities of approximately $5.6–$6.2 million, with foreign-exchange remeasurement potentially affecting financial results.
- Foreign-exchange exposure includes U.S.-dollar revenues and significant NIS-denominated expenses; RADCOM said it had not entered into hedging transactions. Other material risks include technology competition, NFV/5G adoption delays, project delivery and acceptance, cybersecurity, privacy regulation, and Israeli geopolitical and IIA-related restrictions.
- The company reported no material legal proceedings. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. No cash dividends were expected in the foreseeable future.
Investor verification priorities
- Assess the durability and terms of the March 2019 AT&T agreements, including actual orders, revenue timing and customer concentration.
- Track remaining performance obligations of $10.9 million at year-end; RADCOM expected about 72% to be recognized over the following 12 months.
- Verify cash conversion and working-capital trends, particularly receivables of $20.4 million and continued operating cash outflow.
- Review the status and potential financial exposure of the IIA royalty matter and the $48.4 million contingent liability.
- Monitor whether R&D and sales investment produces growth sufficient to restore operating profitability, alongside the effects of ASC 606 and lease-accounting changes.