AudioCodes Ltd (AUDC) 2003 Q3 法說會逐字稿

Good morning my name is Janika (ph) and I'll be your conference facilitator today.

At this time, I would like to welcome everyone to the AudioCodes third-quarter earnings conference call. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Mr. Erik Knettel.

Thank you sir.

You may begin.

Thank you.

I would like to welcome everyone to the AudioCodes third-quarter 2003 earnings conference call.

I'm Erik Knettel of The Global Consulting Group, and Investor Relations Representative for AudioCodes.

Let me begin the call today 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 the 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 effective 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 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, and good morning everyone and thank you for joining our conference call today.

I'll review the quarter's financials and give guidance for the fourth quarter.

And then I will turn the call over to Shabtai Adlersberg, who will review the business highlights for the quarter.

Finally, we will have a short Q&A session.

Now for the financial highlights -- In the third quarter, revenue was $11.8 million, which represented a 13 percent increase from Q2 2003.

Gross margins were 54.5 percent, compared to last quarter's 53.9 percent.

The improvement in gross margins is due to higher sales volume and lower manufacturing costs.

Operating expenses increased from Q2 '02 levels to approximately 8.4 million.

Headcount increased this quarter by 10 employees, compared to last quarter, which brings us to a total of 325 employees at AudioCodes, again, in the third quarter.

The increase in headcount was (indiscernible) the addition in the sales and marketing department.

AudioCodes reported a net loss $1.6 million, or 4 cents per share.

Short-term and long-term cash balances for the quarter were $100.4 million, compared to $103.4 million last quarter.

The $2 million reduction in cash balances is attributed mainly to a negative cash flow from operations.

DSO came in at 54 days, compared to last quarter's 52 days.

Our guidance for Q4 is as follows -- Based on our visibility at this time, we expect revenues for the fourth quarter to increase by at least 10 percent.

We forecast a loss per share of 4 to 5 cents in the fourth quarter, based on approximately 37.7 million shares.

In addition, we're trying to move our corporate R&D facilities in Israel into a new complex during the first quarter of 2004.

Due to this move, we expect to realize a onetime charge in the fourth quarter of approximately $1 million, mainly for the write-down of leaseholder improvements in the old facility.

This charge will be mainly non-cash.

I transfer the call now to Shabtai.

Thanks, Mike.

We're very pleased with the first quarter 2003.

The highlights of this quarter are continued growth in our topline.

We have seen (indiscernible).

Very encouraging (indiscernible) for this quarter -- usually this a very weak quarter.

This is summer, mainly in Europe.

Other places -- we have seen very nice pick up in POs (ph) at the end of the quarter.

We do perceive improved outlook in the market, with weakness in the last weeks or so, and increasing (indiscernible) of customer's POs.

More significant than other things is that we have been very successful in winning new projects with leading OEMs.

And, we do have a few more opening for us.

So, in summary, if I had to summarize this quarter, we have been executing on our strategy.

And then, we have good indications for continued growth (indiscernible) in this quarter, and in 2004.

We now feel that we are more confident that, based on market outlook and the recent months activities for our customers, we should plan to achieve profitability by May 2004.

And that plan is on solid track now.

Even more than that, with the increased activity with our OEM foreigners (ph), we believe that we are setting the ground for increased base in growth at the topline at the second half of 2004 and more into 2005.

So, we are really facilitating further growth in the coming years.

Finally, I think, we see much more optimism (ph) with our customers -- the tier-one telecom equipment (indiscernible) and other leading customers.

Basically, looking more to outsource missing products from their portfolios -- leaning more towards buy-than-make decisions, simply because windows of opportunity just opened not too long ago.

Many of them have not been investing in the last two or three years in R&D.

And the fact that we have been (indiscernible) the opposite and are ready with mature products and specialty (indiscernible) products which comply with the latest emerging (ph) centers (ph), puts us in a very, very good position, going forward.

As we have mentioned in our financial release for the third quarter, we have witnessed a strong revenue growth this quarter -- to 10 percent over the previous one.

And more importantly, 63 percent over the same quarter last year.

That is even more significant when we understand that we've been able to cut our losses by 60 percent that quarter a year ago.

And all of that, in spite of (indiscernible) in revenue and R&D and growing more than 25 percent on a year-over-year basis.

