AudioCodes Ltd (AUDC) 2002 Q2 法說會逐字稿

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Good morning.

My name is

and I will be your conference facilitator today.

At this time I would like to welcome everyone to Audio Code's second quarter 2002 earnings conference call.

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After the speakers' remarks, there will be a question and answer period.

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You may begin your conference.

Thank you.

My name is

of Thompson Financial Global Consulting.

I would like to welcome everyone to the AudioCodes second quarter 2002 earnings conference call.

Let me begin the call with a brief safe harbor statement concerning AudioCodes' business outlook or future economic performance, product introductions and plans and objectives related thereto and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters.

These 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 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 market in particular; ships and supply and demand; market acceptance of new products and continuing products demand; the impact of competitive products; and pricing on AudioCodes' and its customers' products and markets; timely product and technology development; upgrades and the ability to manage changes in the market conditions as needed and other factors detailed in AudioCodes' filings with the Securities and Exchange Commission.

AudioCodes assumes no obligation to update that information.

I would now like to turn the call over to AudioCodes

Chief Operating Officer and Chief Financial Officer, Mike Lilo.

Mike, please go ahead.

Thank you, Eric.

Good morning and thank you for joining our conference call today.

I will review the quarter's financials and give guidance for the third quarter and then I'll turn the call over to Shabtai Adlersberg, AudioCodes' Chairman & CEO, who will review the business highlights for the quarter, following which we will have a Q&A session.

Regarding the financial highlights for the quarter, in the second quarter of 2002, revenue reached $6.7 million, which represents a 16 percent increase from Q1 2002.

This is higher than the guidance that we gave when we began the quarter.

Growth margins increased to 53 percent from last quarter's 47 percent.

Part of this increased contributed to AudioCodes succeeding and selling approximately $600,000 of revenue from inventory written off in the third quarter of 2001.

Excluding this portion, gross margins increased to 48 percent from last quarter's 47 percent.

Operating expenses rose slightly from Q1 levels of $7.8 million.

AudioCodes recorded a net loss of $2.7 million, or $0.09 per share.

AudioCodes closed the quarter with 262 full-time employees, an increase of one employee versus the previous quarter.

Cash balances for the quarter were $120.8 million compared to approximately $125 million last quarter.

The $4.6 million reduction in cash balances is attributed to a negative cash flow from operations of approximately $2 million compared to $4 million last quarter.

Investments in capital equipment were just under $500,000 and the company used approximately $1.2 million to fund a share repurchase program.

DSOs for the quarter were 52 days.

That would be above last quarter's 46 days.

Our guidance for Q3 2002 is as follows.

We expect revenue to increase between five to 10 percent from Q2 '02.

This percent increase is captured, of course, in the total sales for Q2, including the portion that was sold from our inventory written off in previous quarters.

As part of the company's continued ongoing cost reduction program, salaries were cut this month by approximately seven percent and our forecast for earnings loss per share for this quarter will be between $0.10 to $0.12 on approximately 38.4 million shares.

I'll transfer the call now to Shabtai Adlersberg.

OK, thanks, Mike.

What I will do basically is go over the different highlights of the recent quarter.

Most important is that that has been our first consecutive quarter where we have been able to increase revenues.

We see that now as a trend that allows us basically to plan our return to break even and then to profitability towards our second half of 2003.

of the quarter is the fact that revenues came in strong than anticipated.

We have a nice backlog developing for the quarter.

Our visibility is still low in the market, but still from increasingly growing our customer base, we feel confident we can show continued growth going forward.

We have been able to control our expenses and we did so our losses.

Initially we anticipated a loss of $5 million per quarter in the second quarter.

I think the fact that we've been able to close it at $3.7 million shows our ability to control expenses.

It's even more substantial when we take into account that we have been able at the same time to expand our product line, expand our productivity and I believe that a year from today probably our decision to keep our investments, keep developing new product lines basically will be perceived as the most important strategic decision that we made a year ago.

Most important in this quarter was the fact that we have moved into a very warm reception for our systems initiative made by the T1 and T2 OEMs.

We are much more into outsourcing than before and when you take into consideration the fact that there are very few other quality

remaining around us, AudioCodes is emerging as one of the most viable players in the gateway business for the

market.

