AudioCodes Ltd (AUDC) 2003 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the AudioCodes Second Quarter Earnings Conference Call.

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

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

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

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

Thank you.

Mr. Erik Knettel, you may begin.

Thank you.

I'd like to welcome everyone joining us today for the AudioCodes Second Quarter 2003 Earnings Conference Call.

This is Erik Knettel of the Global Consulting Group, an Investor Relations representative for AudioCodes.

Let me begin the call today with a brief Safe Harbor statement concerns AudioCodes business outlook for future economic performance, product introductions and plans and objectives related thereto and statements concerning assumptions made for expectations as to any future event, conditions, performance or other matters.

These forward-looking statements as that term is defined under the US 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 affect 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; 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.

Joining us today from AudioCodes, we have Shabtai Adlersberg Chairman, President and CEO, and we have Mike Lilo, COO and CFO.

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 will review the quarterly financials and give guidance for the third quarter and then turn it over to Shabtai who will review the business highlights for the quarter following which you have a brief Q&A session.

In the second quarter, the revenue was $10.5 million, which represents a 24% increase from Q1, 2003.

This is the high-end of the guidance that we provided for the second quarter.

Gross margins were 53.9% lower from last quarter's 54.4%, due to the inclusion of the U.S. products in the product mix.

Operating expenses increased from Q1 '02 levels to approximately $8.1 million.

We increased our head counts this quarter by 24 employees compared to last quarter, which brings us to a total of 315 employees at our echos at the end of the second quarter.

Increasing head count was a main addition in R&D of the U.S.

Team from Nortel, a business we acquired last quarter.

Audio Codes reported a net loss of $2.2 million or 6 cents per share.

Cash balances for this quarter were $103.3 million compared to $108.4 million last quarter.

The reduction in cash balances attributed mainly to negative cash flow from operations and payment in connection with the U.S. deal with Nortel.

DSOs were 53 days compared to last quarters 50 days.

Regarding our guidance for Q3, 2003 is as follows.

Based on the our visibility at this time, we expect revenues to increase by at least 10%.

We forecasted loss per share of approximately 6 cents per share in the third quarter based on approximately 37.4 million shares.

Shabtai.

Thanks, Mike.

Good morning.

I'm glad to report our seventh consecutive revenue growth in earning quarter.

The scene of this quarter again is continuing to execute on our plan to grow the top line and to reduce our net losses to enrich our profitability.

We are extremely satisfied with our ability to control our expenses while growing debt fast.

As discussed in our financial results released for the second quarter, we have witnessed a very strong revenue growth this quarter. 24% over the first quarter in 2003 and 57% over the same quarter last year.

Our sequential growth was evidenced in both of our technology business line and the systems business line.

As we have released our systems product sales accounted for more than 20% of total revenues, this is a direct result of our continued investment in the new line of complete virtual pack that needs gateways.

Our system product sales in fact had contributions from our position of last quarter for the Universal Audio Server from of networks.

All in all, if I summarize the past seven quarters, we have demonstrated an average top line revenue growth of roughly 12% this quarter over the last seven quarters, which probably best represents our ability to grow revenues and basically the gross model for revenues for coming quarters that give us 53%.

With revenue growth of 24% quarter over quarter and 57% over the quarter a year ago, a major part of our revenue is now derived out of the continued investment in R&D and we find it necessary to continue our ongoing investments both in products and in research development and in future development for our partners and customers.

Working closely with our partners, we and basically to develop substantially include their own specification and meeting very strict delivery integration accept the milestones for them.

We need to add on investment in the newly acquired media server from Nortel network.

We are working to enrich future facts.

We work to cost reduce the product by to a local platform.

At the same time, we are happy to report that following the position of the product group, we have successfully completed the integration of the former research and development team into our R&D team.

Additional investment is made these days in the new functionality's, which is necessary in the new Media Server product line, such as local intercept and future recognition for emphasizing the systems application.

So given our average quarterly top line growth of roughly 12%, we speak with our past quarter projection of growing revenues this year at a range of 55 to 60%.

At the same time, with our increased level of expense in R&D, in our marketing and sales expenses projected for the following quarters, we now adjust our profitability towards the end of this year and believe now that it will take us up to two more quarters to reach that level.

