AudioCodes Ltd (AUDC) 2021 Q1 法說會逐字稿

Hello, and welcome to the AudioCodes First Quarter 2021 Earnings Conference Call.

(Operator Instructions) Please note this conference is being recorded.

It's now my pleasure to turn the call over to Roger Chuchen.

Please go ahead, sir.

Thank you.

Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer; and Niran Baruch, Vice President of Finance and Chief Financial Officer.

Before we begin, I'd like to remind you that the information provided during this call may contain forward-looking statements relating to AudioCodes' business outlook, future economic performance, product introductions, plans on objectives related thereto, and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters are forward-looking statements as the term is defined under U.S. federal securities law.

Forward-looking statements are subject to various risks and uncertainties and other factors that could cause actual results to differ materially from those stated in such statements.

These risks, uncertainties and factors include, but are not limited to, the effect of global economic conditions in general and conditions in AudioCodes' industry and target markets, in particular; shifts in supply and demand; market acceptance of new products and demand for existing products; the impact of competitive products and pricing on AudioCodes' and its customers, products and markets; timely product and technology and development, upgrades and ability to manage changes in market conditions as needed; possible need for additional financing; the ability to satisfy covenants in the company's loan agreements; possible disruptions from acquisitions; the ability of AudioCodes to successfully integrate the products and operations of acquired companies into AudioCodes business; possible adverse impact of the COVID-19 pandemic on our business and results of operations and other factors detailed in AudioCodes filings with the U.S. Securities and Exchange Commission.

AudioCodes assumes no obligation to update this information.

In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share.

AudioCodes has provided a full reconciliation of the non-GAAP net income and income per share to its net income and net income per share according to GAAP in the press release that is posted on its website.

Before I turn the call over to management, I would like to remind everyone that this call is being recorded.

An archived webcast will be made available on the Investor Relations section of the company's website at the conclusion of the call.

With all that said, I would like to turn the call over to Shabtai.

Shabtai, please go ahead.

Thank you, Roger.

Good morning and good afternoon, everybody.

I would like to welcome all to our first quarter 2021 conference call.

With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance at AudioCodes.

Niran will start off by presenting a financial overview of the quarter.

I will then review the business highlights and summary for the quarter, and then discuss strengths and developments in our business and the industry.

We will then turn it into the Q&A session.

Niran?

Thank you, Shabtai, and hello, everyone.

As usual, on today's call, we will be referring to both GAAP and non-GAAP financial results.

The earnings press release that we issued earlier this morning contains a reconciliation of the supplemental non-GAAP financial information that I will be discussing on this call.

Revenues for the first quarter were $58.8 million, an increase of 13.1% over the $52 million reported in the first quarter of last year.

Services revenues for the first quarter were $21.8 million, up 23.3% over the year ago period.

Services revenues in the first quarter accounted for 37.1% of total revenues.

The amount of deferred revenue as of March 31, 2021, was $71.6 million, up from $64.2 million as of March 31, 2020.

Revenues by geographical region for the quarter was split as follows: North America, 39%; EMEA, 39%; Asia Pacific, 18%; and Central and Latin America, 4%.

Our top 15 customers represented an aggregate of 61% of our revenue in the first quarter, of which, 49% was attributed to our 11 largest distributors.

GAAP results are as follows.

Gross margin for the quarter was 68.4% compared to 65.9% in Q1 2020.

Operating income for the first quarter was $10.1 million or 17.2% of revenue compared to $6.2 million or 11.8% of revenues in Q1 2020.

Net income for the quarter was $10 million or $0.29 per diluted share compared to $5.3 million or $0.17 per diluted share for Q1 2020.

Non-GAAP results are as follows.

Non-GAAP gross margin for the quarter was 68.7% compared to 66.1% in Q1 2020.

Non-GAAP operating income for the third quarter was $13.2 million or 22.5% of revenues compared to $7.9 million or 15.2% of revenue in Q1 2020, an increase of 66.9%.

Non-GAAP net income for the first quarter was $12.7 million or $0.37 per diluted share compared to $7.8 million or $0.25 per diluted share in Q1 2020.

At the end of March 2021, cash, cash equivalents, bank deposits and market-based securities totaled $192.5 million.