Basically now we do believe that we are emerging from a period of about four or five quarters that took us to stabilize the business, to regrow a new customer base and basically build a infrastructure for a new product line for the company that will take us forward towards break even and profitability.

Just to get some higher

claim to return to profitability by the second half of 2003, we are going over the period

from

2001 to

2002.

We've basically seen some cash revenues starting to build up.

We have been substantially losing in our operations, but at the same time building our next generation products.

We're just expanding our investment in products in the systems area.

We have been able basically to grow and stabilize a much more mature server client.

We have a very stable platform going forward, both in the

space and in the

space and most importantly it means that while we've felt it dramatically from a lot of very good customers early in 2001, we are now sitting with a very strong customer base.

We do not have any more

customers and we actually see our most

assisting the same customers, treating customers.

So customers are going down.

We have been able basically in these four quarters to develop key ingredients for our systems initiative.

For the following four quarters which will basically stand from 2002 to mid-2003, we perceive and plan on growing revenues on a quarterly basis.

We see our losses narrowing down.

We are basically launching our systems.

This time the lower end of the system got to the market three months ago showing a very nice reception in the market and we do believe that with our higher density, a new density level, systems that are going through trials and beta this month and next month will show more incursions and

into the market.

We'll basically work hard to control our expenses and keep them so that we can narrow our losses.

We will be building a systems customer base, and I'll get to that in a second.

And even more, not less important than that is the fact that we worked very hard in creating and rebuilding a distribution network for different product lines that will allow us basically to improve our stability and specialize in certain applications.

We do believe that investing and executing

will allow us basically to a sense to break even somewhere at the end of the third quarter next year and from that point and on go to profitability.

Now, getting into some of the highlights of the quarter in terms of for our systems initiative, we have launched our wide line media gateway advance three months ago.

We have launched our cable exit gateway initiative at

in the U.S. in May of this year.

And at

we have announced a low desnity media server platform that's

.

All in all, we have engaged in a very active market and communications program.

We've got

back from

.

I think the overall consensus is that very positive

for our ability to take advantage of a very strong technology base and a very efficient product development into moving up the food chain and becoming a much more central player in all that market.

To give you some highlights, there are two tier one OEMs with which we have been able to start very advanced discussion and negotiation on using our system products.

We will announce shortly a very successful

for our cable access gateway in Europe and we also are discussing in advance stage in the wider states with the T1 OEMs.

Only four in all where are System 2000 is available from the end of March and the 5,000 and 8,000 systems will be released this quarter.

All in all I think our ability to secure a design

in the tier one OEM speaks to our ability basically to emerge from the components and the technology business into the systems business.

We are entering some testing periods with some of those tier one OEMs.

We feel confident that we will show performances.

Most of those new systems are based on technology and product that we have introduced to the market a year ago.

We do see more

in the market towards enterprise use than in the

states while there's definitely a substantial reduction in expenses in the carrier states, spending in the enterprise state is not going down that rapidly and we still enjoy some success there.

investments, we have completed the development of the lower end product.

We are going to do a few more trials in Europe and we believe that the placement of

we will be capturing a major share itself in that market.

At the same time, we do look forward to the media gateway play

playing the U.S. to be a

there, as well.

On the

front, we have shipped two systems this quarter to the Far East.

We've definitely seen much more activity in the Asia-Pacific region than in some of the other markets, mainly Europe and mostly America.

And all in all I believe that we feel that prospects for those wire line and wireless are very active in the Far East at countries such as China, South Korea, Japan and others.

We are investing substantially with fine business planning, trying to calculate our moves going forward and basically plan our return to profitability by the end of next year.

And with that, basically I'll conclude giving you our business highlights.

Thank you, Shabtai.

We'll now go to the Q&A session.

Crystal?

At this time I would like to remind everyone in order to ask a question, please press star then the number one on your telephone key pad.

We'll pause for just a minute to compile the Q&A roster.

Your first question comes from

from Morgan Stanley.

Hi, guys.

Hi, Barry.

How are you?

Good.

A couple of quick questions.

On the profitability, what's a rough break even rate that you're targeting in that second half of next year on a quarterly basis?

And just when you think about the expenses, you've kind of held pretty flat the operating expenses at around $8 million, even though the revenue has been up over the last, what, three or four quarters.

