Radcom Looks to Continue Strong Results into 2015 with Global LTE Adoption

February 4, 2015 • Analysis • Tags:

Our prediction on Radcom’s fourth quarter came to fruition as the company reported Q4 revenues of $7.10M and earnings of $0.20/share, beating analyst estimates on both the top and bottom line. The international adoption of LTE technologies and growth of international telecom market has driven the initial surge in MaveriQ technology. With 600 global mobile operators in over 168 countries and LTE subscription expected to spread to 80% of Asia Pacific region within five years, the opportunity for Radcom’s operations remain compelling.

Brief Refresher

Radcom is a Tel-Aviv based technology company specializing in service assurance and customer experience monitoring solutions. RDCM has capitalized on the global trend of mobile LTE adoption through the launch of MaveriQ software in 2013. MaveriQ is a customer experience monitoring system aimed at reducing customer churn for telecom companies. The company’s increased focus on higher emerging markets and transition away from a capital intensive hardware production model to a higher margin software model has had significant effects on their numbers.

Growth Led By Adoption of New Software Product

2014 incomestatement

As seen above, sales for Q4 came in 26% higher from the prior year and 20% higher than Q3 2014. Full year revenues were $23.6 million from $20.8 in 2013, a 15.4% increase. As a result of the transition into software solutions, the company has enjoyed gross margins over 70%, nearing the 75% goal set by management. About 50% ofQ4 revenues came from Radcom’s new product MaveriQ, indicating the adoption of the high margined software solution.

One Time Cost Understated Earnings

Radcom reported a net loss of $365,000 or $0.04 per share in Q4 2014 compared to a profit of $117,000 in the same period YoY. The main reason behind this deficit was a $2 million non-cash writeoff from inventory and other related asset write-offs, resulting from a dispute with customers regarding past delivered legacy equipment from 2010. The company decided to clear the way with the whole write off to make way for stronger 2015 earnings, rather than have the cost amortized over time.

nongaap income statement

Since Radcom is now focused on our software based solutions, the company is left with an inventory of legacy products and projects at reduced value. Disregarding this $1.8 million charge, earnings for the quarter ending Dec 31 2014 totaled $1,795 or $0.20 per share which is a whopping 859% higher than the same quarter last year and 106% higher than Q3 2014. Radcom sport a 25% net margin for Q4 2014, up from 3.3% in Q4 2013.

dec 2014 balance sheet

Due to the company’s improved margins and lean operations, Radcom announced $2.3M of positive cash flow for the quarter and a yearend cash balance of $6.8M (above). The cash balance has increased by $5.6M in just four quarters, providing the company with the stability and flexibility. Management has stated that there are no plans to raise money, which means no dilution for shareholders as cash generated from operations will be sufficient.

2015 Income statement projection

For FY2015, I assumed that total revenues would increase by 20% over FY2014, a conservative figure that I think the company could easily beat. Radcom is expected to hit their goal of 75% gross margin as more revenue will be generated from MaveriQ, a higher margined product. Operating expenses were kept in line with prior years since management has stipulated to maintaining a stable cost structure for the near future. As a result, we obtained an operating income of $6.1 million or a 21% profit margin.

q1 2015 valuation

Assuming that the company achieves an operating income of $6M in 2015, a fair valuation of RDCM stock could be in the high teens, $19.35 if a 30x earnings multiple is applied. This would present upside of at least 50% as the company continues with the adoption of MaveriQ. We expect 2015 EPS to be in the $0.60 – $0.70 range.

Conclusion

Radcom has also signed two new expansion order deals of over $4 million, one in APAC and the other in Latin America. It was revealed in the earnings call that neither of the $4+ million deals was recognized in 2014 revenues, but will be in 2015. This, alone, will result in $8M in revenues to compliment an already recurring stream of revenue. It’s easy to see why management remains highly optimistic and predicts continued growth for the upcoming year. We feel the exact same way.

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