Net cash provided by operating activities was $13 million for the first quarter of 2021.

Days sales outstanding, as of March 31, 2021, were 56 days.

During the quarter, we acquired 350,000 of our ordinary shares for a total consideration of approximately $10.3 million.

We reiterate our guidance for 2021 as follows: We expect revenues in the range of $240 million to $250 million; and non-GAAP diluted net income per share of $1.45 to $1.65.

I will now turn the call back over to Shabtai.

Thank you, Niran.

We're very pleased to report strong first quarter '21 financial results ahead of our internal budget and continued progress in our business.

Most important, we have been strong in the market.

We've seen strong market for our 3 main growth engines, namely: Microsoft business, Contact Centers and Conversational AI.

In the Microsoft business, change in Skype for Business.

Business grew above 20%.

However, most notably, U.S. market showing increased activity in view of the decline in pandemic.

We saw better environment for new credit accounts and businesses, further stronger book-to-bill trend, which portends strong growth ahead.

Contact Center, we've seen strong pickup in activity; Conversational AI, growth of more than 100% year-over-year in total.

Importantly, first quarter industry dynamics for the underlying notion.

This collaboration work-from-home remains center stage in 2021 and beyond, even post-pandemic, and present long-term growth prospects for us.

(inaudible) strong performance in our North America services operation and continued SBC business strength, the outlook for 2021 and onward is positive.

Talking about growth in services, AudioCodes Live continues on track with the initial plan, and we'll talk more about it later on.

Also, with the return to office trend picking, seems in several countries, our devices, IP phones, desktop phones, video conference devices showed meaningful improvement from 2020, though magnitude of recovery could be capped going forward by the well-known ongoing chip supply constraints and shortage.

So touching on the key highlights of the first quarter, total revenue grew 13.1% year-over-year, an improvement as compared to the 11.7% growth back in the first quarter 2020, growth driven mainly by secular growth opportunity within the Unified Communication as a Service and Contact Center markets.

Service revenues grew 23.3% year-over-year.

Service revenues were driven by strength in professional and managed services offering.

Most important, we made ongoing progress in pivoting to recurring revenues with strong traction experience with our AudioCodes Live offering.

In terms of first quarter '21 revenue, let me go by segment.

Referring to the 13.1% overall company year-by-year revenue growth, it is important to note that growth in our key markets, UCaaS and Contact Center was substantially higher.

UCaaS accounted for over 65% of revenue and grew above 15% year-over-year.

Contact Center accounts for 12% of revenue and grew above 20% year-over-year.

So combined, and that is the enterprise operations we have, we now see more than 80% of our revenues growing at the rate of 15% year-over-year, which is substantial growth above the overall company growth.

Two more segments.

Voice.ai, as I've mentioned, grew over 100%, still less than 2% of revenue at this stage.

Decline was seen in the service provider and technology, which finally make up the balance of revenues down in the quarter.

Now to reiterate our 3-year financial model targets, gross, which was 15% in enterprise revenues in the first quarter, provides strong support for our reiterated 2021 outlook as well with our long-term financial model.

The model calls for 13% to 15% growth of revenues.

We did 13.1%.

Non-GAAP gross margin, we define the range of 67% to 70%.

We ended up doing 68.7%.

OpEx as a percentage of revenue, we said we would cap it at 47%.

It came to 46.3%.

And then, when we're talking about the non-GAAP operating margin, we set the range to be between 20% and 23%, we ended up at 22.4%.

Now let's focus on two more key developments in the quarter.

This is the focus on real-time cloud communication and on transition to recurring revenue.

A recurring theme in our operation for the past several years has been increased focus and rapid transition for our solutions and services to real-time cloud communications.

We continue to invest in cloud service since automation and in Software as a service solution development, and we see further growth in this space.

Much was achieved in 2020.

In the first quarter of '21, we have increased and accelerating the investment in this area, driving the momentum in 2021 and beyond.

On top of this, we have substantially moved our focus in sales towards recurring revenue model, and an increasing percentage of revenue now comes from recurring revenue sources versus the historical model of CapEx sales of our network in the year.

To further highlight the focus on transition to recurring revenues, in March 2020, we announced AudioCodes Live initiative, which offers AudioCodes voice expertise, product and solution to enterprises by a very flexible subscription-based managed services model.