Do you think you can continue to hold that relatively flat over the next few quarters at around $8 million?

Barry, I think our main objective is to keep the $8 million as a top level number and try to bring it down as fast as possible as much as possible under the circumstances.

And the more substantial issue is to increase revenue.

As our system

is ticking and Shabtai was giving a description of the phases as we kick the, as the

kicked in and starts bringing in revenue, we think it will be more

obviously in 2003 and therefore revenue will go up and the break even revenue number will be between $13 million to $15 million top line, and that will bring us to break even.

OK.

And Shabtai, can you talk a little bit about what you're seeing in the voice-over I.T. market.

Where are you seeing strength?

It sounds like there's some strength in Asia.

What are you seeing on the U.S. enterprise side?

Can you just give some color on the market?

Thanks.

Right.

It's right before

spending in the

states is rather low.

We still see -- and I guess that comes out of the need to rebuild the infrastructure in the Asia-Pacific markets -- we do see very intensive gateway and soft switch and other IP network development, mainly in countries such as China, Japan and some South Korean companies. other IP network development, mainly in countries such as China, Japan and some South Korean companies.

At the same time, the enterprise phase is really suffering much less on a global basis.

We are encouraged by the fact that on a company level and an enterprise level, the ability basically to

communication

, to integrate voice and data, expense and communication expenses leave companies who choose the voice or IP solution, I think the fact that we are sitting like two or four years after the technology got to the market, meaning it's more mature and really productive, I mean we at AudioCodes do operate the voice IP in the company network between Israel and the U.S. and China.

So in

space, spending is reasonable and

than in the

states.

OK.

Thank you.

Your next question comes from

from U.S. Bancorp.

Hi, Shabtai.

Hi, Mike.

How are you?

Pretty good.

Fine, thanks.

A couple questions.

Number one is I don't know if this was in the press release but did you give a break out of the geographic mix in terms of sales?

No, but I can give it to you if you want.

That would be nice.

OK.

Forty-eight percent of sales were in the United States, 33 percent in the Far East, 10 percent in Israel and nine percent in Europe.

And then how about from, you know, a product mix perspective, you know, a systems, subsystems type analogy?

OK.

.

OK, three percent in systems, 68 percent in subsystems, 23 percent in chips and the remainder in other, I think it's around six percent in other.

And then lastly, as it relates to the results for the quarter without, you know, the previously written down inventories and such, do you, did you provide any kind of color in terms of kind of what the revenues would have been and the bottom line without that?

And then related to that kind of would there be, you know, would there be any way for you to sort of provide some color towards that end as it relates to the third quarter guidance?

Yes.

As I said earlier, the amount of revenue from our written off inventory is approximately $600,000 and the gross margin without that would have been 48 percent, OK?

It came out at 53 percent when you add back this revenue.

Our guidance, despite that, our guidance will be on the top number.

In other words, on the $6.7 million is our guidance number to take into account that this -- we can achieve higher revenue going forward.

OK.

OK, well, a good quarter.

Thank you very much.

Thank you.

Thanks.

Your next question comes from

from UBS Warburg.

Yes, thank you.

Hi, Shabtai.

Hi, Mike.

Hi.

Can you all just, in terms of both on the wire line and cellular market, as well as the enterprise market, just give us a quick rundown on who you see as your most direct competitors.

OK, in the enterprise space the most successful companies these days are Cisco and 3Com.

And we do believe there's other companies, such as

and

,

companies, will try to increase sales in the enterprise space.

We've tried to work with some of these companies and at the same time we've tried to work through our distribution channels in various countries in Europe, in the U.S.

We have basically a ownership with one of these companies that's still in its infancy, but we believe that in the next two or three quarters we'll develop it to more substantial sales of our media gateways.

When we talk about the wireless space, we, there's substantial investments, as I've said before, in the Asia-Pacific markets, definitely 3G is active in South Korea and Japan.

We do believe Chinese companies are working hard, especially those that will go into

situations.

Therefore I think believing that when product development occurs there, that we do believe that some of the T1 system companies cannot stay behind and therefore need to invest enough to allow a gap to be developed.

So we do try to work on both fronts.

OK.

In terms of your systems business, can you give us a target of when you expect them to become a more meaningful percent of your revenues?

