AudioCodes Ltd (AUDC) 2002 Q4 法說會逐字稿

Good morning.

My name is Derrick (ph), and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the AudioCodes fourth quarter and full-year 2002 investor conference call.

All lines have been placed on mute to prevent any background noise.

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

If you would like to ask a question during this time, simply press star, then the number 1, on your telephone keypad.

If you would like to withdraw your question, press the pound key.

Thank you.

Mr. Knettel, you may begin your conference.

Thank you.

This is Erik Knettel, investor relations representative for AudioCodes.

I would like to welcome everyone to the AudioCodes fourth quarter and full-year 2002 earnings conference call.

Let me begin the call with a brief Safe Harbor statement concerning AudioCodes' business outlook for 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 forward-looking statements, as that term is defined under U.S. federal securities law, forward-looking statements are made 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 markets in particular, shifts in supply and demand, market acceptance of new products and continuing product demand, the impact of competitive products on 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.

Joining us today from AudioCodes, we have Shabtai Adlersberg, Chairman, President, and Chief Executive Officer, and we have Mike Lilo, Chief Operating Officer and Chief Financial Officer.

I would now like to turn the call over to Mike.

Mike, please go ahead.

Thank you, Erik.

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

I'll review the quarterly financials and give guidance for the first quarter, and then I'll turn the call over to Shabtai, who will review the business highlights for the quarter, following which we'll have the Q&A session.

Now for the financial highlights.

In the fourth quarter, revenue was $7.6 million, which represents a 6% increase from Q3 2002.

This is above the guidance that we provided for the fourth quarter.

Gross margins continued to improve and increased to 54% from last quarter's 53%.

Operating expenses remained flat from Q3 '02 levels despite increase in headcount from 263 to 278 employees.

The increase in headcount was mainly in R&D.

AudioCodes reported a net loss of $2.9 million, or 8 cents per share.

Cash balances for the quarter were 110,000,000.9 -- sorry $110.9 million compared to approximately 116.3 million last quarter.

The $5 million reduction in cash balances is attributed to a negative cash flow from operations at the amount of approximately $3.6 million.

Investments in capital equipment were $175,000.

And the company used approximately $1.7 million to fund a share repurchase program.

During the first quarter, we've essentially completed the original share repurchase program for 4 million shares, and we will be applying for board approval to extend the share repurchase program during the year.

DSOs were 53 days compared to last quarter's 37 days.

The higher operational cash burn relative to last quarter is due mainly to the fact that this quarter, the fourth quarter, more than 50% of our shipments occurred in the last month (inaudible) and subsequent higher DSO calculations.

Our guidance for Q1 2003 is as follows -- based on the visibility we have at this time, we expect revenue for the first quarter to increase by 10% in comparison to Q4 2002.

We forecast a loss per share of 8 cents in the first quarter based on approximately 37 million shares - Shabtai.

Okay.

Thank you, Mike.

Good morning, everybody.

I'll just go over the key highlights of the quarter.

Basically, the fifth consecutive quarter where we see substantial improvement in our performance.

We've seen revenue growing 6% over last quarter, 37% over last quarter in 2001.

We have seen narrowing losses.

Very good control over our expenses.

We kept a level of expense substantially flat while we have been able to increase manpower and investment in product development.

In addition, we've been able to continue our flow of new product to the market.

We have been focusing on building a much stronger, more diversified customer base worldwide in many of the regions of the world.

We have worked substantially on increasing distribution network.

We've added distributors in the Asia-Pacific area.

We've been working on other regions as well.

At the same time, we have been working to expand our sales coverage in other regions in the world.

We have added sales teams in Latin America and in east Europe.

On top of that, we've been engaged in M&A activity.

We've been evaluating different opportunities.

At this time none came to any closure.

We're very much encouraged by the growth over a year ago, our ability to sustain investment really showing that we going to bear fruit in 2003, and that is even more important in fact of the view that some of our competitors at this time are losing steam or getting weaker, and all in all, we do see our market share in different areas, technology and systems, improving.

We have seen continued evolution of our systems business.

We have further expanded our penetration and relationship with large system integrators and OEMs, none of which we at the current time are able to report.

We have seen continued launch of systems products.

We have named a few of them in our press release of yesterday.

Our penetration into the systems space is, at this stage, apparent more in the (inaudible) space and the (inaudible) space.

I'll go into details later on.

On the market side, we have seen some good things from the market that continued improvement in general atmosphere towards voice over IP is improving and the fact that (inaudible) technology substantially and gradually more perceived as viable technology, future technology, for the communication networks infrastructure.

Although spending in the service providers market segment is still very low, we are -- we are witnessing commitments of service providers to new service plans, new field trials, and growing activity in testing and evaluating voice over IP and voice over pact in the market.