We have made good progress through the second half of 2020 and into the first quarter of '21, and now see the momentum growing and expanding.

By mid-2021, we expect this line to cross the $10 million ARR mark and reach $15 million ARR by the end of the year, more than doubling 2020 levels.

Our booking or our total contract value of this business on end is already several tens of millions of dollars, and it is signed with large number of enterprises we have already started or about to start the UCaaS deployments with us.

This fast-growing business is a tangible proof to our superior technology in the areas of connectivity, management, automation tools, services and adjacent applications to the UC solutions.

I'm confident that this business will keep growing and represents a very significant portion of AudioCodes' value in coming years as recurring revenue basis.

Now to Microsoft operations in the quarter.

First quarter '21 business grew over 20% year-over-year.

Microsoft business is now 45% of overall business.

We target $120 million by the end of the year, growing about 20% and on top of 2020.

We've seen accelerating opportunities in the market, some of which focused more in the mid-market.

We've seen a lot of activity around Direct Routing as a Service.

And we have seen dozens of opportunities in booking and in pipeline.

We also enjoy a lot of success in our business development efforts in the field.

We've seen increased success in the field, identifying new and large enterprise opportunities.

By now, we're getting several qualified deals every week.

The average size is a few thousands.

Similar success now is picking up in certain countries of Europe, where we see cooperation with the local teams of Microsoft.

Now to the mix of revenues in the Microsoft space.

In terms of mix revenue, the mix of revenues, Microsoft Teams witnessed growth of 170% year-over-year, while Skype for Business declined moderately less than 10% sequentially and about 50% year-over-year.

All-in-all, we see much success and growth in the market of business.

We're talking usually about revenues, but I think it's more important to talk about what's evolving, about what I would call a book-to-bill ratio.

So we have seen an acceleration of overall Teams business, opportunities in the U.S. in the first quarter, having increased over 100% on a year-by-year basis, and over 30% relative to the prior quarter.

This metric is a good leading indicator pointing to ongoing momentum in our Microsoft business.

So all-in-all, substantial new Teams opportunity developing for us going forward.

As to the mix of accounts, where do they come from?

So we are around about 100, give or take, opportunities per quarter coming from our old Skype for Business install base, but growing number on Teams.

So all in all, comparing first quarter '21 to the first quarter of 2020, we have seen an increase of more than 50% year-over-year in terms of number of accounts moving to Teams.

To highlight some tough wins in the first quarter in the Microsoft space, talking about a large private company from the food industry.

This is a long-term AudioCodes customer that started with us and was back to business.

We have a gradual journey from Skype for Business to Teams.

We had a huge PO for that (inaudible) replacing competitor (inaudible).

Also, we are providing their Direct Routing as a Service through the live essential service.

Another big account in the U.S., the company well-known in the financial space, they are basically on track with the Teams migration project from Skype for Business.

We've done large professional services project for augmenting in-house capabilities.

Talking about a project in Asia Pacific.

We're talking about the bank in APAC.

We have provided a mixture of product and services, including gateways, session bullet controls, management, central management, routing capability, management capability for subscribers and professional services.

Early competitive win against a competitor from the space, and we -- in that specific deal, we have been funneling with a local -- a large service provider.

So how do we grow from here?

We have a clear plan.

We're going to grow the number of verticals live users.

We're going to scale up in revenue to AudioCodes Live professional and premium services.

We're going to introduce new business application services and upselling.

So that would include recording services, contact center services, analytics, meeting space services and conversational AI services.

Now going to the second large market, contact center.

That is a very fast growing market.

Revenue is now about 15% of our business.

We target growth of above 15% year-over-year.

This market is undergoing through several disruptions.

Firstly, the transition to cloud, also work-from-home evolved the main trend.

So (inaudible) easily becomes mainstream to maintain quality of service when communication goes over the Internet clients.

And then we are engaged in investing in the new emerging intelligent contact center.

And there, we have a greater role to our conversational AI.

All-in-all, this breadth of different technologies allowed us to expand our business in the past.

We've been much more focused on working very closely just with Genesys.

These days, we're expanding our work to work with more contact center vendors and also working with end users.

So the focus on contact center end-users, in contrast to the past, contact center vendor focus helps us in expanding the business.

