AudioCodes Ltd (AUDC) 2004 Q1 法說會逐字稿

Good morning, my name is Taylor, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Audiocodes first quarter conference call. [operator instructions]

Thank you.

Mr. Knettel, you may begin your conference.

Thank you.

I would like to welcome everyone to the Audiocodes first quarter 2004 conference call.

Let me begin the call today with a brief Safe Harbor Statement concerning Audiocodes’ business outlook for future economic performance, product introduction, 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 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 in such statements.

These risks, uncertainties and factors include, but are not limited to, the effects of global economic conditions in general, 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.

We also have Nachum Falek, Chief Financial Officer.

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

Mr. Adlersberg, please go ahead.

Thank you, Erik.

Good morning, this is Shabtai Adlersberg, President and CEO of Audiocodes.

I would like to welcome everybody to our Q1 2004 conference call.

With me this morning is Nachum, our CFO.

Nachum will start by presenting the financial overview of the quarter.

Further, I’ll go into the details and highlight some of the trends we have seen, and some of the guidelines for our next quarter, and we’ll then go to the Q&A.

We look forward to continuing the nice growth of the company as presented yesterday.

Nachum.

Thank you, Shabtai.

In the first quarter, revenues were $15.3m, which represents a 13% increase from the last quarter.

Gross margins were 57%, compared to last quarter when they were 55%.

The improvement in gross margin is due to higher sales volumes, lower manufacturing costs, and favorable product mix in the quarter.

Operating expenses increased from the fourth quarter levels to approximately $9.4m.

The increase consists of two key elements.

The first one relates to our new corporate facility, and the second relates to new recruitment during the quarter.

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

Head count increased this quarter by 14 employees, which brings us to a total of 342 employees.

Audiocodes reported a net loss of $43,000 or $0.00 per share.

Short-term and long-term cash balances were $100m compared to $99m last quarter.

The increase in cash balances is attributed mainly to a positive cash flow from operations, and financing, which were offset by a negative cash flow related to investment activities.

DSO came in at 50 days compared to the last quarter of 51 days.

Our guidance for the second quarter is as follows – based on our visibility at this time, we forecast revenue for the second quarter to increase between 7% to 10%, and we forecast earnings per share of $0.01, based on approximately 43m shares.

This guidance is based on initial backlog of around 60%.

I now transfer the call to Shabtai.

Thank you, Nachum.

Last night we released our financial results for the quarter.

Not only have we been able to continue to grow our top line and strengthen our position in the market, but even more importantly, we have succeeded in returning the company to break-even in our P&L sooner than expected.

Two and a half years ago, we took a very critical and brave decision.

We faced a huge drop in revenue, to a level of $5m per quarter, and mounting losses.

We decided to invest in our future.

We have set aside short-term profitability right along the two and a half years in order to ensure the long-term growth prospects of the company.

Since then, we have been able to triple our revenues, and we have eliminated huge losses.

At the time, very proudly, we have almost doubled our manpower.

While everybody else in the industry has cut investments and efforts into product development and technology development, we kept investing.

I think what we see now is a company that is emerging much stronger in its marketplace.

We decided to invest in our people, and use our technology, product base, and cash reserves to rebuild the company, and I think we are coming out of that period very strongly, and are now able to take on the prospects that the markets show for us.

In terms of our actual financial performance in the last quarter, we grew 13% quarter-over-quarter.

We have been able to grow 82% over the last year.

We have substantially eliminated loss down to a basic EPS wide breakdown.

Similar to Q1, we are entering this quarter with very strong backlogs in our bag.

As far as markets are concerned, we continue to see growth in the Enterprise markets, mainly to [indiscernible] and 3Com.

We have seen good progress in our sales to the Carrier space, mainly through sales of high-density blades, digital strategic gateways and media filled products.

All in all, and I know it was expected like this, our sales into the Carrier space and Enterprise right now divide 60% Carrier and 40% Enterprise, so we do have an exposure to the Carrier space.

We continue to make progress in our partnerships with [SubQ1] OEM.

We have been able to get our gateway to be evaluated, performance-wise and functionality-wise by new OEMs.

We are now in the process of one new design investment which we believe will generate millions of dollars in 2005 and 2006.

We continue to beef up our investment in R&D and we continue to increase our support of our partners.

That is the cornerstone of our success in the last quarter.