That (inaudible) substantially better climate than we saw at the first half of 2002 and -- versus 2001.

Additionally, we do see continued deployment of voice over IP solutions in the enterprise space.

I'll get into numbers in a minute.

Evolution of the technology in the call centers area, in defense application, and also in voice networking over wide area networks.

Just to give you some highlights from a survey report by synergy research, in the first quarter of 2002, enterprise sales grew by 30%.

All in all, Q3 over Q2 was 16%.

We believe that the fourth quarter exhibited pretty much similar performance.

We believe -- and we saw that our (inaudible) to the enterprise market will be substantially higher in 2003.

What's interesting in that report is that for the first time, after two years of declining market size, they do believe that the service provider market segment will grow 25%.

Just to mention that in 2002, we went down in 56%.

All in all, the message for 2003 is continued growth of at least 40% over 2002.

We remain confident in our ability to achieve profitability towards the end of this year.

We believe that growth of the market, 30% in 2003, plus our improved capability to gain more market share and improve our competitive situation in the market will allow us to top that and grow more than 40% this year.

I think we've shown much of that belief in (inaudible) in 2003 by 11%.

That is very prominent, in view of the downsizing in the industry as a whole.

We believe that in 2003, we will continue (inaudible) on our position as the most sound choice (inaudible) voice over pact market.

We are bringing at this time to the market some of the most advanced solutions.

We are leading in performance, in quality.

We are very stable financially.

We're growing in that area.

We are committed to advance the technology, and we have shown very strong execution track record.

Just to mention some of the highlights in (inaudible) systems business, we have been able to get designed into a few projects in the enterprise space with one major player.

We do have initial traction with a few more.

Even more impressing is our performance in the wireless space and the (inaudible) space.

This quarter we have signed two MOUs.

We have also one big -- much of the activity revolves around activity in China, much less of it in other parts of the world.

That pretty much covers my overview for the quarter, Mike, and we can go now to Q&A.

Derrick, we'll go to the Q&A.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1, on your telephone keypad.

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

Your first question comes from Jonathan Half (ph) of UBS.

Hi, Shabtai and Mike.

Hi.

Hi.

Regarding gross margins, how do you see that trending in -- for the quarters of '03?

Our projections are gross margins to stabilize around 55%.

Okay.

And also, you're guiding for a very impressive 10% sequential growth in Q1, but your guidance seems, on the bottom line, seems to be flat.

Where is that?

Is that increasing your operating expenses in Q1?

We -- we've budgeted around $8 million in op ex, a bit higher than what we had in the fourth quarter as you can see from the employee numbers that I mentioned before.

We've increased the number of employees this quarter by 6%.

That will have a certain effect mitigated by our expense reductions here, but in general, our general plan is to keep the op ex during the year around $8 million and that's how it affects the bottom line.

Okay.

The last question before I turn it over to others, can you please just give us a breakdown between the subsystems chips and systems, and also geographically, please?

Okay.

Sales of systems this quarter is 6%.

Subsystems 60%.

Chips 28%.

And other income, 6%.

The geographical sales mix, Asia-Pacific 39%, Europe 10%, Israel 16%, and the United States 35%.

Okay.

Thank you.

That's it for now.

Thanks.

Your next question comes from Shal Eyal (ph) with CIBC World Markets.

Hi, guys.

Good afternoon.

Good quarter, good guidance.

Two quick questions from me.

The first one, the headcount increased.

What segments?

R&D?

Sales and marketing?

Which one?

There was an increase in R&D of 11 employees, and an increase in operations of 4 employees.

Fair enough.

And a reduction of 1 employee in G&A.

I see.

Recently, there was an OEM, Lucent/Cisco announcement, I think targeted towards the wireline.

Is that anything that could have any effect on you guys, or you're geared more targeted -- you know, towards the wireless?

This is Shabtai.

I'm not sure that -- no, I'm not aware of any specific announcement that relates to our business so, sorry, no idea.

I see.

Okay.

Thank you very much.

Good luck.

Thank you.

Thank you.

Your next question comes from Ted Jackson with US Bancorp.

Hi, Mike.

Hi Shabtai.

How are you?

Great.

Hello Ted.

How are you?

Great.

Couple of questions.

Could you discuss customer concentration for the quarter and the year and then I don't remember if you do it on a quarterly basis specific customers, but perhaps on the year, would be the first question.

And then secondly, just sort of tying into that, could you give us a quick refresher of who your major, you know, kind of OEM relationships are with?

Thanks.

Right.

Customer concentration number, doing off my head because the page is not with me but I'll get it to you in a second.

It's approximately 60% of my customer -- the top 15 customers are approximately 60% of my revenue this quarter, okay?

What was the other question?