All-in-all, the concession AI gets a big boost for automated and doing of self-service customer engagement.

So all-in-all, a very successful quarter of Contact Center.

As I've mentioned before, we've grown in revenues of more than 20% over the year ago quarter.

As I've mentioned, we have expanded beyond the Genesys environment.

So we're now selling into some other large contact center vendors in a meaningful way.

EMEA was very strong this quarter.

And we do see the same developing in the second quarter -- the current quarter.

We also engage much in new voice.ai technology that we call VoiceAI Connect that helps to connect with voice to chat bot, and that activity is becoming fairly successful.

Let me touch for a second on our SBC operation, which is our most important product.

Last year, sales reached short of $100 million.

We plan to grow this year another 20%.

The quarter was very successful.

We grew 30% above the year-ago quarter.

We've seen very strong booking growth, more than 40% year-over-year.

We all-in-all see a lot of activity in the space, various different projects, different technologies.

For us, this space represents a lot of opportunity.

Microsoft revenues in this space continue to grow 70% year-over-year.

In terms of geo split, the majority of revenues came from Europe, about 40%, about 25% and above from North America, 13% from APAC and the rest from CALA and East geo.

Now let me get to the smallest growth engine, but still very important and very exciting.

Talking about Conversational AI, our next-gen growth engine.

Conversational AI business includes the following lines.

It includes recording services that's part of Teams and Meeting Insights.

It includes also the VoiceAI Connect to connect voice to chatbots.

And then we have the Voca for Conversational IVR.

We've seen strong business.

As I've mentioned, revenue grew more than 100% year-over-year.

Our age in this area stems from the fact that technology realizes a combination of ungrown cognitive services technology such as speech-to-text, text-to-speech, machine learning, NLU, NLP and then cloud cognitive services and SBC networking telephony expertise, which sell for our competition.

Just in the cognitive service area, lack some of the components.

Long-term growth potential.

That business fund ended up in 2020 at about $3.6 million.

We now target to grow more than 50% this year, and we target to reach $10 million by the end of 2022.

Growth is driven by trends in the UCaaS and Contact Center and meeting industry and the trend from self-service, customer code automation in the Contact Center market.

Smart cap, which is our solution for compliance recording, enjoyed a lot of success.

We just got certification for Teams about 3 months ago.

We are one of the few who got that certification.

We've seen pipeline growing significantly, driven by the increased compliance recording needs from using a number of Teams users in the enterprise space, so very successful operation there.

I'll mention also VoiceAI Connect, our industry-leading voice enabling chatbot technology, plays a vital role in enabling contact centers to support increasing call volume arising from the ongoing secular shift to digital engagements.

We are preparing for production with several customers and are on track to achieve 1 million ARR by the end of 2021.

We will continue to provide updates on this exciting imaging business going forward.

So all-in-all, a very successful operation.

With that, I have concluded my presentation.

I'd like to move the call to the Q&A session.

Operator, please go ahead.

(Operator Instructions) Our first question today is coming from Samad Samana from Jefferies.

Congrats on the strong results.

It's good to see you kick the year off with strong numbers.

So Shabtai, maybe first, Team's growth continues to be very exciting.

And I know you dug into it about the quarter somewhat in your prepared remarks.

But when you think about the go-to-market motion, are you guys hiring more sales reps to sell into that Microsoft install base to drive voice into Teams, or maybe what's AudioCodes doing as an organization to address that opportunity from a go-to-market perspective?

Thank you, Samad.

I'm really glad you brought that up.

I didn't mention headcount.

Headcount really changed dramatically.

We grew 6% over the last year.

So we added another 45 employees to the 745 employees we had then.

Majority of these positions are with our sales and services organization.

And as you can expect, because we see a lot of growth in the U.S. Most of it is really occurring in the U.S., so yes.

And I can tell you, just in the past 2 weeks, we have approved between 10 and 15 new position for the sales and services organization.

There's a lot of activity, and we're going to support that with that.

Great.

And then maybe on the pipeline, again, your confidence in the environment definitely ran through on the prepared remarks.

But when you think about how you measure it in terms of either client inbound requests or sign-ups for demos, anything that maybe kind of tangibly that AudioCodes measures that points to what the pipeline looks like, or how healthy the pipeline for Teams related deals is?

