AudioCodes Ltd (AUDC) 2002 Q1 法說會逐字稿

Good day, welcome everyone to the AudioCodes first quarter 2002 earnings results conference call. Today's call is being recorded, statements concerning AudioCodes' business outlook or future economic performance, product introduction, plans and 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 that term is defined under U.S. federal securities law, forward-looking statements are subject to various risks, uncertainties and other factors that could 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, shifts in supply and demand, market acceptance of new product and continuing products demand. Competitive products and pricing on AudioCodes and its customers products and markets, timely products and technology development upgrades and the ability to manage changes in market conditions as needed. And other factors detailed in AudioCodes filings with Securities and Exchange Commissions and Tel Aviv stock exchange. AudioCodes AC audio coded net coder, trunk packet, voice (inaudible) media pack, Stretto and IP media are trademarks or registered trademarks of AudioCodes limited. All other products or trademarks are property of their respective owners, at this time for opening marks I would like to turn the called over to CFO, Mr. Mike Melo, please go ahead.

Good morning, good afternoon. Thank you for joining us on this conference call today. I will review the quarterly financials and give guidance to the second quarter and then I will turn over the call to Shabtai Adlersberg, chairman, CEO, who will give the highlights of the quarter following which we will have a Q and A session. Now for the financials. In the first quarter revenue was $5.7 million which represent a four percent increase from the previous quarter, the fourth quarter of 2001. It's above the guidance that we gave to the quarter. Gross margins increasing 47% from last quarter, from last quarter 43% which was the result of an improvement in variable gross margins and also a reduction in direct costs. Operating expenses went down from 2% from Q 4/01 levels to 7.7 million dollars. AudioCodes reported a net loss of $4 million at ten cents per share. AudioCodes closed the quarter with 261 full-time employees, an increase of 4% versus the previous quarter and increases mainly in R & D division. Cash balances for this quarter were $125.4 million compared to approximately $130 million last quarter. Production of $4.6 million in cash is attributed to a negative cash flow operation of approximately $4 million. Investments in capital equipment just under $1 million. contributed approximately $300,000 to the cash flow. Days outstanding came down from 67 days last quarter to 49 days this quarter. Our guidance for second quarter is as follows. We expect revenues to increase between 5 and 10% for the first quarter '02. We forecast a loss per share from approximately 11 to 13 cents. This is based on 39 million shares. Now, I will turn over the calls to Shabtai for the highlights of the quarter.

Thanks, Mike. What I would like to do basically is to review some of the biggest highlights of the quarter and then provide some perspective and observations on the market trends, some of the working exemptions and a few areas where we want to focus.

All in all, I think (inaudible) with the progress we have made this quarter. As planned we've continued to execute on what we have planned quite ahead of time. Basically the company continues to evolve in its traditional technology business and we see some good and positive happenings this quarter and at the same time we are developing our new OEM systems business, which is a very prudent evolution task for our company. We feel we are on track on that.

We still believe that with the launch of the new very diverse new line of complete voiceover packet beginning of the next year. We will and this is a hope, we will see some initial sales contributing in the first quarter of this year. We're very close now to launching this new product line. We're completing developments this quarter and we will employ some customer relations in early third quarter, so definitely a progress in our systems initiative.

We have been successful this quarter to reestablish our customer base and we have seen some nice surprises both in the gateway business and the media processing business. Gateway business is really triggered more towards international markets, mainly in the areas of countries I've mentioned mainly China and some initial spots in India and many other countries. We in North America we think in interest in media processing. We have announced this quarter very substantial customers, we hope, Arkein Japan and covert emphasis new from division new program services to allow system integrators to ponder with us on supplying the media processing boards into complete systems. We're focusing first quarter in reorganizing the streamlining of ourselves and marketing efforts, mainly in the international markets. We see a lot of focus there.