Our ability, basically, to mitigate our R&D investment, in view of market needs and the need to support our OEM customers -- that is the challenge we face.

We have been able to control it and manage it very well this quarter.

The R&D investment is even more important, simply because that would be the fuel for our continued growth, going forward.

We believe that being able to win some of the lucrative projects with some of the leading OEMs in that market is very important.

And the fact that we (indiscernible) combined mature products with the ability of our clients to push those through direct (indiscernible), will basically support through their acceleration and growth for sales.

Just to mention -- that these days we are employing more than 180 employees and (indiscernible) our R&D department.

And I believe it is (indiscernible).

This is one of the largest teams that is working on (indiscernible) of effective technology.

Relating to (indiscernible) growth in the (indiscernible) where I came from -- sequential growth was evident, both in our technology business plan and the system business line.

And we have seen our systems product sales accounting for more than 25 percent of the revenue.

It is a 20 percent improvement this quarter, and this is a very nice point to (indiscernible) growth on a quarter-to-quarter basis.

All in all, again, coming to look on our growth strength and (indiscernible), we see that in the last eight quarters, we've been able to grow our topline roughly on a rate of 12 percent a quarter.

And that pretty much should characterize our growth, going forward.

So, given the fact that we plan on a 10 percent-plus topline growth going forward, we believe that, while we will be able to grow in 2003 by more than 55 percent all in all, we should expect at least 40, 45 percent in 2004.

This is very impressive growth year-after-year.

We have been keeping our investments with our close partners.

We work very hard to satisfy their needs as the market opens for deployments.

So, now to the highlights of some of the announcements we have made this quarter.

Very positive (ph), the announcements we made with Trickum (ph) a few weeks ago about corporation (indiscernible) enterprise telephony markets.

We have announced some projects with Matel (ph) UAS for the carrying market.

The fact that now we are in OEMs is very strong in the enterprise market -- creates for us a new leg in the voice (indiscernible) market.

We will be supplying Trickum with three types of products -- (indiscernible) gateways, digital gateways, and media servers.

We will be basically here implementing our strategy (indiscernible) with a subswitch (ph) (indiscernible) that provides a complete solution to the market.

And I think the marrying of benefits is providing the sophisticated (indiscernible) platform with the voice over packets -- (indiscernible) on gateways.

And then, with the subswitch (indiscernible), providing the complete solutions through channels already established on a global basis.

That is the type of partnership that we will try to follow going forward, and then we've got a few more projects down the (indiscernible).

So, that has been a very important and substantial announcement for us.

Now, we will move to some of the technology announcements that we have made.

We have made, this quarter, our voice (ph) pricing system architecture, which is the core of all of our products, basically shipping from -- back from 1998.

To this date, we have shipped more than 10 (indiscernible) that we (indiscernible) basically, over each six to nine months.

With activity, we are already seeing a new updates for that architecture, basically providing an updated and upgraded functionality with its own features.

All of that complying with the most advanced in most emerging status and protocols (ph).

That is very special.

I think, understanding that -- that voice operating system, the voice over, basically represents (indiscernible) of many years invested over the last four or five years.

And then going forward, we continue to have more R&D.

I think that creates a (indiscernible) in (indiscernible) that will be very difficult for competition -- that they have been cutting on resources, cutting on expenses and R&D, and not executing going on new and advanced products.

That would make life harder for them.

That would also improve our positions with the potential OEM customers who now would be able to get (indiscernible) to market and (indiscernible) to revenues, based on technology and architecture that is solid and being supported by hundreds of (indiscernible), going forward.

The other announcements we made is very, very substantial.

I don't think that has been that (indiscernible) in our announcement.

We have announced a new Media Gateway and a (indiscernible), and that is called the TP-6310, and that is a -- an STM1 and OC2 Media Gateway (indiscernible).

Now, definitely compactment (ph) is a key here.

We've not seen anybody capable of providing such density on a -- using such base.

But more than that, that new product is based on the new technology platform that we have been developing, using a team of between 20 or 30 over the last two or three years.

And basically, that represents a new platform that is lowering costs, lowering (indiscernible) consumption -- very compact.

And basically, that is going to be our new engine, going forward.

And, we do believe, at this stage, we are confident that it is one of the most advanced, if not the most advanced, platform in the market.

We'd do believe that that will enable us to win more and more design (indiscernible).

Getting a bit to what we have seen in the market itself -- We have been a bit negative last quarter, looking at some of the market.

