AudioCodes Ltd (AUDC) 2003 Q4 法說會逐字稿

Good morning.

My name as Zendra, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the AudioCodes fourth quarter 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. (OPERATOR INSTRUCTIONS) Mr. Knettel, you may begin your conference.

Thank you.

I would like to welcome everyone to the AudioCodes’ fourth-quarter and the year-end 2003 conference call.

I am 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 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, 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 Nachum Falek, Vice President, Finance and Chief Financial Officer.

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

Shabtai, please go ahead.

Thank you, Erik.

Good morning everyone and thank you for joining us today for the conference call.

I am Shabtai, with me this morning is Nachum Falek our CFO.

Nachum will start first by reviewing our fourth quarter financials.

He will then provide guidance for the first quarter of 2004.

I will follow on discussing the following topics, the first one would be the business highlights of 2003 and fourth quarter.

I will then discuss shortly some related market trends and development, and then will discuss finally our plans for 2004.

I will then turn the call to Q&A session.

Thank you, Shabtai.

In the fourth quarter revenue was 13.5 million, which represents a 15 percent increase from the third quarter.

Gross margin was 54.9 percent compared to last quarter 54.5 percent.

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

Operating expenses increased from third-quarter level to approximately 10 million.

This increase consists of two key elements.

The first one relates to other expenses for approximately 900,000.

The second relates to new improvement in the last two quarters, material used in R&D project and expenses relating to sales and marketing.

The increase in operating expenses was in line with our expectation.

Headcount increased this quarter by three employees which brings us to a total of 328 employees. (indiscernible) resulted in a net loss of 2.1 million or 6 cents per share out of which 900,000 in other expenses relates to a move into a new corporate facility.

Short-term and long-term cash benefits were 99 million compared to 100 million last quarter.

The one million reduction in cash balances is attributed mainly to a negative cash flow from operations which was offset by a positive cash flow from employees option exercised of 600,000.

DSO came in at 61 days compared to last quarter 64 days.

Our guidance for the first quarter is as follows.

Based on our visibility at this time, we expect revenue for the first quarter to increase by 10 percent, and we forecast a loss per share of 3 cents based on approximately 38 million shares.

The guidance is based on a stronger initial backlog of 60 (ph) percent which is higher compared to previous quarters.

I now transfer the call to Shabtai.

Thank you, Nachum.

So first actually the business highlights of 2003.

All in all, we are very pleased with the performance; we have been able to grow annual top line by 62 percent.

Then if we look on a quarterly basis year-over-year, we have been able to grow 78 percent (indiscernible) the fourth quarter of 2002 and we have been able to achieve more than 60 percent reduction in operating loss, basically going down from a loss of 3 million on a quarter (ph) basis to 1.7 if I put aside the investment in moving to the new facility.

More importantly, that we really start 2004 with much stronger backlog than we used to have in previous quarters.

As Nachum mentioned, we opened this quarter with about 60 percent backlog towards the new revenue targets we set for the first quarter of 2004.

The key to success in 2003 basically is we have been able to execute on our plan.

Our plan potentially targets to honor and work with the Telecom top tier 1 OEMs.

We have announced agreements with Nortel Networks and with 3Com and have been able to execute on both partnerships in the second half of 2003.

Our gateways have been evaluated and that is a very recent trend, more in the fourth quarter than in 2002 and 2003.

Gateways have been evaluated positive by leading OEMs; we believe we will be successful going forward in having some of our gateways adopted by some of these players, and we have more OEM agreements right now on the work.

In 2003, we have been able to make up (indiscernible) position which requires Nortel (ph) UAS (indiscernible) group.

This activity goes well.

We just held last week a conference call to review the activity; think both parties are satisfied with the performance.

Now we positioned ourselves fairly well for the future continuing this trend of winning tier 1 OEMs, this type of investments substantially in R&D.

We now have close to 180 employees there.

We believe this is one of the largest team in the industry that is fully dedicated and focused on gateway technology.

We believe that will take us further down the road and based on market reports on the growth of the gateway market going forward by 30 and 40 percent on a compound annual basis, we believe this leaves us much room for us to grow there.

At the same time, we have increased personnel in program management, operations, and Q&A.

We have more mature and expensive product portfolio.

We have mentioned some of those products during the year.

Most notably, our new architecture (indiscernible) that (indiscernible) industry records in terms of compactness, density, (indiscernible) low power consumption, etc.

We believe that would be our winning vehicle going forward in many for our systems.