I think that at this stage many in our industry deliver the complexity, the amount of work that’s needed to build a capable state-of-the-art and continually evolving gateway.

Having one of the largest R&D forces in the industry, and keeping investing in this, ensures that quarter by quarter we are able to increase market share, and are able to increase the gap between us and the competition.

All in all, we are building here a very strong company, and a very strong infrastructure going forward.

On a macro level, and a market level, we have seen activity in this Enterprise space, adopting [indiscernible] in a nice way.

Audiocodes moved, this quarter, to a new facility.

We have here more than 300 employees, we are using an [IPDX] system here.

It’s part of the same old experience with the old [PDX], and we see that trend of adopting IP-PDXs in most of our key technology and the enterprise continually growing.

We have seen on the Carrier space much activity, both by ILECs and alternative carriers.

ILECs substantially invest in building plants, trialing with limited deployment, and we believe that we will see more and more of that coming into fruition in 2005 and 2006.

Alternative Carrier platforms and markets – they do adopt VoIP [as their basis for] voice services, and electing the time and existence in the market, the rush to market, and in that rush they build up VoIP, which is key technology to implement their strategy in sales.

With various market studies estimating the Media Gateway market growing at 40% annually, and our ability to grow more than 50% last year and this year, above 50%, we do believe that we are grabbing more and more market share.

We are seeking recognition from [indiscernible].

I think at this time [Servers] OEMs which have gone through rough times, basically coming to the decision that they need to revert to their core competence, and are not basically capable of maintaining and increasing the amount of investment that’s needed to maintain a leading VoIP system.

This is where we come to play.

This is where we are [indiscernible].

I’d like to point out that the press release in [indiscernible] is Brooktrout, a company we competed with in the last few years in the blades market, and I think the fact that Brooktrout choose to adopt our high-density blades to use as their high-density solution speaks for itself.

From an M&A point of view, we see more opportunities as small and private companies get weaker and weaker, and the fact that investors behind them basically do not believe they will be able to grow the company, turns those companies more and more into M&A opportunities.

All in all, we have seen on the product line increase, a very nice increase in sales of [VRP] devices with some of the alternative carriers.

We have seen more success between the season functionalities.

We have seen more chip sales of the low density growing substantially in the Far East.

We do see our mid density Gateway gradually going to market.

There are two companies already looking at integrating into their portfolio, and we will have a focus on those mid density gateways going forward at the end of the day.

Mid density gateway and other gateways will comprise around 50% of the market.

We have cost reduction plans in-house right now that will allow us basically to maintain or even increase the growth margins going forward.

All in all, if I have to provide guidance for the rest of 2004, we stick to operating guidance.

We see a continuing growing market.

We see ourselves getting stronger in the market, and that’s why we believe the target that we set for our sales to grow 50% this year is definitely achievable.

We will continue to focus on partnering with Q1 OEMs.

At the same time, we will develop some balance to the OEM effort by establishing sales through alternative areas, through strong local system integration in target countries.

We are working to increase market share in strategic business lines, through a combination of continuing growth through product development, and we also are actively and very sensibly working trying to identify M&A opportunities.

That’s it for my part.

At this stage, I’d like to turn the call to Q&A.

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

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

Your first question comes from Ittai Kidron, of CIBC World Markets.

Hi, Shabtai, hi, Nachum, congratulations on a fantastic result and good guidance.

I have a few questions.

First, Nachum, can you give us the spread between the systems, sub-systems and chips?

Okay, the system product line was 34%, sub-systems were 50%, and chips come to 16%.

From a geographical perspective, our geographic spread mix was 60% in North America, Israel, 8%, Europe, 14%, and Asia Pacific, 18%.

Okay.

Now, Shabtai, when you look at your system business obviously it’s growing, but you started to mention that you’re starting to see more going into the medium-density.

Can you talk to us about the trends here?

Are you seeing that more from the Carrier side or the Enterprise?

If you look at your system revenue today versus where you expect it to be a year from now, as far as density is concerned, can you give us a little more color on where you think things are going?

Sure.

Right now, most of our systems sales comprise of two components.

One is the [indiscernible] area where we sell products that are based on products that we have bought from themselves.

We have components related, namely low density digital gateways that provide connectivity to digital tracking of 1% to 2% [indiscernible].

We do see initial interest in more and better gateways.

Basically we’re talking about mid density that’s ranging between 60 and 100 [indiscernible].

