- Net R&D for the quarter was up $250,000 due to a delay in grant receipt from the Chief Scientist Office, an Israeli support arm
- Net Financing Expenses were $452,000 due to fluctuation of Brazilian Real
Both the above parameters caused earnings to come in ~$800,000 lower. The significance of this is that both expenses are expected to be reversed for Q2 2015 and are immaterial to the company’s operations.
R&D Grant from OCS to Be Received By Q2
Management alluded to the increased R&D expense in the conference call. The R&D expense was accounted for in Q1, but the federal grant from Chief Scientist’s Office (OCS) was not yet reimbursed. This was simply a timing issue that will be fixed by the second quarter, when Radcom expects to receive the grant.
Fluctuating Brazilian Real Impacting Financial Expenses
The depreciation of the Brazilian Real against USD during Q1 (above) contributed to financial expenses of $452,000. So far in Q2, the Real has appreciated 8.7% against USD, which would translate to financial income of $180,000 for Radcom. If there is little change until the end of June, the company should report meaningful financial income. Given volatility of USD/BRL pairing though, I expect financial expenses to continue fluctuating.
Nevertheless, neither the R&D nor financial expenses are considered material costs to Radcom’s operations. From an operational point of view, stripping away the currency impact of the Real, Radcom would have reported non-GAAP EPS of $0.15, coming in above analyst expectation. While revenues did not meet expectations, industry trends are signifying a strong demand for the remainder of 2015.
Strong Growth Expected For Rest of 2015 with Adoption of MaveriQ
Radcom’s management pointed to several tailwinds that will continue to drive the company new business. The Network Functions Virtualization (NFV) rollout is picking up speed. This benefits Radcom’s traditional markets like Asia Pacific and Latin America, as well as new North American markets. Carriers are looking for software solutions, rather than hardware, to deal with quality issues due to the lower costs and better efficiency.
MaveriQ is a software product that has seen great initial adoption with Radcom’s existing clients who have transitioned to a virtualized environment. This has opened doors for the company to be considered as a potential partner for large Tier 1 telecoms in newly penetrated markets like North America and Europe. As mentioned in the conference call, Radcom is participating in “some large tenders in the United States”. The company hopes to announce good news soon, indicating that a new purchase order may be in the works.
By the end of Q2 the company expects to have doubled the sales people that it started 2015 with. This increased sales and marketing effort is a result of the increased demand and positive feedback of MaveriQ. Radcom is participating in a lot more deal opportunities and is increasing sales personnel to deal with the forthcoming demand.
The majority of revenues thus far have come from existing customers that have integrated MaveriQ. This can also be seen in the company’s record gross margin of 82%. The second half of the year will be focused on closing new customers, further driving Radcom’s top line growth.