RADCOM Ltd. — FY2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; the supplied filing text does not provide clear Q4-only financial results. Amounts below are U.S. dollars unless stated otherwise.
Business context
RADCOM provides cloud-native network intelligence and service-assurance software and services to communications service providers (CSPs), supporting NFV, 5G and hybrid networks. The company reported one operating segment. It entered into multi-year agreements with AT&T and Rakuten in 2019; Rakuten selected its solutions for its cloud-native mobile network.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $33.0 million | $34.1 million |
| Gross profit / margin | $23.1 million / 70% | $25.2 million / 74% |
| Operating loss | $7.8 million | $3.5 million |
| Net loss | $6.8 million | $2.4 million |
| Operating cash flow | $6.8 million provided | $1.9 million used |
| Cash, equivalents and short-term deposits | $69.3 million | $62.0 million |
- Revenue fell 3.2%. Products rose to $16.4 million and services to $16.3 million, while projects declined to $0.3 million from $12.2 million, primarily after completion of AT&T’s initial implementation project.
- Operating expenses rose 7.7% to $30.9 million. Net R&D expense increased 20.1% to $16.7 million; sales and marketing expense declined to $10.5 million.
- Operating cash generation benefited principally from a $9.3 million reduction in trade receivables. Investing activities used $62.6 million, mainly reflecting $61.9 million placed in short-term bank deposits and $0.7 million of capital expenditures. The decline in cash equivalents largely reflects this deposit placement.
- Year-end working capital was $70.5 million; total assets were $96.4 million and shareholders’ equity was $73.9 million. The balance sheet reports $22.5 million of liabilities, including $6.2 million of operating lease liabilities. No conventional borrowings are identified in the supplied financial statements.
- Gross margin contracted by 4 percentage points, mainly due to higher service-delivery salaries and subcontractor costs. Share-based compensation expense was $2.2 million.
Material changes, outlook and risks
- Customer concentration remains high: the three largest customers accounted for 83% of 2019 revenue. North America contributed 43.9% of revenue, down from 65.1%; Asia rose to 42.7% from 21.1%.
- Management reported growing interest in NFV-capable service assurance, but said NFV transformation remained slow and implementation timing varied among CSPs. It expects 5G deployment to support future NFV demand, while acknowledging that adoption may be delayed or fail to meet expectations.
- Management expected significant R&D investment to continue in 2020, including automation, containerization and machine-learning capabilities. The filing gives no numerical revenue or earnings guidance.
- COVID-19 was identified as a risk after year-end: remote work had enabled development and customer support to continue, but travel restrictions, customer procurement delays and the ability to meet development targets remained uncertain.
- Liquidity: management said available capital resources and operating cash flows were expected to cover requirements for the next 12 months, while noting it might raise funds or reduce discretionary spending. It reported no off-balance-sheet arrangements and no material legal proceedings.
- Contingencies include approximately $51.0 million of conditional royalty obligations to the Israel Innovation Authority (IIA), payable from relevant revenues, and a $0.39 million potential BIRD Foundation royalty obligation. RADCOM disputes alleged historical IIA royalty miscalculations and says related royalties were paid or accrued, but cannot assure the IIA will accept its position.
- The company disclosed a $33.7 million Israeli tax-loss carryforward and a full valuation allowance against deferred tax assets. It does not expect to pay Israeli tax on operating income until those losses are used.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The company has never paid cash dividends and did not expect to do so in the foreseeable future.
Important facts for investors to verify
- Whether AT&T and Rakuten deployments generate the expected recurring product and service revenue, and the commitments and renewal terms in their agreements.
- Customer concentration and the identities, purchasing trends and payment performance of the largest customers; verify whether 2019 operating cash flow is repeatable given its substantial receivables-collection contribution.
- Progress in CSP NFV and 5G adoption, sales pipeline conversion, and the effect of continued R&D spending on margins and profitability.
- COVID-19 effects on customer spending, delivery and development, along with currency exposure—especially NIS costs against U.S.-dollar revenue.
- The basis and potential amount or timing of IIA royalties, including resolution of the historical dispute, and the company’s actual liquidity needs and any financing plans.