Especially the cable market and the 3G market.

I think that in the last few weeks we have seen some change in this to market segments.

We see renewed interest in the North American cable market.

And, we have seen some tier-1 OEMs acting in a (indiscernible) fashion to move to that market.

We are playing in that market today through (indiscernible) modules through a division of (indiscernible) these days (ph).

But, we do plan to play even in a more meaningful way in that market.

We feel, in view of the recent updates coming from China, regarding the fact that there will be 3G licenses awarded either at the end of this year or early next year.

We have seen some rushed activity within some tier-1 OEM players wishing to complement their product offering, and basically completing their offering and portfolio to be able to play in that market and compete with the Chinese market.

And, we are working (indiscernible) in trying to address some of these projects.

In terms of geographical basis, we have seen strong sales in North America and in Europe.

Activity in China picks up again in the first quarter versus the second quarter.

This was affected by the (indiscernible) phenomenon.

Our activity in Japan and South Korea has not improved much from the last quarter.

But then, we have seen a nice pickup in our sales in East Europe and Latin America.

And that basically summarizes my description.

Mike?

Thanks, Shabtai.

We will now go to the Q&A session.

Janika, please?

(OPERATOR INSTRUCTIONS).

Jonathan Half, UBS.

Mike, can you comment on the gross margin?

It came in a little bit above my expectations.

I think, better than Q3.

And I think you were guiding for -- or at least I understand that you were guiding for some decline as you integrate the UAS productline into your system.

Can you kind of comment on what you would expect in there?

And maybe what was behind the better margin?

As I said earlier in the beginning of the discussion, this quarter, the higher volumes that we had in sales in general, created a situation where you have a fixed amount of overhead spreading over a larger sales volume.

Therefore, the gross margin is favorably affected.

That's one side.

And the other portion was that I saw a reduction in certain manufacturing costs, which affected also the cost-of-goods sales.

Another (indiscernible) to a reduction in cost, and that was in a higher gross margin.

Obviously, the higher sales of UAS impacted -- the other way around was (indiscernible).

But, net picture was that the gross margin improved.

Going forward, I think we should estimate gross margins between 54 to 55 percent range in the near future.

Okay.

Can you please give us a breakdown of between subsystems (indiscernible) this quarter.

I think (indiscernible) had over 25 percent systems.

Or was that UAS?

As you know, we don't break out UAS separately.

So for systems, it was 30 percent; subsystems, 54 percent; chips, 16 percent; and other was zero.

Okay, and how about my geography, please?

By geography -- North America, 53 percent;

Israel, 12 percent;

Europe, 12 percent; and Asia-Pacific, 23 percent.

And finally, for me, this 10 percent customer and percent of revenues to your existing customer base, please.

Right.

We had (indiscernible) was above 10 percent -- a 10 percent customer.

And the top 15 customers at AudioCodes this quarter represented about 60 to 67 percent of our revenue.

Was that 67 percent?

67.

Right.

Thank you.

Thanks, and good luck.

Ittai Kidron, CIBC World Markets.

Congratulations on a great quarter.

A couple of questions from me -- with respect to your guidance for the next quarter on the loss per share -- you mentioned 4 to 5 cents.

Does that include the onetime charge?

No, it does not.

That is why I said in addition.

We expect 4 to 5 cents from our (indiscernible) in the regular operations.

And then we'll have a onetime charge of $1 million, approximately, for the change in (indiscernible).

Right.

Going forward, you mentioned gross margins should be around 54 or 55.

With the expected integration of UAS completed somewhere at the end of the first quarter of next year, should that margin go even higher?

Or is that pretty much where it will stay?

Well, what has happened is -- the gross margin -- it will definitely improve the gross margin.

The thing that you have to take into account that might happen -- (indiscernible) be conservative -- is that there might -- on the other hand, in the general market, be price erosion that my affect it, though.

What will happen is you have this upside from the U.S. platform transforming to an AudioCodes platform.

But, that is an upside -- you might also have price erosion.

So, we will have to get closer to that timeframe to be more accurate.

So, what I would say is to be conservative, to model currently at 55 percent gross margin, knowing that there might be upside as we move into the new platform.

Okay.

And this new move to a new headquarters -- should we see any savings on OpEx as a result of is?

Actually, not.