All in all, I believe that we have built a very sound company infrastructure to enable our growth going forward.

Now, some of the market trends that we have seen, 2003 really closes with much stronger trend towards (indiscernible) than in previous two years.

Enterprise spending has been increasing on a continuous basis, and now we believe represents a long-term trend.

At the same time, we see wireline operators receiving voice-over packets, that is a technology that will enable them to achieve higher revenues from offering value enhanced services.

We see growth in the broadband access area, both DSL and cable.

We believe that voice-over packet will be key to any throughput play and therefore, we do see interest rising mainly the cable space these days with voice-over packet.

At the same time, we have seen investment in 3G wireless intensifying.

Mainly towards China but we also see some signs for that also in North America in terms of gateway disconnect with not only 3G wireless systems but also some of the FUJI Gsm architecture.

We basically believe that the Telecom space increases most of the packages concern is coming to a new age.

With (indiscernible) provider emerging from financial instability and shift some of their budgets towards IP network, we believe the mostly affected gateways will be the prime focus of the industry in the next two or three years.

While NEP’s network proven provider is usually focused on the large ilecs, usually when you deploy a network, (indiscernible) tends to be lately focused much more in the (indiscernible) of the network integration and ability to build and support large-scale nationwide presence.

At the same time, with the downturn in the industry the last two or three years, they really found themselves with less efficient products on the gateway part.

So, NEP's now need special (indiscernible) to gateways to deploy rather complex (indiscernible).

This will reduce the transport outsourcing, quite found in the industry as Tier 1 (indiscernible) outside gateways that represents state-of-the-art technology.

At the same time, we have seen competition in the core media gateway voice-over equipment space weakening which really leaves us in a very unique stage here in the industry.

Even more so that these trends could (indiscernible) between gateway technology between wireless and cable, and we believe that by building one of the most efficient gateway lines in the last two or three years, we built for ourselves a very strong product line going forward.

In terms of what we plan to achieve in 2004, we intend to continue our top line growth minimally at 40 to 60 percent.

We plan as we have said before, to reach breakeven by mid-2004, and get back to profitability in the last two quarters.

We will continue to execute on our plan to penetrate and partner with Tier 1 OEMs in the wireline, wireless and cable space.

We do intend to increase market share in some of the (indiscernible) strategic.

Those are (indiscernible) for the kind of identity media gateway systems.

We do intend to expand some of our general activity.

We have been very lucky with our strategic (indiscernible) products lately, and we will definitely look for continued M&A activity to grow our revenues (indiscernible).

That basically sums up my summary of 2003.

I will now turn it over to questions and answers.

(OPERATOR INSTRUCTIONS) Jonathan Half from UBS.

Thank you.

Nice quarter.

Can you please give us the breakdown between the system, subsystems and chips please for the quarter?

And also if you could give us a geographical breakdown please?

The system product line was 31 percent, subsystem 55 percent, and chips accounts to 14 percent.

Our geographical sales mix was 67 percent in North America, Israel 8 percent, Europe 40 percent, and Asia-Pacific 21 percent.

What was Europe again?

Europe, 14 percent.

Did you have any ten percent customers this quarter, and how many?

We had one over 10 percent customer.

Can you discuss a little bit your relationship with 3Com?

How that is progressing?

Has it become material or does it appear to become material in the fourth quarter?

When do you expect it to start ramping?

Relationship with 3Com seems to be growing fairly well.

We have been selling to 3Com both in the second and the third quarter and fourth quarter.

Right now, we do see our (indiscernible) media gateway and low end digital media gateway embedded in 3Com offering for the enterprise so we expect 2004 to be stronger.

Okay.

Just a model-related question.

You are guiding for a 10 percent sequential growth in your revenues, but flat on the EPS.

Where are you going to be increasing your expenses?

You will see some increase in our R&D expenses going forward simply because that is associated with the timing of R&D grants authorities from the chief scientists.

Additionally, we do expect that the move to the new facility will cost more, will basically increase our G&A simply because we are moving to a much larger facility.

All in all, we do not expect other than those key items, any substantial increase in other expenses.

Finally for me, what would be your share count if you were profitable?

How you would include diluted number of shares if you were -- when do you report a profit?

Assuming we are profitable the share count, the common share price will be around 43 million shares.

43 million?

Okay.

Thank you.

Ittai Kidron of CIBC World Markets.

Congratulations.

I just had a couple of questions.

Correct me if I am wrong, if I heard right, you mentioned that the backlog into the next quarter is 60 percent of the quarter's guidance?

Yes.