We will repeat our belief that this plan will carry us into similar growth patterns in 2004 and beyond.

Projecting minimum annual top line growths 40% in 2004, mainly as a direct result of our current investment and at the same time, we project operational expenses to grow more than 10-15% in 2004.

From the design win front, we have enjoyed this quarter, a few more design wins which are noteworthy with two of the leading vendors in the enterprise phase.

Adding these design wings to our privileged base of customers will continue to build the revenue base to 2004 and beyond.

On the product front, we have launched a new technology product, which we plan to introduce in the coming months. thinks the big market of media processing applications, core centers, which basically today prefers self-migration from the current TBM architecture and market letting for capabilities.

In terms of market focus, we continue to emphasize partnerships, with self vendors both into wireline and wireless space.

We are investing substantially in teaming up with leading vendors in interrupted work and participation in field trials will sum up our partners in various countries and markets.

In terms of business focus, we have decreased the investment and lowered the pace of investment in market segments, which appear to exhibit a lower growth or a delay in the evolution.

Those markets specifically now are the cable market where employment's focused today in more on surface which technology and the wireless market.

On a brighter note, we have seen efforts in interrupting the enterprise base and in care of access application including vicinity research.

In the first quarter of 2003, the overall market demonstrated 24% growth over the first quarter of 2002 for the enterprise market.

Basically, the enterprise markets represents today in most of the market opportunities rather than and is projected to grow from $1.3 billion in 2003 to $2.4 billion in 2005, driving the focus in that market to Cisco, which is substantially stronger than Telfa Space.

We see other vendors such as Nortel, which is a partner to us in some of the projects reaching through the market and basically rises to compete with Cisco in that space.

All in all, is selling easier in the enterprise with much shorter ROI and more simple technology, so selling in the enterprise usually leads to much of the said factors.

Geographically, we have witnessed strong sales this quarter and in North America and with Europe.

We have less activities, less success in the market in South Korea and less in Japan.

Our China operations this quarter has suffered from our inability to travel due to the SARS phenomena and our ability to visit with some of our partners and customers has been limited.

We saw a nice pickup from our initial sales force in Latin America.

We are encouraged it is a nice pick up from our initial sales effort in east European Latin America.

We are also encouraged by the major network deployments project in India.

All in all, summarizing this quarter, we believe that we have been focusing just like the past quarters on building the company in all position as a very strong reliable unique complete mitigative supplier to the leading one to one OEMs and to par with those leading we believe that in 2004, we will emerge as one of the best suppliers in that field.

Mike sums up my introduction.

OK, Mandy, we'll go to the Q and A session.

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

We will pause for just the moment to compile the Q&A roster.

We are still pausing to queue the roster.

Your first question comes from Jonathan Half with UBS.

Hi, Mike and Shabtai thank you.

My first question, can you give us the breakdown between systems boards, subsystems and Chips, please?

All right.

System sales this quarter were 26%, subsystems 67%, chips 15% and other 2%.

OK.

Can you also -- your - just make sure I understand you correctly?

You said that you expect now to turn profitable two quarters later than you had in the past, i.e., are we talking of Q3 '04 as a target and what sales level do you see profitability?

We think -- we believe that by Q2 '04 will be at the break-even level, at sales of between $15 to $16 million dollar.

OK.

And finally, can you just give us the percent of UAS this quarter?

And also maybe you can comment on the gross margin, which was stronger than I expected.

You know, just how you expect that to trend going forward?

It just appears that you integrated UAS may be a little quicker or is there something else that I'm missing there?

Thank you.

As we said in the conference call when we did the deal, we will not be breaking out the UAS revenue separately, but I can say that we also projected a lower gross margin this quarter due to the product mix of UAS in its current architecture and the core business of AudioCodes, and we expected a lower margin.

What happened was that we had two phenomenon's happening this quarter.

One, that the product mix was very strong in favor of the core business of AudioCodes and also the core business of AudioCodes gave a higher gross margin than I expect and therefore margins were higher than expected.

We expect margins to be around this level, maybe a bit lower, but it will be above 50% going forward.

OK.

I'll allow others to ask and then get back to you.

Thank you.

Your next question comes from Ittai Kidron with CIBC World Markets.

Hi, guys good quarter, just a couple questions from me.

