AudioCodes Ltd (AUDC) 2003 Q1 法說會逐字稿

Good morning.

My name is Amy and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the AudioCodes First Quarter 2003 Earnings 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 "*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 with the Global Consulting Group.

I would like to welcome everyone to today's 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 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 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 it's 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.

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

I'll review the quarterly financials and give the guidance for second quarter and then I'll turn the call over to Shabtai to review the different types for the quarter, following which we will have a short Q and A session.

The highlights are, for the first quarter revenue was $8.4 million, which represents 11% increase from Q4 2002.

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

Gross margins continue to improve, increased to 55.7% from last quarter's 55.4%.

Operating expenses rose slightly to approximately $7.7 million.

We increased head count this quarter by 14 employees compared to last quarter, which brings us to a total of 291 employees at AudioCodes at the end of the first quarter.

The increase in head count was mainly R&D and sales and marketing.

AudioCodes reported a net loss of 2.5 million or 7 cents per share.

Cash balances for the quarter with 108.3 million compared to 110.9 million last quarter.

The $2.6 million reduction in cash balance is attributed to a negative cash flow from operations of approximately 2.1 million and investments in capital equipment were approximately $0.5 million.

DSO's were 50 days compared to last quarter's 53 days.

Our guidance for second quarter is as follows: Based on our visibility at this time, we expect revenue for the second quarter to increase to between 10 to $10.5 million.

We forecast a lost per share of approximately 7 cents in the second quarter based on approximately 37.4 million shares.

Shabtai?

Thanks, Mike.

We are glad to report another growth quarter for the company.

This has been our sixth consecutive revenue growth quarter.

Basically we continue to execute on our plan to grow revenues, to lower losses and get back to break-even and profitability.

Our focus this quarter was placed on building a stronger and more diversified capital base on a worldwide basis.

This has been achieved mainly in the systems area in the media Gateway product lines which exhibited nice subsequent growth over the last quarter.

We have extended our sale coverage on a global basis by opening sales operations in Latin America in east Europe.

Most notably this quarter, we have completed a very important first M and A activity with (inaudible) with Nortel networks.

We are very encouraged by our continued growth of 47% over a year ago.

We basically see that our formula continues to work.

We have sustained investment in R&D, we have extended our partnerships with living system integrators, vendors, and applications manufacturers.

We have more mature rich product line portfolio and at the same time, we are continuing to make our position of -- packet subsystem and OEM supplier stronger.

We are perceived by our customers to be reliable and provide unique and most advanced technology in the media Gateway platforms, and, therefore, we are a natural choice for honoring the (inaudible) vendors.

We see continued evolution for our systems business, we extend our foothold as a key supplier of (inaudible) for the leading OEMs in the enterprise (inaudible).

Plan for 2003 of growth of over 40% in our top line.

I believe that now with the UAS transaction almost completed, we believe that we should get growth this year beyond 55, 60%.

This growth, with cooperation with market leaders (inaudible) improving competitive position should support further succession growth in coming years and definitely in 2004.

Our sales from (inaudible) customers into greater China are being affected now by the SARS epidemic, and we see slower growth in our sales to the region.

Should the situation continue to deteriorate through this quarter, we may see decrease in our revenues in China.

We also have witnessed slower sales and booking process during the month of March, some of which we believe is related to the war in Iraq.

Some of that has been picked up back in April, which we hope is just -- all that phenomenon we hope is just a reflection of the general weak economic climate on a worldwide basis.

We do not see much activity today nor (inaudible) activity except for trials in several places in Europe.

Now to the most prominent event in this quarter, which is the transaction with Nortel networks.

We have announced a few weeks ago that we have entered into agreement with Nortel networks to acquire the UAS Product Group and assets, and that we will (inaudible) supplier (inaudible) while in succession business for a period of three years.

Basically this means that AudioCodes has been chosen by Nortel networks to develop the next generation media server product, which is packaged designed Nortel networks packet suggests session architecture.

We see that that as a mission in our acknowledging product excellence.

In fact, we do intend to leverage this transaction to further advance our position in the media server market and to expand (inaudible) media Gateway's products to additional sales o Nortel network providers and OEMs beyond Nortel.

Transaction also includes an OEM supplier agreement covering the range of additional products including, media 2000, media server and media 2000 media server.

The financial aspects of that deal, we do see a focus of sales topping 30, 40 million to Nortel networks in the next three years, and basically that transaction allows us to grow our top line in systems base and revenues to become approximately 25% for our overall systems business.

We do see that as an opportunity to penetrate into the (inaudible) market where we have no presence so far.

Bottom line is that that transaction further validates our direction to focus on building complete platforms and market those to the leading OEMs and their core competence and being able to (inaudible) those networks on a global basis, and they as a result need to rely more and more on companies like us.