The per-square-foot cost of a new complex is much, much lower than it is here today in our two facilities in Yehud and in (indiscernible) in Israel.

But, the total amount of space that we are taking is much larger, due to the fact that we plan on expansion.

And as you see, the company is growing topline and also from an employee perspective, and therefore we're preparing facilities for a larger organization.

So the total expense in absolute dollar terms will be higher.

And that is what we have -- taken that into account in our guidance regarding Q2 breakeven.

That is fair enough.

Shabtai, can you comment a little bit more about both Nortel and 3Com (ph).

And with respect to Nortel, can you give us any sort of general information?

I know you don't break out UAS separately, but is that -- at least until this point -- stands with your original expectations at the time of the acquisition.

If I'm not mistaken, you mentioned $30 million over three years.

Plus, with respect to 3Com, when do you expect that to have a meaningful impact on your results?

Okay.

Well, basically, we are definitely pleased with the emerging relationship and cooperation we have with Nortel on a few of the projects (indiscernible) yes.

At this stage, the UAS corporation runs pretty smooth.

And, on a (indiscernible), in view of the fact that we are in that activity on the 6 months now.

It is still premature to say whether we will deviate from that 30 million target that we put for ourselves.

But, we have shipped products.

We are progressing with more-advanced releases of the products.

And we believe that the first initial sales of the products to Nortel customers, which are operators and service providers -- as soon as the (indiscernible) and the first introduction of that product will be completed.

We believe that, going forward, we will seek ramp up.

So, all in all, our experience with Nortel, both on the UAS and the other project, has been very well working.

As I mentioned before, working very hard to (indiscernible) the service Nortel needs.

I should say also that being a big company with very strict procedures and operations, we have not seen, in my opinion, yet, any substantial impact.

Although we have seen growing sales, we believe that in 2004, those channels -- that machine will produce more revenues for us.

So, we are encouraged by what has been happening with Nortel so far.

Trikum is a new and young addition for our OEM partners.

We have a very good initial project.

We're working very hard, again, to meet milestones.

Again, Trickum will take time to develop.

We've seen some revenues in the second and increasing revenues in the third quarter, but we really believe that the change (indiscernible) only in 2004.

So, I should say that we are basically laying out the groundwork this year for an improved 2004.

And at the same time, we are working to add a few more such OEMs to our list.

Thank you very much.

And Mike, just one last question.

With respect to the contingent payments to Nortel, can you tell us how much have you paid so far for the UAS acquisition?

And considering your experience so far, how much more do you realistically expect to pay, based on milestones?

Right.

The only thing I can say, realistically, at the moment, is that from a cash flow perspective, next quarter and the fourth quarter, we are due to pay $2 million, based on the original payment terms that we agree with Nortel.

So, you will see a $2 million outlay in the fourth quarter.

This is not against (ph) an earnout; it is not against the sales.

Regarding the sales earnout, that is a bit early to say.

It is only after 12 months that we actually do that calculation.

So, it is too early.

Okay.

Thank you very much, guys.

Congratulations.

Robert Katz (ph), Sun Best (ph) Israel Partners.

Great quarter and the guidance.

I have a few questions -- is the breakeven level still the same.

It sounds like you're adding some employees and you plan to keep adding.

So, I imagine that would be creeping up a bit.

The fact that we feel we want to breakeven by the second quarter.

At the moment, the expense level to break even is higher than it is now -- (indiscernible) take into account.

I said earlier (indiscernible) change of facilities and other hiring expenses.

But, from a -- what I said in previous conference calls, I still believe it to be around a 16 to $17 million revenue at the breakeven level for us.

We expect it.

So, that has not changed, really.

But, we might increase expenses, but we hope also that the revenue number will be higher, as it needs to be.

That would imply that you have a decent revenue growth throughout the next three quarters --?

We don't have the visibility, but we do have a huge amount of activity part that we -- part of it is already public, for instance, what is happening at Nortel and at 3Com.

But we really set the stage for next year with very good revenue growth.

You take into account, 2004 potential compared to 2003 with many more design wins with more tier-1.

So if you look at, for instance, Q4's run rate, that we expect about $13 million.

Multiply it by $4, it is a 52 million basic run rate for a year.

And we have (indiscernible) activity going on now. (indiscernible) So, the revenue should be much higher.

That sounds good.

Can you talk a little bit about trying to get new tier-1s in the different geographic regions.