Does this represent the departure from your typical way of providing guidance of 50 percent?

Is there a reason for the change?

No, we usually plan on growing this year around 40 to 60 (ph) percent minimally which would assume on a quarterly basis will translate into 10, 12 percent.

This quarter simply we see substantial increase, we really do not as yet have (indiscernible) from the stance this is a long-term trend thus far, although we have very strong backlog, we do not increase our guidance for more than 10 percent.

So, was the fourth quarter more back-end loaded than front-end?

Could you provide us more color and linearity during the quarter?

The quarter was rather linear.

I think we are a bit contrary to other players in the industry, we're not that much back-end loaded.

How would you expect your gross margin to -- where would you expect that to be over the next few quarters?

You mentioned volumes as one of the reasons for the increase in gross margin.

Now that volumes will increase more and more during the year, where do you expect that to kind of peak by the end of '04?

As I said, as volume grow higher the gross margin will probably be better.

Going forward, I think we should estimate gross margin between 55 to 56 percent range in the near future.

Okay, guys, congratulations.

Frank Marsala from First Albany.

Hello, gentlemen.

How are you doing?

Question is really with respect to the integration of UAS and how are you doing with that?

General levels of profitability in that business; things of that sort?

As I mentioned before, we are fairly satisfied with the last eight months of operations.

All in all we believe that we have achieved everything that we had to do, we had a plan of records to execute and being able to achieve that and deliver on time.

At the same time, shipments and deliveries to Nortel and from Nortel to its customers are on track.

We do believe that we will enter the third phase of our plan, and that is to replace the old UAS products with our own new omrom (ph) gateway that will improve our gross margins going forward.

So, all in all we are very pleased with our pickup in earnings as well.

And your expectations in the past you talked about kind of revenues from that business in the range of about $10 million.

Where would you put those numbers now?

So far, the experience is that we will be somewhat close to that 10 million.

A bit below, but we do believe that that product is attached to packet networks as virtual packet networks get deployed more and you heard the latest announcement by Verizon teaming up with Nortel deploying wireline network.

That type of product is going to be part of that deployment, so if more carrier networks will be deployed, the UAS product will be deployed in larger number of units.

The last question really is kind of a more general question but a number of years ago, if you look back at your financials in 2000, when you did revenues in the $70 million range, your gross margins were like 60 percent or so.

You had net income close to 27 or so million dollars.

How has your business changed over the last few years?

What can we expect that we start to see numbers like that?

Good question because indeed the company today really looks different.

We had a phenomenal (indiscernible) back in 2000, but if I have to compare today, our company today with the year 2000, we are at a much stronger point.

Back then, with the technology business which we still have today, but today we do (indiscernible) systems and Tier 1 play, and that has been almost zero in the year 2000.

We do believe that the investments we made in the last two or three years, really will start to pay itself in 2004, 5 and 6.

So all in all to judge in comparison the year 2000, I propose to wait at least a year or two before our investment comes to full realization.

So all in all, I think we have now more product lines, stronger positions with this competition, more active (ph) to our customers and all in all I think we are a strong company.

Thank you very much.

Carter Driscoll from Independent Research.

Good morning and thank you.

You made a comment and correct me if I'm wrong, but you made a comment regarding competition that you think it is weakening in the outsource market.

If you could talk about -- given the strength that you are forecasting top line growth and really market growth -- talk about maybe which potential competitors you see kind of exiting or at least weakening this market?

And why it is you they might be able to do so, is it because of just a superior best-of-breed product that you deliver and they cannot keep up?

If you could just give us a little bit of color on that comment, I would appreciate it.

Right.

So just take the gateway space we believe that while back two or three years ago, where you had few more companies that could supply gateways to the market several of them disappeared, that is gateway suppliers.

Look at the cable space company called proBridge (ph) who could jet stream into DSL space.

In the wireline I think we have seen either not only independent companies, but also the big companies investing less in the gateway technology simply because they had to cut their resources and budget.

If you take the globe (ph) business, we do see that our superior team in voice-over IP is coming to play where some of our partners (ph) looking to OEMs for some of our product who are previously they have been trying to compete with us.

On the CT devices, we do see some small companies with extra sources like financial soundness and ability to continue to invest; this is a business where you need continuously to add more features and continue development.

They find themselves less able to do that.

We have been approached for M&A basically in those applications a few times.

All in all when you integrate all of those different product lines you do see that now we become stronger competitor and more competitive towards those companies.