Actually yesterday we've announced to our new entry into the cable space which is very important step for us. Originally our plan have been to diversify our offerings and ability to grow in many different areas creating more or less who are technology based and products and we have invested substantially in this new cable, packet cable operation. We're working on that for six months already. In essence we're making a reuse of the technology investment that we've done throughout recent years. We entered into this field not alone. I mean we've basically worked with CableComwhich has been previously a cable telephony CableCom acquire trade development project, some technology business to upgrade our media gateway technology to adopt specifically for the cable market. We do intend to focus initially in Europe and we already got in contact with few of the market players trying to make some plans for (inaudible) in the coming quarter.

Just to mention (inaudible) in the cable space, I will mention a few data points that I think relatively few take a few of the telephony market, one of the few markets that still shows signs of growth is definitely the cable market. This is a new opportunity with standards finalized last year and with the wide accept accepted notion of the triple play of being able to bundle voice and media services from a single service provider will definitely position cable telephony to be competition to the incumbent public telephone. We do see (inaudible) offering services but definitely with the new cable (inaudible) just to mention some numbers. Right now we're talking about the customer base to be about 1.8 million, all our circuit switched, this is as of 2001 from 1.8 to seven in 2006 and the majority of all the subscriber base will move to (inaudible). Service revenues from cable telephony are expected to grow from 870 million last year to 11 billion in 2006. So large investment upgrading the cable plan lately and definitely telephony revenues will improve their cash flow. A new focus for us going forward will be on MNA. We think that when we take into account our very strong financial position and the market trail is both in the financial markets (inaudible) we think we'll find some interesting opportunities. We definitely intend to review and investing in how we can (inaudible) presence in the market through MNA activity. In terms of market outlook short term, the market is still slow. We do not see any major developments yet. However, we do get visits from customers saying that they see the market behaving much better than they saw it six months ago. Even we relate to some late inputs, we see the last month's (inaudible) articles more encouraging than before in terms of all their intake rate. But still, it is still very difficult to assess whether this will be a trend or this is just the second quarter. Long term, definitely the need for developing countries to invest in building their infrastructure based on you go and plan for the next 10 and 20 years. Second emphasis we see a lot of investment in media processing in the north American market, trying basically to develop new equipment that will be able to answer needs both on a the current (inaudible) under the new developments on NASDAQ. We do see (inaudible) or financial in a strong base of technology and products. We feel we're building better than other companies to where the market, this is a key strategic guideline for us going forward and we believe that will allow us basically to grow our market share versus the competition which is weakening. In terms of working exemptions, we understand the trends of lowering IFEX in North American marketing in other places in the world we still believe there is enough level of activity for a company like us to be able to grow our revenues, even in the definite environment getting to be more competent. Investment in 19 (inaudible) will continue and we see definitely a sense of that. As the company we will focusing growing the two businesses we have, technology business. We have stabilized and started to grow new opportunities in our modules and boards. At the same time we're developing a very strong, we believe, foundation for our system operations. We have invested substantially in creating a unified architecture that will be able to be used in different market segments such as the tracking, wireless market, cable market, etc. And that's basically summarizes my highlights for the quarter. Mike.

Phillip, we'll go now to the Q and A portion.

If you would like to ask a question today please press star key followed by digit one on your touch tone phone. Once again to ask a question, please press star key followed by the digit one. We will pause a moment to assemble our question roster. Let me go first to Victor Lynn with Robertson Stevens.

Hello, thank for you taking my question. Could you guys talk a little bit about the revenue break down in terms of product sales versus licensing and then break it out by product?

Yes, Victor. Hi, how are you. This quarter we're going to begin with a new presentation. Since we've recognized (inaudible) we've started a break down based on systems, subsystems in chips and other income from royalties and the subsystems include all the board modules and the analog, low density media gateways and that breakdown is as follows. Systems this quarter were 2% of revenue, subsystems 50% of revenue, chips 37% of revenue and other income from royalties and licensing, etc., 10% of revenue.

Thanks, Mike. Could you actually give me the last quarter's as well?

Right. Last quarter there were no systems sales last quarter. Or revenue perspective even though we did ship a shipment we did not so it is 0% for system, 70% subsystems, 24% chips and six% other.

Great. Thanks. And in terms of head count.