With respect to UAS, I mean --at the time when you announced the acquisition, you estimated that over the 12 months following the acquisition, you will have revenues from UAS of around $10 million.

Can you tell us so far how has been the progress of UAS?

Is that doing better than you expected and do you expect now to make more than the $10 million?

Right.

Let's just remind everyone that UAS deal and the revenue perspective began on the first of May, so we have only two months of experience with UAS.

It's going as planned, and we're not altering our forecast regarding the $10 million, so it is going as planned but it still early in the process.

We have to wait at least another quarter to make a more determined statement.

OK.

Do you know anything with respect to whatever you saw this quarter to UAS into what end customers what service providers have actually installed that equipment?

We don't have that kind of information.

We get orders in general for UAS prior.

We don't go per customer, but if you look on the public information that's available on -- Nortel puts out you can see that they have already announced quite a few design wins for the succession product where the UAS is one of the pieces there and for instance, this month two design wins for Nortel in succession, one with Hong Kong broadband and another with China Worldcom.

OK.

Can you give us the geographic break down on the revenue?

Yes. 56% of our sales were to North America. 25% of our sales were to Asia Pacific. 11% of our sales were to Europe.

And 8% of our sales were to Israel.

All right.

Thanks, guys.

Thank you.

Again, at this time if you would like to ask a question, please press star then the number one on your telephone keypad.

Your next question comes from Robert Katz with Sun Best Israel Partners.

Hi Shabtai and Mike nice quarter.

I have a question about the integration of UAS is that still on target for Q4 or it sounds like you are doing a little more modification of the product?

Is that one of the reasons for pushing out break even?

No, the integration in line -- we are talking about Q4 fourth quarter as we take to the port all the software and to our hardware.

It wasn't Q4, it was four quarters.

OK.

It going according to plan and that's not the reason why we changed the break even.

We said in the last conference call that US is very new to us and we have to learn numbers both on the expense side and revenue side to make sure that we can reach break even as quickly as possible and what that date will be.

All right.

I'd like to add to that --this is Shabtai.

The point of returning to profitability is key here.

When we announced our plan four quarter ago May 2002, we had a plan of going roughly six quarter and reaching the break even level at the end of 2003.

With the growing rate of 15% of revenue, fourth quarter we should be able to reach that within the next three quarters.

So between first quarter and the second quarter of 2004 we should be there.

The main thing that changed here really is our increase in investment in R&D having to development more functionality for the newly acquired product line and our success I would say not projected initially to team up with leading vendors which also get us into investing much more in customization work through them that basically drives us to increase some of the operational expenses that we have not planned before.

All in all the revenue growth is there as planned before the only thing that change is the expense level so now it will take another three or four quarters instead of two, but I think all in all executing on the plan that was announced four quarters ago for the next 3 to 4 I think will be doing quite well.

Great.

Mike can you be more specific about the expense rate on the Op-x side, R&D sales and marketing, G&A, how we should model that out in the next four quarters?

I can give you the -- guidance for the next quarter.

We haven't given guidance, four quarters from now but except for the general picture of break even, but I can give you a general picture.

I expect Op-x to be around $8.6 next quarter, OK?

And the share count to be the same, approximately so from there you can -- 10% increase in revenue and then you can reach the guides than we gave providing the loss per share.

Sure.

Most of the increase in Op-x that the R&D level?

That's correct.

Because of the increase in employees there in North Carolina.

Thank you.

Thank you.

Your next question comes from Jeff Myers with Intrepid Capital.

Hi guys.

Thanks.

Just wondering if you can talk about your book to bill this quarter, and also, you know, your percentage of business from turns.

This past quarter maybe what you're expecting for the coming quarter?

Right.

We have a simple quarter, models have been working for us very well in the last two years.

We take the backlog that we have for the current quarter at the time of the conference call and multiply by two and that's our guidance.

So that dictates that at the time of the call, we have approximately 50% backlog at the time of the call and then the rest of the business during the quarter is another 50% that we have of PO's coming in during the quarter.

OK.

And in terms of -- yeah, I guess in terms of book to Bill, anything that you could talk about that?

I think it's based it means that 50% of the orders come in the conference calls, at the date of record.

