The mobile industry has scaled dramatically over the last decade. At the end of 2003, one in six people had subscribed to a mobile service. This figure increased to about half of the global population by 2013. Looking forward to the upcoming decade, the global adoption of LTE will sprout new challenges and opportunities. With networks evolving and information becoming accessible globally, quality of service will take on an augmented role for telecommunication providers. This will undoubtedly pose a risk for service providers such as Vodafone (VOD) and T-Mobile (TMUS) , yet an opportunity for companies that provide customer experience management (CEM). Radcom (RDCM) is an Israeli based company that provides solutions by monitoring networks to assure quality of service for providers. After the introduction of its new MaverIQ software, Radcom has reached profitability, a trend I expect the company to carry on October 29, 2014 when Q3 results are announced.
What Growth of Telecom and LTE Adoption Mean
Below is a snapshot showing the present and future of the telecom industry according to The Mobile Economy 2014 report by GSMA.
As seen, exponential growth is expected across the board. By 2020, more than half (56%) of people will be subscribed to a mobile network, many of which will be running on the most advanced LTE networks. The numbers of LTE networks are forecast to increase to more than 500 in 128 countries across the world by 2017. With the infrastructure in place, LTE connection uptake will increase from 3% of the global total in 2013 to 25% by 2020.
By 2020, 3 in 4 mobile users will be able to take advantage of high speed networks (3G & 4G) and the data hungry applications such as video streaming, internet browsing and file downloads. Therefore, it will be up to service providers to maintain a high level of customer experience with subscribers. If not, revenues will be lost as churn (rate at which customers stop subscribing) could become a growing issue.
Mobile Growth Challenges Seen as Opportunity for Radcom
Global demand will be driven by the 4G LTE build out, which in turn, will increase the voice/data usage and the need for telecom companies to maximize efficiency and customer experience across their networks. This challenge presents an opportunity for Radcom as the company offers low cost solutions to reduce churn by monitoring customer experience.
Radcom’s MaveriQ monitors a wide range of technologies and services (LTE, CDMA, SMS, VoIP to name a few) all in one box. Continuous analysis of service performance and quality offers Radcom’s clients (service providers for the most part) full end-to-end visibility of their network across all technologies.
The global growth of telecom will put pressure on providers to offer advanced technologies while maintaining customer service and performance. Such challenges will place importance on products that monitor and optimize network performance. This is where Radcom will prove to be a fitting partner for tier 1&2 telecom companies around the world looking to improve their data and LTE quality of service.
Market Acceptance of MaveriQ
Radcom’s MaveriQ software was officially launched in February 2014, so the market has not had much time to digest the platform. However, during the first full quarter (Q2) on the market, MaveriQ accounted for 60% of Radcom’s $4.97M in revenues. This strong reception bodes well for the future outlook of MaveriQ, especially when considering that 60% of Radcom’s revenues come from repeat business.
As mentioned above, the global mobile growth will prove to be a tailwind that drives Radcom’s top line. Management alluded to MaveriQ’s prospects as “competing in a much higher range of opportunities than our size of opportunities than in the past.” So not only will the new MaveriQ software provide a greater quantity of deals, but also at larger sizes.
One of Radcom’s growth engines will be the focus in the Asian & Latin American markets, which forecast a 70% CAGR for mobile data for 2013–2017. Currently, US, Japan and Korea account for 80% of all global LTE connections. Going forward the focus will shift increasingly towards Asia, with the region set to account for almost half of all LTE connections by 2017. These forecasts align perfectly with Radcom’s growth initiatives.
Radcom’s business model has transitioned from hardware to software driven company with the launch of MaveriQ. The advantages from this move include recurring revenue streams with significant growth potential due to mobile industry growth. Management has guided that, due to the nature of software and reduced COGS, margins will reach a long-term sustainable level above 75%. To compare, prior margins were in the low 60%.
Transition to software has also accelerated the company’s deployment cycle which will reduce expenses and make collections faster. Radcom management has guided that operating expenses will remain at $14M/year. Radcom is debt free and has a cash balance of $3.9M.
Could Upcoming Earnings be Inflection Point?
Historically, the second half of Radcom’s fiscal years have generated stronger revenues than the first half. With greater adoption of MaveriQ, this trend is expected to continue during 2H 2014. Additionally, in the latest earnings call, management disclosed that one project which was supposed to be recognized in Q2 will be recognized over the second half of the year. This timing issue will still result in the same annual perspective, meaning that the “lost” revenue in Q2 will be recognized over Q3/Q4.
Each of the scenarios that project the remainder of 2014 results in profitability. The road to profitability has been a function of the revenue which management explained as “significant growth in 2014 over 2013”, higher software margins and expense control. Applying a conservative 20x P/E would value Radcom at roughly $8.40, a 40% upside to current valuation. I believe that the market has discounted Radcom beyond fair measures and that upcoming earnings will prove to be a pleasant surprise.
Radcom’s clean share structure will magnify a potential earnings beat. The company has 8.1M shares outstanding, of which 40% are owned by insiders. This leaves an approximate float of 5M shares, a relatively low number of shares available to be traded. If an earnings surprise does in fact occur, I expect the stock to spike due to the low float.
Radcom’s revenue stream is moving towards a one product (MaverIQ) portfolio, which could be detrimental if adoption of the software does not go as planned. Therefore, Radcom may be a victim of putting all its eggs into one basket. Additionally, Radcom is headquartered in Israel amidst geopolitical tensions There always remains the possibility that these issues may affect operations. However, this also plays a role into the significant undervaluation of the company.
Radcom: A Play on LTE Growth
The global widespread of telecommunication and LTE adoption expected to occur within the next five years presents RADCOM with an opportunity to grow exponentially. Service providers are placing an increasing amount of significance on customer service to remain competitive over rivals. Radcom’s software offers just that. MaveriQ has shown great initial traction which is only expected to expand moving forward as it will play in important role in a market that demands close attention to clients. Expect Radcom earnings to continue to provide the top/bottom line growth which could make the company a sustainable long term investment.