Yes, later on, I think, this year should we be able to achieve our objectives in the systems business, we will, those will be contributing like five percent this year in 2002.

In 2003, we believe that percentage will go to 25 percent and in 2004, I believe it will come close to 50 percent and above that.

OK.

And my final question, you made a comment, I believe that you said that you built a nice backlog in the quarter.

I might not be quoting you exactly on that.

Can you give us a bit more color on that in terms of your visibility into at least this quarter?

And also if you can comment on the back to bill in the quarter, if it's relevant.

And thank you.

OK, yes, we do, we did go into the quarter with more than 50 percent of the expected revenues in hand.

That's a nice backup these days.

Beyond that, this quarter shapes up nicely.

It's very hard to see the quarter beyond that.

OK.

Thank you.

That's all for now.

Thanks a lot.

Sure.

Your next question comes from comes from

from Goldman Sachs.

Hi.

Thanks a lot.

One of my questions has been answered.

Mike or Shabtai, maybe you could touch on currently how you see the revenue ramp sequentially playing out.

I mean you're talking about break even towards the second half of next year, something between $13 million and $16 million.

We're at a six to seven level right now.

In terms of the timing or in terms of when do you really see the acceleration in those numbers to get you that high a revenue level, how do you see that playing out?

What's going to drive that and your kind of -- in terms of timing, when do you think we start to see some of that acceleration?

Right.

Basically what we do see is -- our plan, at least, of the way we see it now is that we do try to keep our revenue growing this year by approximately 10 percent on a quarterly basis.

We do believe that since we will be going to beta in the issues of trials for our systems this quarter, then the more substantial revenue kick in from the systems business will occur in the first quarter of 2003.

But those ideas assume that starting from the first quarter of 2003 and going forward, we will see an increase of 15 percent on a quarterly basis.

I believe that if one of those opportunities develops as we think it will, we could expect even more substantial growth.

But I believe it's pretty reasonable to assume 15 percent on a quarterly basis next year.

OK, great.

In terms of some of the big OEMs that either you're talking to your you're kind of in final stages of trialing some of the systems with, what are the partner applications and what can you use this for?

Is it mostly enterprise?

Is it carrier grade?

What are they looking to sell it into, primarily?

Those are different at each OEM.

One of them is in the area of finances.

The other one is in the enterprise space.

Actually, in one of those T1 OEMs, we do look into more than one opportunity and those

between us

too.

So all in all I believe, you know, I didn't talk much about the competitive environment, but anybody looking more deeply into what's the landscape, you know, they see that there's a phenomenon where many of the previous gateway companies are not too successful in their gateway business and therefore have less desire for

take an example of, you know, just training

which this quarter and we see a few more weekends coming.

We simply, it looks like

really starts into a marketplace that's becoming more and more open.

The fact that we are very strong financially and we have some staying power basically is a great advantage towards our possible partners, because for them it's very important once they decide on our

and they have to decide that way these days, because they do not have many, much R&D funds available, they do need to look for a very stable partner.

And nowadays, I believe, AudioCodes does represent one very such

technologically and stable financially.

And that happens for

substantially those T1 OEMs, those who carry enterprise applications.

All right.

OK, great.

Thanks very much.

Sure.

Once again, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone key pad.

Your next question comes from

from SWS Securities.

Hi, good morning.

Good morning to you.

Really, just some housekeeping questions.

Can you tell me what depreciation was during the quarter?

Depreciation?

Depreciation.

Yes, approximately $500,000.

And what do you expect from capital expenditures going forward?

Approximately the same number next quarter, about $500,000.

OK.

Do you need to increase that amount to, you know, in future quarters or...

No, I think it'll remain relatively stable.

OK.

The other income line was a little bit lower than what I expected.

Was, what do you expect from that line going forward, as well?

I don't expect a significant change in that line.

.

How many shares do you have left under your authorization?

We, let me see the exact numbers here for you.

One second.

Here we go.

We purchased up to Q2 2,150,000 shares out of four million.

And the first month of July we purchased another 274,000.

So as we said before, we have authorization to purchase up to four million and we did about 2.5 already.

OK.

Thanks a lot.

Your next question is a follow-up question from

from UBS Warburg.