One other question if I may, could you comment just briefly about the announcement Nortel and Verizon hooking up in terms of Nortel being pretty much exclusive supplier of their VoP migration?

Talk about maybe the impact on the back half of this year.

Do you see other baby Bells trying to accelerate their migration from circuit to packet as well?

And could potentially Nortel be a beneficiary and then yourselves indirectly or I should say directly from this?

The truth is that being a vendor, we usually have less visibility into the design wins by our customers with the leading ilecs.

While we have no such information, we do see some more intensive activity on working and integrating our products into Nortel portfolio, and some of their OEM portfolios.

All in all, we believe that the UAS product will be part of that deployment.

We do believe that some of our product in the enterprise offering for micro media communication and IT centrics will be part of that, so all in all and our relationship with Nortel, and 3Com and other companies is really started on in the second half of 2003, and are still in their infancy at this stage.

So we believe that that is most of the effective growth to be more mature in the field with the higher shipments.

Lastly if I may, could you kind of compare and contrast very briefly the North American market from the European market?

And what different levels or stages of integration or development of the packet transition, if you could just compare and contrast and maybe highlight one or two of the leading Tier 1 OEMs over in Europe?

And potentially, not necessarily giving away any customer information, but just to give us a little more color about how the European market is progressing relative to North America?

Thank you.

I would tend to say that most American-based Tier 1 OEMs are more active in the Voice-over packet that take Nortel, Cisco and some of the leading vendors and primarily some of these players (indiscernible) North America, so we do not see that intensity of activity in Europe, not with the providers and not with the OEMs.

We do believe that it is truly something more in North America with that transition to Europe.

Would you characterize it as still fairly depressed economic growth and therefore a lack of spending by the carriers themselves or and enterprises?

Or is it just the focus on other activities rather than packet migration?

It's hard for me to say.

We are focused much more in North America at this stage.

We have led a little bit into Europe.

Thank you.

David Hawks from Dougherty, Inc.

I had a couple of questions; one on the evaluation the design win timeframes.

Could you give us some color on how you are progressing today as compared to say roughly about a year ago?

How is that timeframe, is it changing or are the projects getting bigger but the timeframes are getting longer?

Could you kind of give us some color on that?

Several factors to that.

Since we do have complete gateways now, obviously the time to market will be shorter simply because between our supplying a product and the customer deploying that in the field, when we deliver a complete gateway what goes on is usually modifying, adding a few more features, integrating and testing it and then deploying it.

So, versus the past where we were sending more technology components that had to be designed into our customer design which would have taken much more time.

So, time to market is now shorter.

Still, with large Tier 1 OEMs, usually those players do release their products to the market for leases which are made once or twice a year, and then our products usually need to be integrated into one of those releases and therefore there is more kind of a fixed period where (indiscernible) can get to market.

All in all, we believe it is now shorter time to market than before.

Looking at opportunities in the enterprise and service provider, if you look into this year, where do you see most of your opportunities?

Is it kind of weighted more in one over the other.

Could you kind of talk about it this year and then how things look into 2005?

I tend to think that still 2004 will be characterized by increase to the enterprise space simply because the momentum is there, the average sales price of a network deployment is usually lower, and this trend is already evident.

We, however, see some very substantial change in the carrier space.

Still we do expect 2004 will translate more into trial evaluations and first deployments.

We do believe that the market there will take up more in terms of revenues on into 2005.

Okay.

Thank you.

Jeff Meyers (ph) from Inteprid. (ph)

Just wondering if you can talk a little bit about some of the potential OEM agreements that you are working on.

What you might be looking for in a partner, etc. etc.

Thank you.

I am sorry but obviously we can't talk about any agreement we didn’t announce yet, and as we always we are always dealing with new owners agreement, but we cannot say anything specific right now.

Okay.

Thanks.

(indiscernible) Chopra from (indiscernible) capital.

I had a quick question regarding the opportunities with 3G, and Edge (ph)in North America.

I know you had mentioned that Asia is seeing more activity there, but with the recent Verizon announcement with IX CVDO (ph) as well as with the deployment of Edge in the U.S., what you see as the opportunity there?

Thank you.

Currently, we are not involved in any activities that relates to Edge and/or CDMA, so we are not involved for such activities in the U.S.

We are focusing at this stage much more on uncs (ph) region.

Great.

Thank you.

Alex Henderson from Smith Barney.

I was wondering if you could give us some sense as you look at the NT installations, what type of installations you will be most beneficiary of?