10% customers?

No 10% customers this quarter.

How about for the year?

Also for the year, there are no 10% customers.

And then can you just give us kind of a refresher of who some of the larger, you know, customers or OEMs that you have are?

In general, we sell into a variety of customers, as you know, and -- and (inaudible) each one makes up a certain share of the, you know, top 15 in our roster.

Customers like Siemens and Nortel and other customers which I can't mention because we're under an MDA, but there are customers like OKI (ph), Variant here in Israel.

Those are some of the customers that we -- that compile the main customer list.

Okay.

Thanks.

As a reminder, in order to ask a question, please press star, then the number 1, on your telephone keypad.

Your next question comes from Robert Chapman of Chapman Capital.

Nice quarter.

Good to see you guys are giving 10% sequential guidance too, so congratulations.

My first question relates to that.

Are you seeing some kind of a basing out in overall telco equipment spending?

SBC had a conference call recently in which it appears for the first time they did not guide down on cap ex.

In fact, it looked like they may have actually guided flat to upward, so I'm curious on that.

And then I just have a couple more brief questions after that, but I'll just wait to hear your First Response.

Okay.

This is Shabtai here.

Basically if we divide the telco market into service providers and enterprise, I think we've probably seen the worst in the service provider.

Not that we expect much growth in 2003, but on the other hand, we do not believe that there will be a decline.

As a matter of fact, synergy research do estimate that there will be growth there of 25%.

On the enterprise space, quite the opposite.

We do see, and we agree with their estimate that in 2003, enterprise sales grow 30%.

So all in all, if you want to take these two data points and arrive at basically a conclusion that (inaudible) and that's the bottom, we should be able to believe similarly, yes.

My second question has to do with what I seem to ask about on every conference call, which is, you do a great job buying back stocks.

We're happy to see that.

But why didn't you authorize another couple million share buyback, given the -- you know, more than ample liquidity that you have, close to $3 per share, and given your burn rate?

It would take you close to an eternity to burn through that cash, particularly given your guidance for a break-even on the fourth quarter.

Actually, we are going to ask for court and board approval to extend the buyback into 2003.

It's a process that has to -- initially has to go through certain legal aspects and it's going to be done during this quarter.

As you know, I strongly encourage that, and I think your stock has outperformed a lot of its peers in downwardly moving markets as a result, so I hope you do do that.

The last question I have has to do with China, and it appears that the Chinese continue to be extremely tough competitors.

In fact, there's a company in China that's actually creating switches that are so closely identical to Cisco's that if you took the label off, you can't each tell and as a result, Cisco earlier in the week sued them.

What are you seeing in China in terms of legitimate competition and potentially illegal competition?

You know, I'm not the expert on what happens in the data com space.

As it relates to voice over IP, I think the technology, the software design, the applications are still evolving, and do require very high level of expertise and investment.

I think at that point in time, voice over IP technology is not in stake of similar risk.

I think in order to be able to compete, you need to own your research/development team, et cetera, so we do not see much of that, and -- at least for the next year or two, I don't think we'll see any risk coming from that part.

So you don't see any risk coming in the next year or two from China?

We see risk in -- well, let me phrase it differently.

When a product is stabilized and its software development is complete and performance is at the level that satisfying it's customers, then you would expect much more competition because competition really is more on cost basis and less on ability (ph) to further develop, integrate, (inaudible) and sustain and improve performance for a long time.

So as far as far as voice over IP is not in -- is in that stage, I don't think that (inaudible) is something that we should be afraid of.

All right.

Well, when it comes to China, I'm afraid of just about everything, so I hope you guys have your confidence based on your experiences and your competitive strength.

Thank you for the answers.

Okay.

Thank you.

Your next question comes from Mr. Hawks of Piper Jaffray.

Good afternoon.

Just have a quick question.

You talk about sales into the enterprise being substantially higher than -- in '03 than '02.

What do you see as kind of the key drivers for that, you know, and really gives you good confidence in that you're going to garner more business there?

Okay.

I think we coming from two ends.

On the technology business, we do see some continued performance improvement in terms of between 5 and 10% a quarter, so that's one area.

But more than that, we do anticipate that some of the design wins that we have enjoyed in the systems space will materialize and be translated into (inaudible) growing ramp-up in the second half of the year.

So in that regard, we do believe that second half will kick in much higher revenues than what we see now.

Okay.

Thank you.

At this time, there are no further questions.

Mr. Lilo, are there any further remarks?

No.

I just wanted to say thank you for everyone who joined the conference call and we had a great quarter, and Q1 also looks very, very good from our point of view and hopefully we'll see you in the next call a quarter from now.

Thank you, and have a nice day.

Thank you.

This concludes today's AudioCodes conference call.

You may now disconnect.