And that's my summary for the quarter, Mike.

Thank you, Shabtai.

Amy, now we will go to the q and a session.

At this time, I would like to remind everyone, in order to ask a question, please press "*1" on your telephone keypad.

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

Your first question comes from Robert Chapman of Chapman Capital.

Gentlemen, nice quarter.

I wanted to the get a little bit more sense for what you're seeing out there in terms of the voice over IP up-trend in revenues.

Are you all taking share basically or do you see more adoption or what is -- on a qualitative basis, your explanation for the acceleration in revenues, which, of course, about which I'm happy.

Secondly, there's not much operating leverage showing its way down at the bottom line here.

In what point in revenues does a lot more of that revenue increase start to translate into no losses, lower losses or, God bless, profits?

Thanks Robert.

That is Shabtai.

Referring to where voice over IP is today, if we divide the telecom state into enterprise and carrier, the enterprise phase is picking up nicely.

A just quote synergy research report basically says that sales in the enterprise space grew from 1.6 -- I'm sorry, 1.3 in 2002 to 1.8 billion in 2003.

We feel that we participate in that.

We do that basically in two directions.

One is our own media Gateway sales through our distribution network, that's one phase to it.

The other phase to it is basically sending to the tier 1 OEMs where we leverage our system business to sell to their enterprise channel.

What I was looking for was something a little more specific.

Are we now at the point in the enterprise's mind mind-set where a Chief Technology Officer or Chief Information Officer can sit down with a salesperson from either an OEM or AudioCodes and the sales salesperson can walk them through how much money they're going to save by having the entire enterprise telecommunications network over the Internet protocol as compared to going through the traditional closed circuitry of a BellSouth or Qwest or whoever?

On a business case basis, it's pretty easy to show and we have such customers that basically prove that in a very short span of time, could be six to 10 months, there's complete return on investment, and from that point and on, operating expense to lessen within the enterprise is substantially lowered.

But saying that, we need to realize that voice over IP is in its infancy.

I would say the penetration right in the enterprise is still very low.

I would guess much below 10%.

All that says, that the application is proved, the business case is proved and the thing of much opportunity.

The only question is really the phase in which we cover, but I think we are at beyond return in that.

Customers, when they do need to lower expenses or (inaudible) they'll go to that technology and not to (inaudible).

And at what level of revenues or what can you do to get some of these accelerated revenues to translate into no losses or profits?

I think you've talked about sort of a break even point in the past, but with the Nortel arrangement and all the moving parts, can you give us an update on where you see that?

Right.

I would just comment on the UAS that we believe it's a great transaction but we will be wiser on one or two quarters until we are actually into the operational status of that.

Having said that, we have not yet changed our plans to return to profitability by the end of this year.

We still believe that we should be able to do that at a revenue level that should be around 14 to 15 million.

So that's basically our plan.

All right.

Well, congratulations.

The market has been rewarding you.

Just wish I could have made you more aggressive on your buyback below 2.

Thank you, Robert.

Your next question comes from Jonathan Haus of UBS.

Thank you.

Hi.

Can you comment on what percentage of revenues Nortel -- we should expect Nortel to be in Q2, and maybe also for the second Haus of the year?

Yeah, Jonathan, this is Shabtai again.

It's premature.

We are at the final days of completing the deal.

We feel still do not have the experience -- still a new business to us.

We do have forecasts upon which we have our plan, which is rather conservative.

We still need to go through the first few months of operation to understand exactly how revenues and expenses play out.

As we said, we're very confident that what we have said in our previous conference call, we do expect that the deal will turn accretive in the first 12 months, and beyond that, will be definitely profitable.

Ok, but as far as it pertains to Q2, your guidance here is -- I assume it includes some revenues to Nortel.

Yes.

Maybe give us what your guidance would have been excluding your estimates of sales to Nortel in second quarter.

Or maybe I'm wrong, it doesn't include any sales.

Right.

We usually do not break down our revenue streams, and I would, you know, just refer you to the growth of our additional business, and since we provide our revenue line that's above that, you can assume that we've included part of it again, taking our rather conservative approach, we do not want to dictate before we have experience to say more than the number we quoted.

Ok.

How about impact -- I mean, you're giving guidance for revenue and for EPS.

Can you give us a little bit of sense of how the different line items are impacted, gross margin and -- I remember, I think, 20 people will be added, you know, where does that impact on what the magnitude is on the operating lines?

Right.

Mike, maybe you want to take that.

Hi, Mike.

Hi.

We're scheduled to do the closing of the UAS deal tonight, so today or tomorrow, the 20 employees will be joining AudioCodes.

They will be adding between 3- to $4 million to the expense line on a yearly basis, and you can do the math from there.