And where you are, I guess, in those relationships?

What should we expect over the next quarters?

The answer (indiscernible) is mostly on the North American market.

This is where we see most of the new opportunities opening for us with tier- 1 (indiscernible) vendors.

At the same time, we are investing heavily, both in China -- we believe that the market there's going to be substantial.

I think we bring complementary abilities to the (indiscernible) manufacturers.

And, we will try to team up with several Chinese companies.

We will try to do the same in India, but we do believe that, in terms of voice or (indiscernible), India is behind China substantially, but at least more than (indiscernible) 12 or 18 months.

We have not been investing lately in Europe, but in face of -- I would say the recovering telecom market -- we will be looking more towards approaching, again, European (indiscernible).

But all in all, I think the (indiscernible) opportunities should come from North American-based equipment vendors.

The answer at this stage is mostly on -- And that would be picking up new North American equipment vendors potentially --?

Yes, that is the (indiscernible) it is very intense efforts.

I don't think that we have faced in the last two or three years such intense activity -- (indiscernible) design win activity with those companies.

We all need to be aware to the fact that once the market -- the telecom market -- seems to be (indiscernible) and it is maybe taking a bit upwards.

Companies need to get to market, need to free up their offerings and be part of the (indiscernible) process.

And that positions us as potential partners with those companies and (indiscernible)

One last question.

You talked about the new Media Gateway and the new Blade (ph) and the density on the blade.

You seem pretty proud about being a leader in that space.

Can you talk a little bit about that the competitive landscape, and what this new architecture will allow you to do, versus what is out there?

Right.

I should say that, at least in the past, we had two or three competitors trying to compete with us on the blade market.

I think that since then we have created some very substantial gap, or I should say lead, over those companies.

So I should say, that at this stage, we really do not see on a pure voice (indiscernible) or voiceover (ph) density in performance lead.

We do not see any competition from this company -- not that serious.

The more stuff (indiscernible) right now.

It is not really available, but, really this is -- We are trying to win (indiscernible) by decision with the equipment vendors and the (indiscernible) R&D team.

And I think this is where we meet with more substantial existing capabilities.

And, this is where we need to show that through our more-advanced technology and more resources put to (ph) the work, we are bring in more advanced, and even more stable solution, simply because we are involved today in many deployments.

We start to develop the kind of economy of scale with that ability.

And when we come to compete with an R&D team with one of those vendors, we are in a better position to bring market experience of existing deployment.

So that is the key competition for us --

Good luck.

Dan Harvard (ph), HSBC.

Shabtai, when you talk about design win activity picking up, can you give an indication of where the interest lies?

In other words, are we talking the system or the subsystem level, and specifically, on which type of product ranges?

Okay.

Most of (indiscernible) really comes from a specific density in the market, which is the low to mid density.

This is where we've got a (indiscernible) platform that is pretty advanced, feature-rich.

And this is where many of the companies have built more high-density gateways -- find themselves without a solution.

We have success, I think, these days more on the systems side, simply because time-to-market is key here.

But, I would tell that some of the (indiscernible) who are more price-conscious, sometimes pick up the technology solution.

But, all-in-all, the new platforms -- the (indiscernible) -- will provide a substantial advantage in terms of cost and (indiscernible), are both for the systems and technology.

And, how big is the market potential of the low to medium density gateways, compared to their higher end?

These days, we believe it is pretty hard, simply because (indiscernible) these days use more in the international markets with some countries which are big in area and usually the teledensity of the solution is substantially lower than what you would you expect should the gateway been placed in the (indiscernible) office in North American.

If you take India, if you take China, if you take Brazil, if you take Russia, if you take Australia, when voiceover (ph) deployments are really in their infancy, most of the deployments start with low-density, and this is where our capabilities are really needed.

Would it be a strategic goal of the company to get into the high-density solutions also?

Or, do you feel you prefer to specialize in certain niche?

Not necessarily.

I think we look more to complement our OEM foreigners' abilities, and not to compete with them.

Most of our partners do see the high-density gateway as their most influenced part of the portfolio.

And, our approach has always been to assist and serve our customers, rather than try to compete with them.

So, at this stage, we are really focused more on the low to medium.

Can you give some kind of an indication of possible time frame in terms -- of the (indiscernible) deal.

Should we expect to be hearing more things in the next quarter or so?