Yes, just to follow-up on the previous question, regarding other item, was that the financial income line?

And why was it down?

And why do you expect it to be at this level?

The financial income line is, represents the interest income from our deposit on the cash balances.

The cash balances as they go down, obviously, the income goes down, in fact, income and also the interest rate when we have certain long-term investments which mature and as interest rates have come down worldwide, therefore it hits that number, it hits that line and the numbers go down.

I think it's going to stabilize around these levels approximately.

OK, great.

Thank you.

Your next question comes from

from

Hi Shabtai and Mike.

A very nice quarter.

I have a question about the end markets that you're going after, cable, wireless, wire line now.

How do you see those markets unfolding in terms of timing of twhen they ramp up in terms of which ones ramp sooner or later?

And also, can you give a little more color about what your content is?

Does your product -- where your product goes on the wireless site on the cable side and how we should be thinking about pricing of your product and modeling for the different markets?

OK.

First, just a note that, you know, from initially the strategy in the gateway business for us was to build a series of platforms that can go from the

site into approximately any gateway business should it be cable, wireless, wire, media server, etc.

We

more of the software applications

make it such platform unique for the space.

Now, in terms of wireless and the business developing

, basically the wire line is the more active space simply because there's already entry for that market from a recent symmetry report, I believe, the global sales into the wireless space have been like $390 million in the first quarter of 2002.

So wire line is definitely strong

some of our

opportunities are in the wire line space.

We do see initial trials and deployments in the cable space in the U.S.

You know, Comcast has just completed a trial in the

market.

We know they do plan a market deployment next year in Philadelphia.

So all in all, packet cable was

and the cable space will probably develop first in the U.S. market and I believe that 2003 we'll be on the initial deployment and 2004 should develop into substantially sales.

In the wireless space, there'll be some delays.

We, a year ago we started

wireless metric

than what we see today.

We are witnessing a slowdown in the market, but as I've said before, there's some activity in the Asia-Pacific market that does not allow North American companies to spend

.

So we do expect that sales into the wireless space will only take from 2004.

That's basically, in terms of the application, where are the gateways going to, it's a mix up of being used in tracking applications where you want to bypass

communications.

Then it can go into access applications such as cable networks basically allowing to offer a converged communication to the last mile.

In the wireless space, it's really part of changing the infrastructure, the

from being TBN-based into packet-based simply because applications are third generation or expected to combine voice and data.

So that's roughly the description.

And is there a difference in pricing in the different gateways into the different markets?

Yes.

Well, in terms of pricing, I would say that there's a difference today basically between the cable market and the wire line market, and that's simply tied up to quantities.

There's much more less in the wire line applications.

The price per line tends to be lower, roughly in the 50, 60

for line, depending on the quantity.

In the cable space it's much higher.

All in all we do see that still we do not see very high density gateways being deployed.

Most of the activity in the market is still surrounding around lower end and mid end densities.

Thank you.

Your next question comes from

from CIBC World Markets.

Good afternoon.

at CIBC World Markets.

Hi, Mike.

Hi, Shabtai.

In terms of your quarterly cash burn for the remainder of the year, Mike, do you have anything in mind that you can provide us with?

Yes, I think cash burn will be between $4 million and $5 million per quarter till the end of the year.

Obviously next quarter I'll give a guidance again.

But it looks like we're stabilizing and going down in cash burn.

As you saw this quarter from an operating perspective, cash burn went down from $4 million to $3 million for operating activity.

Therefore, I think as revenue goes up and expenses go down, this is just going to go and improve and just increase our stability and staying power in the market.

OK, thank you very much.

Good luck.

Thanks,

At this time, there are no further questions.

Mr. Lilo, are there any closing remarks?

OK, thanks, Crystal.

I want to thank everybody for joining the call.

I think we had a great quarter this quarter and hopefully we'll have a better quarter next quarter and I thank you for joining us and we'll be in touch.

Thank you for participating in today's AudioCodes second quarter 2002 earnings conference call.

This call will be available for replay beginning at 10:00 a.m. today through 11:59 p.m.

Eastern on August 7, 2002.

The conference I.D. for that replay is 4840399.

Again, the conference I.D. number for the replay is 4840399.

The number to dial for the replay is 1-800-642-1687 or 706-645-9291.

Thank you.