The gross margins, as I said to you on the conference call -- still using the current architecture, so our gross margins from the U.S. sales will not be traditional AudioCodes margin of last quarter of 55% but they'll be 35%, so based on the mix between the UAS sales and the AudioCodes sales, the gross margin will be affected, will be lower this quarter, and revenue will be higher.

But that's a temporary state until our architecture kicks in within a year, and then the gross margins will return to the previous level.

Ok.

Based on Shabtai's comment before, I assume you're not going to give guidance for gross margin level?

For Q2?

I expect gross margins this quarter to be between if -- 50 to 52%.

Great.

Ok.

And then finally from me, can you just give us the geographical breakdown of revenues, please?

Yes.

The geographical breakdown for Q1 was as follows: North America, 36%, Asia-Pacific 35%, Europe 18%, and Israel 11%.

Actually the last one.

Were there any sales this quarter to Nortel at all?

Yes, there were sales.

There was actually also a one 10% customer, a European tier 1.

Ok.

Thank you very much.

Your next question comes from Aki Hedron of CIBC World Markets.

Hi, guys.

Congratulations on a good quarter.

Just a couple follow-up questions from me.

Mike, could you give us the product percentage breakdown?

Yeah, I'll have it here in a second.

One second, please.

Ok.

System sales were 9%.

Subsystems sales 68%.

Chips 21%. 2% for other.

Thanks.

Now, with respect to Nortel, when you include them into your guidance, do you expect -- how often do you expect the media Gateways to kick in?

I know most of your guidance is probably based on servers, correct me if I'm wrong?

Yes.

This is Shabtai.

Initially, most of the forecast has been on the server.

We do have Gateways on plan to sell to Nortel.

That's tied up usually to specific license -- such as integration license using Nortel.

So I would assume that more Gateway products will be sold to Nortel as of the beginning of 2004.

Ok.

And can you elaborate on -- or give us any more details on what other projects you're working right now with Nortel?

I assume these two were only just a beginning for you as far as the relationship is concerned?

We do have other projects with Nortel, but we are not allowed basically to disclose any of our OEM relationships unless that partner allows us to do that.

We do have other activities at the time.

Ok.

And lastly for you, Shabtai, in the press release, you mentioned that you had new design wins with wireline and wireless.

Could you give us more detail on who was the wireless design win?

Yes.

Most of the wireless activities currently being done in the far east, basically in China and in South Korea.

Gotcha.

Ok.

Thank you very much.

Thank you.

Your next question is from Brian Murray (ph) of Equity Growth.

Hi.

Can you talk about what you're seeing in terms of the tone of business in the carrier market aside from Nortel as the tone of business seem to be improving or are things still pretty difficult there?

I'll take the lead.

This is Shabtai.

All we can do, two things, synergy research report, basically they say -- they claim basically that in the fourth quarter of 2002, there was pickup of 25% in the carrier market.

That is primarily more in pockets of growth in areas such as in the -- and other places.

We do not see as a substantial steady growth in the carrier market.

It's sporadic at this stage.

Ok.

But you did mention the soft switch market as being an area of strength?

Yes.

Yes, absolutely.

We are currently in trials with -- subswitch - vendors.

Ok.

Thank you.

Ladies and gentlemen, I would like to remind everyone in order to ask a question, please press "*1" on your telephone keypad.

Your next question comes from Don Hovic (ph) of HSBC.

Hi.

Good afternoon.

First question is really sort of for the future.

I was wondering if you would be able to give a breakdown of revenues by wireless, wire line and enterprise space, and if you can't do that for this quarter, then at least give an indication of where the majority of your revenues are coming from.

We'll take it into consideration, next quarter start breaking it down as revenue starts picking up and those numbers have more significance and we'll be able to break it down for you in those three categories.

And in terms of this quarter, where are you seeing the bulk of your revenues coming from?

Maybe we can say something about that.

Out of our sales into the systems area, about 15% came from the wireless space and 85% came from the wire line.

There were no sales into the cable space.

Ok.

Then just moving on to what you mentioned in the press release about media Gateway sales to Nortel, Nortel has their own media Gateway, so does that mean that you'll be replacing some of their existing pro product lines?

This is Shabtai.

Sorry, there's an echo here.

We cannot comment on that, but essentially, no, we basically are -- for products -- activity -- our partner does not have its own developed technology.

There's no competition on internal resources.

Ok.

And then I just want to clarify something that you said earlier, Shabtai.

If I heard correctly, did you say you expect the UAS sales to be 25% of your overall systems business?

No.

Actually UAS will become, this year, substantially more than 25% of the -- systems.

I said systems will get to 25% of our total revenues.

Ok.

Ok.

Thank you very much.

Sure.

Gentlemen, at this time, there are no further questions.

Ok.

Thank you very much, and hope you will join us on our next conference call next quarter.

Thank you.

You're welcome.

This concludes today's conference call.

You may now disconnect.