I made a mistake. I read 2001. My mistake. 5% subsystems, 37% chips and 8% others. I apologize.

In terms of head count, you guys, I think, stated that you were going to grow 5 to 10% going forward the head count. Is that still what your plan is? Then in terms of looking at our outbacks model, maybe could you kind of just talk a little bit more about how it might be a little bit lower or higher than what we currently had probably modeled?

I saw the models from the previous quarter. You had models in approximately an average of $8 million for IFEXin the first quarter we came in under that 77. Inaudible) for this quarter. In addition, as we said, we increased employees. Going forward we're going to increase employees at a lower rate probably in the previous quarter but we're still going to increase employees, not reduce them at least and therefore we're going to have in fact on the outback but we also expect the expected devalue situation of the dollar (inaudible) and therefore we expect the IFIX to be around 8 to 8.3 million dollars.

Great. Thanks. Moving on to kind of just the outlook for the business. I'm trying to understand. I mean you had an announcement on the cable space. You now have an enterprise business and access care type business, wireless and then even cable. Maybe Shabtai, if you could talk about -- and I know it is difficult to forecast this far out -- but just looking out how that revenue might break out over time at AudioCodes from those four types of businesses?

I think regarding the division of operations I think we're gradually moving into a different structure. I think (inaudible) the systems and technology in the systems space, we look at wireless cable, voice (inaudible) revenue product that we will announce in the second quarter. In the technology we count chips, modules, boards, etc. Now, right now I believe this year we will not see more than 5 to 10% revenues from the systems operations. So this year we will realize substantially more on the year should be a different story. We believe next year we should grow the systems business to provide 20% more revenues. We also would wait for the next two quarters to see how well those data products are being received by customers and we'll be able to provide more guidance as to growth of revenues but all in all, I believe we definitely plan going long term to rely on a combined revenue stream from both technology and systems.

Great thank you.

We'll go members from Goldman sacks.

Give us some guy gans on where you see your cash burn going forward. Mike can you give us a geographical breakdown, last quarter you spoke about opportunities in China and I wondered if you could give us some sort of update on how that's going.

Right. Regarding cash burn. Since next quarter's expenses relatively the same (inaudible) as the first quarters I expect cash burn, I will keep it as my original estimate of between six and seven million dollars next quarter also cash burn, total cash burn. Regarding geographical sales mix it is as follows. 35% to Asia Pacific, 18% to Europe, 11% Israel and 36% in United States.

Let me answer on China. Actually this quarter has been very good in China (inaudible) considering the Asia Pacific market. We are designing to some of the largest (inaudible) manufacturers who also build for gateway development. All in all our high end high density technology product is very successful there. We just added another person to our operations there. We're going to increase -- I believe by this quarter revenue (inaudible) we do believe that a portion of revenues coming from the far east and China will grow definitely going forward in 2003.

Thank you. Mike, with only 10% customers and did you sell anything to current and local techs this quarter?

Okay. There were no 10% customers this quarter. Customer concentration improved significantly in this quarter, top 15 customers were only 65% of total revenue and a lot of new customers this quarter. We sold to local techs this quarter it wasn't 10% customer although we don't say how much it was. Regarding (inaudible) I don't have it on my list here if we sold to them first quarter but it wasn't significant.

Lastly, did you sell in terms of TPM 1,100 and 800, odd whether you are selling systems of those products?

We don't want to release the exact percentage that we sold of the modules but yes, we sold modules this quarter, yes.

Okay.

We go next to Ed Jackson, U.S. Bank Corp.

Hi, Mike. All the real questions I had were asked. A couple of followups. First with regard to Asia and the attraction that you are obviously having here. Is there any business that you are actually garnering because of the collapse in Claronet, essentially their exiting from the media gateway business, as a follow-up question I do have a question on cable in Europe.

I have mentioned in our (inaudible) there is a trend that while previously gateway manufacture used to basically develop the Softswitch in our products, (inaudible) it turns more to a reference where they sell their Softswitch and we the channels, we are exposed much more to channels that have been opened by those companies in the past. Actually we're being approached by those channels. We now feel a need to fill these channels with media gateway and right now we are one of the best companies to do that. So that is definitely one of the plays in the far east and in China.