Would it be, when they are in the early stages of adjunting an existing Class five, or would it be more as they do Class five collapse and start to transition the network architecture more dramatically over to Voice-over-IP?

If you could in the process of doing that, talk a little bit about where exactly you are within what components within the mix of that rollout you would be supplying?

Right.

Basically, we do see our products being integrated both into wireline activity and Edge productivity.

The wireline activity, we do see opportunites such as the UAS providing a needed server, and then also providing some CPE devices that will complement a wireline voice-over network deployment.

As it relates to enterprises, we do believe that we should be part of deploying multimedia communication system based on Voice-over-IP.

We do see also some nice centric (ph) activity, so roughly I would say at least in 2004, we will see more of the enterprise deployment, and then some of the carrier space deployment.

I understand you are all involved with Sonus?

I was wondering if you can talk a little bit about what you are doing there.

In the past we have announced that we partnered with Sonus on attaching more analog media gateways to their solutions so that is one activity that has been done before.

A few (indiscernible) ago, and we believe it will continue.

I see.

Would you expect as you move more into the cable markets that you might have an opportunity to work with somebody like a Cisco that is more predominant in that category or would you continue to ride the NT horse?

We do not believe at this stage that we would partner or be perceived as a partner by Cisco simply because we do believe that they have that, a similar level of technology inside.

We then tried, we will go for the cable market, and we will seek more for it, not only Nortel, but a few more but that activity at least today is still very new.

Thank you.

(OPERATOR INSTRUCTIONS) Robert Katz (ph) from (indiscernible).

Nice quarter.

I have a question about the market size.

The addressable market for your products.

Can you sort of talk about in a broader sense what your (indiscernible) rate of gateway or your products are in the Voice-over-IP market space?

As well as with the Verizon deal, what is your revenue opportunity in that type of deal?

All in all, I say just general numbers including the synergy, the overall Voice-over-IP market has been around 2 billion in the enterprise space and about 500 million in the carrier space.

Out of that, in the enterprise space, I believe that the market for gateway is roughly about 500 million.

So going forward, we do believe that we will see an end base of synergy; we do believe that we will see a compound annual growth of gateway usage that is not less than 20 or 30 percent on a yearly basis.

All in all, more and more activities for gateways as everybody understands we just have to (indiscernible) with the wireline.

We know that cable will come to play end of 2004 and more substantially in 2005, and 3G wireless will really start more into effect probably 2004, 2005 or later, but all in all we do see growth in all of those areas.

Now more specifically from the sale deal with Verizon as I said before, we really have no visibility into specific opportunities that lie ahead of us, other than to say that we have talked with several of the enterprise solutions that will be deployed there as present UAS and hard for me to quantify at this stage the impact of the size of that.

On the enterprise side, the gateway represents about 25 percent of the bill of materials?

Do you have a sense what that is in the carrier, whether it's 10 percent or is there any reason why it would be less?

I would guess it should amount to the same percentage but again this is to really give you more serious answer, I need to go back to my therapist (ph) and give you that number.

Thank you.

Barry Parsinek (ph) from Catskill Capital (ph).

I was wondering if you could tell me what percentage of your revenue is direct sales versus through the channel?

At this stage, (indiscernible) are really direct.

We do have, I would estimate not more than 10 to 15 percent through channels, but we do expect due to the success of some of our recent (indiscernible) that we will see more going through (indiscernible).

Okay, did you say 10 to 15 percent is through the channel currently?

Yes.

Does that include, the channel would include people like Nortel?

No.

That is considered a direct sale.

Oh, those are considered direct.

Okay, but what about when you sell directly to a customer without somebody like Nortel being involved?

Can you break that down between -- can you break down the remaining 85 to 90 percent between where you sell directly to a customer versus through a carrier?

Okay, let's take the 85 percent.

All we can say is that Nortel has been more than 10 percent in the latest quarter.

We really cannot say much more about the percentage of our sales to Nortel or to 3Com.

Can you say in total what percentage of revenue is direct versus through carriers?

We are not selling to carriers, we are selling mostly to OEMs, and then 10 to 15 percent through system integrators and distributors.

Okay.

Just regarding the prior question on the gateways, I believe you said would be roughly 25 percent of the total sale for a carrier.

Are you referring to the gateways or the media servers or both in combination?

Today, I think the majority comes out of revenues will come from gateways.

Media server is still relatively very, very small portion of an overall carrier space shipment.

And is the universal audio server would be considered a media server or gateway?

The UAS is considered to be a media server.