Yes, we are.

We definitely track that internally.

We have analytics.

Each of these deals -- as we're moving more and more into our current revenues, we're measuring the pipeline.

We're measuring the total contract value that is accumulated.

We measure, obviously, the execution, how much was deployed, how much -- you need also to -- by the way, to simulate that.

Every organization that starts to move into AudioCodes Live and/or managed services is really deploying only a very small portion of its operation initially.

So it will be very natural for an organization to start with just few hundreds, right?

The proof of concept may start with 100 or 200.

But at the end of the day, this organization is about 3,000 or above.

So what we basically tell you is that -- and I have really -- in terms of total contract value, we have not counted the thousands, we have counted only the hundreds.

So there's a lot of accumulated potential there.

And as we continue to deliver well on our promises, we basically see growth.

I've mentioned tens of millions of total contract value.

That is what's developing within the scope of a year now, so a lot of activity.

Great.

Maybe just one last one for me, for either of you, but the profitability continued to be nicely above our expectations.

And so, I saw that AudioCodes repurchased $10 million worth of shares in the quarter.

Maybe, how should we think about the rest of what's left in terms of that $30 million buyback?

And if there's any appetite to maybe expand the buyback level given the current valuation?

Right.

So right now, I mean, by -- we are in a position where we need to relaunch a new purchasing effort every 6 months.

So the current one basically add like $25 million in total, out of which we already executed on $10 million.

So we're left with about $14 million for the rest of the 6 months that will end somewhere in July.

Again, based on the situation there based on what makes sense for us.

I think that we see a lot of value in this buyback because we definitely want to invest where we believe the investment makes sense.

And right now, that is what's happening.

Our next question today is coming from Raimo Lenschow from Barclays.

Congrats from me as well.

Can you talk a little bit about the strength in the call center market?

Like how much of that do you think is -- that you see there is kind of more like pandemic kind of one-off emergency versus really strategic changes to what's going on in the industry?

I think pandemic really put a lot of weight on the issue of moving the agents from the facilities into working from home, right?

There was no other choice.

So -- but during that process, I think many of the vendor, at the end-users actually, found out that the cost of using agents at arm is substantially lower than the cost of maintaining that operation on-prem on facilities.

So there's a natural saving when that force is sitting at home.

So obviously, that is a driver that's going to stay.

Beyond that, the evolution of the cognitive services technology and industry, I think, help moving from human agents operation.

This was 100% 2 years ago, 80% now.

And according to research, people believe that in 3 years from today, only about 30% of the agents will remain human.

So it's really the evolution of the technology completely or target out to the pandemic that is driving that shift.

Beyond that, there's a shift from the premises to cloud, which makes sense usually for smaller companies, but then provides a lot of efficiency for the vendors.

So not all of it.

I think it's mainly the work-from-home, it's the quality monitoring end-to-end over the internet.

Those are technologies that evolve due to the pandemic, but are going to stay with us.

Okay, okay.

Perfect.

And then if you think about your ongoing migration like towards more software away from hardware, can you talk a little bit about -- like are there any more active steps you need to do as an organization to kind of achieve it, or do you think it's just a natural evolution?

It's an evolution.

I mean, we have started that journey like 3 years ago.

We've gone great steps.

We are improving quarter-to-quarter, and I believe that in -- today, there's no single application that's developing internally that does not rely on cloud communications -- real-time cloud communications.

So everything that needs to take into account, DevOps, Software as a service, automation tools, et cetera, analytics, all of that is being developed as we go into 2021.

So I assume that in less than 2 years, we'll be fully cloud-based.

(Operator Instructions) Our next question is coming from Greg Burns from Sidoti & Company.

You gave the relative growth rates between Teams and Skype for Business.

But can you just give us the mix of revenue?

Like how much revenue in Microsoft is still Skype for business?

Yes.

I can tell you from top of my head.

So I think revenues topped $25 million or above.

Out of that, Skype for business accounted for, give or take, about $8 million, and the rest of it came from Teams.

Okay, great.

And then, when you look at the Teams market in terms of voice penetration with the end user base, can you give us an update on where that stands?

And have you seen any change in the trajectory or the pace of voice adoption within the Teams user base?