You are now actually partnering with Independence Softswitch manufacturers that are going after the Claronet install base or are you actually partnering with Claronet with Softswitch and then their referencing your media gateway platform?

We're basically doing both and we continue to work with Claronet and base of the fact that our (inaudible) work mostly with Softswitch and I'm not sure that other people can do that. Definitely there's a basis for the corporation with them. At the same time, we do work with other people again the play very simply is with the Softswitch (inaudible) for the media gateways.

And then in Europe with regards to cable, from what I've seen at least from reading the prices the market that has had the most activity to date has been Germany. I know Nortel has had a fair amount of success there. Could you spend a couple of minutes talking about your efforts with regards to the cable product within Europe and what countries you are particularly focused on where you see the greatest opportunity?

Right. You know, a disclaimer, I mean this is the first quarter for us going into the field itself. We have seen -- we have actually met with both systems integrators in Europe. We see activities basically monthly in the western part of Europe, mainly Germany, Netherlands, Spain, other countries in Europe. The good thing about this market is that it is very fragmented and while you do have the big (inaudible) such as (inaudible) there are other small carriers that for a small company like us entering this field will allow us basically to penetrate the market. We just have gone there for two trips lately but we definitely see, we participated last week in a trade show in Germany specifically devoted for the cable market. So all in all, definitely Germany is one of such countries.

You are going into initial trials this current quarter? You have those evaluation customers already lined up?

Okay. We already met with customers. We have presented our plans. Our plans right now are to complete the development. Essentially we're talking about a product line already -- should be completed early May so that would go -- could go into trial this quarter. The two other products will go into beta in third quarter and we're talking not only to Europe basically but there are other places too.

How much do you need to partner with CMTS vendors in terms of your ability to roll product out? Is there a need for you to work with those vendors closely or are the decisions made with regards to the gateway product made separate from any CMTS purchase decisions?

Well, our thoughts right now is it is a big system integrators that will serve the whole solution, the whole cable based telephony solutions. The system integrator basically needs to verify that the whole solution works which means interim between CMTS, (inaudible) gateway and other sponsors in the network.

Thank you very much.

We go next to Barry Lebovitz, Morgan Stanley.

Hi, this is Steve Apgard calling in for Barry. I have a couple of questions. Have you seen change in competitive landscape have you seen more competition with Asian manufacturers?

We have not seen at present the level of competition. I think what's going on is that since the technology is pretty complex and it takes many years to develop, we have developed players. So actually competition usually 80%, 90% of the cases basically is limited to the old players. Some of them continue to play as before such as I would mention NMS and other companies. But on the other end, as I've said, weakening financial markets basically get small companies to a tough decision about starting to compete with (inaudible) also you need to take into account the view of the end customer who really at this stage does not just care about the performance of the equipment, also gives us consideration to financial stability and soundness of the supplier and in that regard again competition is weakening. I can just give -- you know, even in the broadband effort in cable there's been lately a few examples of companies in shaky financial situations that definitely often for us source in new products and stability.

That's actually another question I had was who are you seeing as competitors in the cable space?

Right now there are published players. We know Tolbridgein U.S. and Europe and a few more companies. Relatively we've seen (inaudible) trucking gateways more into this new space was very new architected system. We think we'll come with a very interesting product.

One final question. The stronger order intake that you mentioned seeing in March of this past quarter, are you seeing that continuing into April as well?

Would you repeat the question.

Regarding the stronger order intake rate that you were seeing in March, have you seen that continuing into April?

Yes. April quarter, April month is also very strong in the rate of the orders that are entering the company and it's looking quite good.

Great. Thanks so much, gentlemen.

We go next to Joe Sears, CIB World Markets.

I just have one question that hasn't already been asked and it's related to gross margins. I had a real strong upstake in this market and Mike, I was just wondering you briefly talked about it. I wonder if you could give some color is to strength and gross margins and also I'm curious about sustainability more at the 46 and-a-half, 47% rate going forward.