Again, we need you all to know that winning a product is important, but that means that usually that involves a 6 to 9 months period of development.

Then we go into a 3 to 6 months period of evaluation, testing, and integration.

So, ramp up of any new design will not contribute to revenue before the end of 2004, 2005.

But, really important is that we are creating, at this stage, much more opportunities going forward.

And we feel that we are really filling up the basis of our growth for coming year.

And just one final question from me.

Can we get an indication, or some sort of guidance in operating expenses in Q4?

Operating expenses in Q4 -- if you take into account (indiscernible) all the parts of the puzzle -- if you take into account that revenue will be at least $13 million, about a 10 percent increase and gross margins now 55 percent.

I think OpEx is straightforward.

Okay, so the question is -- where is the increase in OpEx coming from?

Are you expecting more --?

I'm sorry (indiscernible) -- the increase in OpEx is coming from both increase in sales and marketing and also in R&D.

Okay.

Thank you very much.

(OPERATOR INSTRUCTIONS).

Chet Mayer, Interpret Management.

Thanks.

Can you just talk a little bit about your backlog going into the quarter.

And also, you mentioned I guess, activity has been picking up.

How is this, I guess, October so far look, compared to previous October's?

Okay.

First of all, as you know our backlog situation, which we base guidance on is very simple.

We just take the backlog at the conference call and multiply it by two, and that is our guidance, going forward.

We have done that in the last seven quarters, and you can see it has worked quite well.

So I think we're going to continue it in the next period of time.

But, from a intake perspective, we do see a pickup in revenue -- in PO coming in .

We see a much stronger market.

Yes, the visibility is still based on short lead time, but we see much more activity and many more customers asking for quotes, (indiscernible).

So I think the general market atmosphere is much more positive.

And also, October is near the end, but it is also a strong month, and I think the whole quarter will be very positive.

It sounds almost like you might have to adjust your times two going forward, given the increased activity.

To be conservative, I will multiply with less than 50 (ph) percent.

Good.

I understand.

What about in terms of, like, specific applications.

Media Gateway, I guess, is one.

What are some of the other popular applications (indiscernible) going into right now?

There is the Media Gateway and also the UAS device, the media server.

Our board has multiple functionality -- our Media Gateways (indiscernible) blades or they are also what we call IP media, which they have other functionalities which help companies do IVR conferencing, recording and other functionality.

So, there is a wide range of product offering, and wide range of activity and a different product line in those applications.

Okay.

Great.

Thanks a lot.

Jonathan Half, UBS.

Just like all of the depreciation and amortization (indiscernible) this quarter?

And also maybe a follow-up on the competitive -- or the competition, Shabtai.

If you could maybe name a company or two where you tend to see more often on the competitive -- you know, when you go for bids.

It will be helpful.

Okay.

I will go into the depreciation.

It is approximately $550,000 this quarter.

Thanks.

Okay, on the competitive front, (indiscernible).

When we talked about the low-end, low-density media gateways, digital (indiscernible), we often see (indiscernible) when we go to (indiscernible) gateways, we do see a variety of products coming from companies, such as D-Link (ph), Media Tricks (ph), and others.

On the board front, we do have our traditional competition coming from companies such as Internet Communications, and sometimes Intel.

That is pretty much the competition in the picture.

Thanks.

That is helpful.

Robert Katz, Sun Best Israel Partners.

I have a question about sort of long-term modeling for the company.

Where do you think revenues per employee will kind of trend towards?

What is your target or goal on that, on that type of metrics?

A good question.

You're talking about 2004, right?

2004, 2005.

Right.

As a follow-up to what I answered you before, first of all, we're trying to balance between our goal of breaking even in the second quarter and not jeopardizing revenue opportunity in 2004, 2005.

That is why you see the increase in employees, especially in R&D, as AudioCodes is trying to make sure we get the revenue and the design win activity.

On the other hand, we also see on the other hand, the issue of breaking even is important, a strategic goal.

So that is why we are increasing expenses and doing it in a very -- (indiscernible) very precisely to not overshoot our goals in Q2.

From a (indiscernible) in 2004, 2005, we are right now in the midst of preparing our budget for 2004 and also 2005, our planned -- and therefore, I do not have a number for you offhand. (indiscernible) in probably the next conference call, I can give you a better picture.