Yes.

I think we're seeing in '21 greater emphasis on voice.

It may relate to competition coming from other companies making voice more important this year.

Also, if you want to play on the top line of the vendors of us you really need to have all of the different components.

And this drives some other companies to invest a lot in voice.

I would mention also, by the way, this did not come up during the discussion that we have made some very nice steps in selling also into the Zoom environment.

Zoom Phone, which was less visible in our operation last year, started to pick up end of last year.

First quarter was really strong, above -- more than double the business we had in the fourth quarter.

So I guess that greater emphasis by all of the other players.

Take 8x8 and RingCentral announcing services that combines there offering with Teams.

I think all-in-all, the voice space is getting more importance these days.

Okay.

Great.

And then, in terms of Live, can you maybe -- what is embedded in that those ARR targets, the $10 million midyear (inaudible) million by end of the year, in terms of maybe the number of seats or the relative size of the accounts and ARPUs?

Right.

So basically, we're talking about companies who -- our target is mainly thousands of sets, but the project do start with type of 100.

In terms of services, we do provide the first, the most basic services Direct Routing SBC.

On top of that, we provide management.

On top of that, we provide other routing services, call recording services, in the future also some cognitive services.

So it's a stack of technology.

Actually, we start to push it as Teams Voice as a Service.

And when you're deploying voice like Team's voice, you really need a stack of technologies to provide overall processing.

So it's SBC, it's routing, it's management, it's devices, it's meetings, et cetera.

And then, that's what consists of Team's Voice as a Service or as we've called it before, AudioCodes Live.

Okay.

When you look at that stack of the underlying technology stack required to stand up like a seat, and then also these -- some of these incremental applications you're talking about cross-selling or selling into that universe, where do you think ARPU could get to, or where do you see it may be starting and...

Okay.

It's a great question.

We can start as slow as $1 when the service is the most basic one.

But when you stack up all of the different capabilities or when you need to connect to the local PBX or to provide more advanced services, the ARPU can go up to $4, $6, $7, et cetera.

So you can make the average yourself, but this is the range where, I would say, $1 to $7 million is the range of where we should earn up.

Okay, great.

And then just lastly, how are you going to market with Live?

Do you have any like direct or internal sales force selling that, or are you going all through channel?

So we're working with those channels.

I mean, we have not changed anything in our go-to-market`.

We actually include our partners in the game.

Obviously, we help them or elect the knowledge and/or the expertise.

But the go-to-market is indirect.

Still for some very large customers who have hundreds of thousands of employees, in some cases, we do some direct touch.

But the majority of the service is indirect.

Our next question today is coming from Ryan Cruz from Needham and Company.

Thanks for all the color on the Microsoft ecosystem.

Are you seeing any -- within that area, are you seeing any shifts in the competitive landscape?

Are you seeing new vendors get approved?

And then, second question on the product side.

Are you seeing any shifts towards more of a SaaS model there or is it still more kind of a licensed approach?

Sure.

So generally, there are not too many newcomers, right?

We've seen announcements from companies like 8x8, RingCentral and Vonage, offering services like that Direct Routing, nothing more than that.

So all-in-all, in terms of providing a full technology stack for Teams, I think we do not see much competition at this stage.

I'm sorry, the second question related to growing SaaS?

yes, changes in the product model.

Are you seeing -- is it more of a licensed model or is it more...

Yes, obviously -- Yes, right.

Actually, we did deploy -- actually, I'm glad that you mentioned it because in the first quarter, we have deployed a new service that we call Live Essentials on Azure.

This is a completely SaaS solution.

We're going to offer management solution as a service, et cetera.

The trend, again, is indeed to move substantially more from services and managed services into SaaS solutions.

Thank you.

We've reached end of our question-and-answer session.

I'd like to turn the floor back over to management for any further or closing comments.

Thank you, operator.

I would like to thank everyone for attending our conference call today.

With continued good business momentum and execution in the first quarter of 2021 and previous quarters, we believe we are on track to achieve another strong year of growth and expansion in 2021.

We look forward to your participation in our next quarterly conference call.

Thank you all.

Have a nice day.

Thank you.

That does conclude today's teleconference.

You may disconnect your line at this time, and have a wonderful day.

We thank you for your participation today.