So we have 50% coming in before that and then during the quarter we build -- we received PO's from 50% of the business and that's how the number is derived.

Thanks.

Again, at this time if you would like to ask a question, please press * then the number 1 on your telephone keypad.

You have a follow up question from Jonathan Half with UBS.

Thank you.

Mike, any 10% customers this quarter and just make comment on the top 15 customers represent of revenues they were?

The top 15% customers this quarter made up 65% of our revenue and we had one 10% customer from North America, actually one OEM.

You count Nortel as a customer?

Not

Right.

OK.

Thanks.

One moment.

We are pausing to queue the roster.

Again, you have a follow-up question from Robert Katz with Sun Best Israel Partners.

I want to follow up on the book to Bill question and trying to get a better sense of what visibility that and also activity in the pipeline that allows you to give your type of guidance where you just go through tons of backlog

The interesting issue is that what that cause the performance quarter after quarter, right strongly on the increase in revenue side, but with -- we're still stays the same is the environment where the lead time is still, very, very short and therefore, we see an increasing -- we see from quarter to quarter still the fact that many customers keep the orders very, very short term and one delivery as quickly as possible and short lead time as I said.

So that's been very characteristic of the quarter since the Telecom melts down in 2001 and it hasn't changed, despite the AudioCodes numbers have improved, but it's still being, by the fact that AudioCodes penetrated more into more markets geographically more application and increased its customer base in a huge way, but from the characteristics are the same, a very short lead time.

OK.

What percent of revenues sell through the channel versus direct?

Is it mostly through channel?

You can assume that the majority of sales to North America and Israel direct and the remainder are through channels.

OK.

And an interest level in the products at the customer level, are through the channel is that.

Have you been getting a sense about that is increasing or there's more opportunities out there?

The interest level, I think the numbers speak for themselves.

I think the fact that AudioCodes is, in this environment, in this global economic environment increased sales by 24% and both in the core business and the UAS have increased.

I think that's -- I think that defines the fact that we have increased interest for our product.

I think that the fact that the many of our competitors have become much weaker and is also a factor also, and I think the fact that we are here to deal with Nortel also increased our exposure in the market to other customers and their interest in what we have to offer.

All in all, I think we've in the as two quarters we became very, very strong and I think the future design wins we'll be announcing will also be a factor.

All right.

And it sounds like your term product line is geared more towards the enterprise, sort of small to mid sized gateway.

Can you refresh us in what the UAS product brings to the table and are you to going to go after the carrier market or the central office market in the future?

Actually, the UAS product is part of Nortel's succession product that's targeting the carrier space.

That's basically is a Media Server, the Server that it is in public networks and provides functionality of the quality required in Telecom networks such as the announcements and conferencing, local intercept, few more functionality's.

I would say that right now our product mix basically tried to target both enterprise and carrier.

Through that -- the market is growing much more internationally these days.

The enterprise, we have more focus in the last few months in the enterprise phase.

But all in all, we're targeting and show an uptick in the caring the care market.

Great.

Thank you.

You have a follow-up question from Ittai Kidron with CIBC World Markets.

Guys, just a quick question on the systems.

Where do you expect them to be as a percentage of revenue by the end of the year?

Probably if we take the current trend, if we have reported on 26, my guess it will take this year anywhere between 20 or 30%.

It's hard to predict.

We still have very partial UAS experiences.

It was only -- it was less than the full quarter that it was integrated into our revenues.

So all in all, we expect to develop much more experience with UAS in the coming two quarters.

OK.

Lastly, with the -- with the exception of Nortel and UAS, what other -- do you have other OEMs or other design wings with vendors that have actually sold products systems, I mean into actual network deployment not beta tests?

Actually, we have -- we have basically we have announced this quarter two major design wings.

Those products are deployed these days actually in the current quarter have been deployed by two new vendors.

Beyond that, we do have ongoing sales of system products low into some of our system integrated products in various parts of the world.

OK.

Great.

Thanks, guys.

At this time, there are no further questions.

Mr. Lilo, were there any closing remarks?

Yes.

I want to thank everyone for joining the call this quarter and I think we had a very, very good quarter and very good results and hope to see you on the call next quarter.

Thank you.

Thank you for participating in today's AudioCodes Second Quarter Earnings Conference Call.

You may now disconnect.