We do believe that it will be more able to start for us once deployments of voice respected networks grow, and then it will be used basically not only the carrier space but also in the tracking (ph) space but also in the (indiscernible) space.

So, our growth of cable solution and DSL solution using Voice-over-IP will mean that we will be using that space, too.

Okay.

Just on the Verizon or on the Nortel, I believe you said that you expect sales into enterprise in 2004 more so than into carriers.

But I thought your agreement was with the wireline division.

Would the wireline division of Nortel be selling to both carriers and enterprise?

What we are saying is that we do sell the UAS program products through the Nortel wireline division.

We have said in the past that we do have some other product designs and Nortel enterprise offerings that could be done either by the enterprise division and/or by the wireline division.

Okay.

Thank you.

(indiscernible) from King Capital Management.

When you look at your two parts of your business systems and subsystems, can you break out roughly what you are seeing there as far as gross margin and operating margin on those two divisions?

I guess as you look out and you see the space getting more attention and more demand for boards and chips in the Voice-over-IP rollout, where would you like to get that and your target model as far as gross margin and operating margins on those two different divisions?

We usually don't break it down between those two divisions and in general I can say that we in the near future we do think that we can keep the 55 percent growth margin and (indiscernible) a little bit higher than that.

But in terms of the value between the group, we don't do it.

One number we can say that it its 55 right now, I think we can continue keeping this number and even get a little bit higher than that in the near future.

Would you care to disclose what you would like to have as a target operating margin for '04 and '05?

As target operating, I mean we are hoping that we can --at the end of 2004, we might be able to get 15 percent on the net income.

You said 15 percent?

Fifteen, 1 5 at the end of 2004 and maybe as a target but the general target to 2005.

Thank you.

Alex Henderson from Smith Barney.

I was wondering if I can go back to this Nortel situation for a second.

I had a conversation with the CTO of Verizon, and their description of their rollout with Nortel was that predominantly was going to be ATM oriented upfront since the -- according to Verizon -- the IP oriented product would not be ready until at least the end of this year or early next year.

So going back to your comments about the timing of ramping your Nortel business, predominantly going toward the enterprise, I assume that that is related to the partnership that they announced in terms of targeting enterprise customers along with Verizon on a reselling basis.

And second, is your product involved at all with the ATM oriented products that they are initially selling or will you only be selling with the IP gateways that they are intending to sell at a later date?

Would that imply a much steeper ramp in business with Nortel in '05?

The UAS product basically is attached or can be used both on ATM networks and IT networks and basically the product that is being shipped today is being sold to ATM networks as well.

You are asking me first a function that sells into the enterprise space really be related more to sales of Voice-over-IP products by Nortel to Verizon.

So it would be Verizon reselling into the enterprise then?

Yes.

So you are actually attached to that aspect of that Verizon deal as well?

We are attached to Nortel and offering and whenever it is being sold its directly and/or through carrier channels (indiscernible).

I see.

Would the logic of a much steeper ramp in '05 for the Verizon-related network also be correct to assume that that would also be a steep ramp in your product through that channel next year as they get into serious deliveries?

My personal assumption would be, yes.

I think that it takes time for a product offering to get through the channels.

We will see some of that starting in 2004.

It will come into more full play in 2005.

Could I go back to my original question a little bit?

When you are looking at what Verizon is doing, they announced that they will be collapsing existing Class five architecture networks and literally replacing them with Voice-over-IP gear.

That obviously is a pretty dramatic change.

Initially, however, according to the CTO, most of the initial deployments will be in conjunction with a gradual migration.

Is your product more utilized in the full flashover environment, or is it more utilized in the adjuncting environment?

That is a tough question.

It's hard for me to say.

We really do not have full visibility into what is the Nortel offering that includes all product to the exact configurations to understand whether it is an adjunct solution or not.

I know that we are designing to (indiscernible) in the enterprise.

We know that they are being used as CP devices and whether it is a prime offering and/or an adjunct, it's hard for me to tell you.

Thank you very much.

There are no further questions at this time.

I would now like to turn the call over to Mr. Adlersberg for closing remarks.

Thank you.

We would like to thank you all for joining our conference call today.

We believe it was a tough quarter.

We made good progress on our strategic plan for 2003.

The outlook going forward into 2004 tends to be on track with our plan, and we believe we will continue growth and return to profitability in 2004.

And we look forward particularly to meet with you over the next few weeks when we visit some of you and see you on our next conference call.

Thank you very much.

At this time I would like to thank everyone for joining today's AudioCodes’ fourth-quarter conference call.

You may now all disconnect.