We will probably have to wait a little bit and see what our plan is, (indiscernible) authorized by our Board of Directors for 2004, and then we can see our numbers filled out.

Sure.

When you hire people for R&D, are they being hired to complete specific projects for specific customers?

Or is it the general (indiscernible) the market.

If your product was able to do best, then we would --?

Let's look at it two ways -- first of all, we have a lot of features and requests that our customers ask for in the products.

But then again, these requests have been applied or leveraged in all of our products and to all of our customers.

So, on the one hand it might be a specific spec, or something that a customer asked for, and we do (indiscernible) the extra effort to get it done quickly.

But then, it is added to our general roadmap and general offering to all customers, and therefore all customers benefit from it.

And also we benefit from the revenue that we generate from those extra features.

So, when we add the R&D people, yes, it is usually based on a project that might be specific customer-base.

But on the other hand, it as a general effect, long-term.

Signing of a new tier-1 -- is that more of a business process or is that more of R&D work needed on the product to meet their technical needs?

Usually it is both -- (indiscernible) the evaluation that takes place, and coming to terms on the business side.

But then, usually each such OEM customer has got his own specific needs, his own specific applications.

And we usually are, basically, working on an R&D project with them to complement and to integrate and to test that protect to the specific integration to that customer.

So, the new potential tier-1s are basically engaged in R&D work with you right now.

And that would, or could lead to a stronger relationship, a more developed relationship ?

The new design -- the (indiscernible) I mentioned before -- right now we're at a stage where we're trying to win, meaning that we are on a very intensive process, responding to specifications, discussing, explaining, and basically -- our customer has to understand fully the implication of working with our products and integrating it.

And also assimilating the (indiscernible) and investment of using our products.

So, it is a process that usually takes anywhere between 2, 4, 5 months, and only then showed that OEM decide if he is going to use us (indiscernible) we go into an R&D project and then to deployment.

Thanks.

Dan Harvard, HSBC.

I was just wondering if you -- what kind of success you're having selling the media server to customers other than Nortel?

And what you are seeing your customers buy through a package of both Gateways and service?

Or whether it tends to be separate sell?

Well, the (indiscernible) the first question, because the media server based on U.S. technology is only being (indiscernible) at this stage into AudioCodes' platform.

And, as we said earlier, we be only ready by the end of the first quarter and then we can start marketing it in a full fashion to other OEMs.

And then we will be able to answer that question.

So, it is a bit early.

We have our own media server product, not based on U.S. technology, which we're selling.

But the basic three main features on the U.S. platform -- the conferencing, the announcements, and the legal intercepts will be available, as we said, at the end of the first quarter, 2004.

Usually, by the way, we don't sell customers both media gateways and media server's.

It's usually one or the other.

Okay.

Thanks very much.

(OPERATOR INSTRUCTIONS).

Jonathan Half, UBS.

The last one from me, I promise.

Mike, what will be the share count assuming you're profitable?

And also, can you give us any sort of indication whether you expect maybe some seasonality, normal seasonality, in 2004, i.e., Q1 being below Q4?

That is a very good question regarding, seasonality.

It is difficult to say because, I, think, the voiceover I see marketed is a bit different now because it is growing very quickly.

And therefore, it could be that regional seasonality (indiscernible) you're seeing capital expenses trending a different way because of the expansion in voiceover IT, and that might mitigate any seasonality in Q1 or Q3 quarters. (indiscernible) in the past year.

So, if you take into account, as I said earlier, the strength of voiceover IP, especially in 2004, I think that the issue of seasonality will not be that much -- (indiscernible) that much.

What was your first question?

Regarding the number of shares we should be modeling for when you are profitable, assuming the current share price?

Right.

I think we should do at the moment about 38 million shares.

38 million -- okay.

At this time there are no further questions.

Are there any closing remarks?

Yes, I would like to thank everyone for joining in the conference call.

I think we had a very, very strong quarter.

And we have good outlook, going forward.

We (indiscernible) our guidance for 2004 -- it would be a good pick-up message on the wire line -- enterprise and carry business also -- Shabtai mentioned the fact that also cable and wireless is also picking up and has had some good traction going there.

Compared to previous quarters, we were more pessimistic in those areas.

So, to summarize, we had a very, very good quarter, and hope to see you and hear you on the next conference call.

Thank you very much.

Thank you for participating in today's conference call.

You may now disconnect.