Right. I think the thing at the moment is the fact that on the price side, in other words, the price pressure is not that significant for us and the product is very, very competitive, very, very strong. The volume isn't where we want it but in general, what we're selling, we're selling at a good gross margin. Manufacturing costs, manufacturing costs are now lower because the fact of the components are still lower than they were in previous quarters and years. As you know, during the height of the spike of 1999, 2000, burn out old inventory and start using new components and that moves us into the gross margins and direct gross margin. And the indirect costs, as I mentioned in the opening, they also went down and that made mainly if you read to the fact that we had the effect of the dollar devaluation.

How bad do you expect the gross margins are going to be sustainable at the current levels?

I think we're going to see gross margins go up as the volume increases and fixed costs spread out over a larger volume of sales and also relative to products in this course it has been in effect but as a state it is still minimal. And I think gross margins should move up slowly and I target the 55 to 60% range in going long term.

Thanks a lot.

Once again to ask a question, please press the star key followed by the digit one. We go to Dave moss berg with SWS securities.

Thank you, my questions have been answered.

This is more kind of a macro related question in light of what we're seeing out there in terms of our long-distance carriers. Are you getting a sense or a feel with some of the realities, you know, I guess no new news but the margins we're seeing in long distance, you mentioned earlier that you kind of felt some of your customers felt that the market was behaving better. How much with the bump in what we're seeing in the revenue do you think is a sense of urgency to get in and with the new enabling technology for voiceover market or is it more kind of a gradual, sustained trend in business? I guess my question is are you seeing anything related to the environment that would have caused, you know, the growth in the quarter or do you just think this is kind of we could see five, 10% normalized revenue growth from here on out?

As I said before, I think if you ever in the overall market. This is tough to say that the market outlook looks better. My feeling is that our increase in revenues in the first quarter and what we anticipate for the next one is basically build more on the maturity of our products, the ability to see the new design (inaudible) and our improving competitive position in the market. As to whether the international biclassification will drive the business, we basically changed that perception a long time ago. I think that that biclassification is no a long time no more the key driver. The key driver is basically the evolution of the public networks. Definitely more in the developing countries but also in the established ones where we effect the background simply because that's more economical for the service providers. If you just take the capital (inaudible) triple play, the ability basically of the MSO's to still (inaudible) the subscriber away from the incumbent telephony service provider that's a major drive for growing in the market. So many areas and services, more services in terms of conferencing announcements, all of those transfer in the gross of the market (inaudible).

One other question. You mentioned competition weakening. Could you take some shares here in the quarter?

I'm sorry?

Market share.

It is very difficult to define more share in terms of percentage. I can speak more freely about being able to win accounts. We definitely feel strong each time we come into a new account winning it and I believe that (inaudible) we're able to design out the competition.

Thanks.

We'll take a follow-up question from Nick Terlin.

You talked about the guide. Guide being 5 to 10% essentially. Can you talk about background coverage where it's at and maybe the turn expectation between 5 and 10%. Thanks.

Backlog at this stage is more than 50% of our guidance at this time. So and we see before on the previous question that, in answer to the previous question that the April month was strong and, therefore, it looks very positive that we can do the numbers that we put out today.

Great. Thanks.

We go next to Porner Jacobs, UBS Warberg.

According to your profitability?

We don't -- as you know we don't give guidance more than the current quarter so I don't want to give projections when we're going to break even, though the calculation at what levels we're going to break even is quite simple as affects will be are above 50%, then we need between 13 and 14 million dollars to break even. That's the level. When we'll reach that number I just couldn't say at this time.

Okay. Thanks a lot.

There are no further questions at this time. I would like to turn the could he in Mr. Melo for any additional comments.

I want to thank you for joining our conference call. Please feel free to e-mail me with any questions that you might have and I will get back to you as soon as possible and if you want to call me, of course, and I hope that you will join us at our next conference call in the next quarter. Thank you very much.

Thank you for attending today's conference call. Thank you for your participation. You may now disconnect.