Most of the insurance is on the current base, and we do see OEMs starting to turn off products and product portfolio to meet the demand in that internal market.

Okay, and that’s Wireline, mostly, at least in the near-term?

Well, actually, the activity, both in the Wireline and Wireless, in the Wireline it’s really more towards an activity application, an IT sensor classification.

In the Wireless space, there’s increasing investment towards 3G and there the requirement is for substantially higher density.

At this stage, we are not aware that there are such products that implement such networks, but we do think that towards the end of this year, and early 2005, we will see more initial deployment of Wireless, mainly in the 3G area.

Thank you.

And on the M&A side, I mean, what would you be looking to buy right now?

I mean, what would be your focus?

What would be something that you were looking for?

We have confined ourselves to an area of strategic business lines.

Those areas we would like to build a larger market share, and we would like to build a much more sound customer base.

Right now, our efforts focus on identifying companies who have got a good and sound customer base and revenues that are matched to one of the activities that we have.

We have done that a year ago, with the OES products themselves.

We do have two or three more companies on our register right now, and we hope that we will conclude at least one such transaction, hopefully in the near-term.

Good, and lastly, you mentioned a sort of design wing kind of underway.

Could you give us a little bit just more background in the sense of, is it on the Carrier side, Enterprise, and for what product would it be, hopefully?

We’re talking about the Carrier side.

We’re talking about mid density gateway, and that’s all I can say at this point.

Okay.

Congratulations on the results, and good luck.

Your next question comes from Jonathan Half of UBS.

Thank you.

Just a follow-up on the last question regarding the mid density gateway, can you give us a sense of when you expect to generate revenues from the design wins, and maybe if you expect them to become material?

That is an unissued result.

It’s included in revenues in 2005.

In 2005?

2005.

Okay, maybe a few questions for Nachum.

In your long-term investments, I think for the first time you are adding now structured notes.

Can you just give us a little feel of what exactly you’re holding in long-term investments, the percentage, and what you are exposed to?

In terms of percentage, I think I can only say that it’s around 50%, divided between longer-term deposit and structured notes.

That’s about it.

Okay.

Shabtai, you made a comment that the cost reduction programs you have in place could result in a continuing improvement of gross margins.

Obviously it was a nice jump this quarter.

Can you give us a sense of where you see gross margins trending as we go through the year?

Well, right now, we do plan to try and increase our gross margin by possibly 1% in each coming quarter.

All in all, towards the end of this year, we build on a gross margin of 12% to 15%.

Okay.

The last question for me please.

Can you give us a sense of the percentage of revenues for the Enterprise versus the Carriers?

Yes, I think I mentioned that before.

In Q1 2004 we sold roughly 60% of our products into Carrier applications, and 40% into the Enterprise market.

Great, thanks, and good luck going forward.

Your next question comes from Frank Marsala of First Albany.

Hello, gentlemen.

I have a couple of questions, just following up on the last point.

You said now Carriers are 60%, Enterprise 40%.

That’s kind of a reversal of where you’ve been before.

I’m just trying to get a sense as to in one quarter things have moved.

You know, the mix has shifted pretty well.

Can you talk about what is going on there, and the momentum you’re seeing in different parts of your business?

Yes, we’ve never -- basically, this is the first time we’ve provided that number because, you know, we have never said that, and actually, because of the comments made to the public, we had to go and look for the numbers.

So this is the first time.

We never gave a different expression.

The thing is that, you know, take our blades, which have been strategic to us probably since 1998.

That is most of the applications right now are gateways.

So the gateway has been thrown into the Carrier space.

If you take some of our low density digital CPEs they are being sold into the Carrier space.

If you take the Media Server functionality has been thrown into alternative Carrier space.

I think that we will go and look back for it.

I’m not sure that we will see different behavior.

All in all, I think that’s why in 2001 and 2002 most of the growth came from Enterprise.

It’s evident that more and more activity is picking up from the middle of 2003, and this year, from the Carrier space, and that’s why we believe that more and more of our sales will go into that market.

Okay, and then just back on the gross margin for a minute, I believe you said you want to get one point improvement per quarter for the next couple of quarters.

Maybe 60% by year end.

Is that what I heard?

That would be the target, yes.

Okay, and so your target model that I’ve seen presented before, you talk about a 55% gross margin.

Is that something that we should start to think about, 60% there as well?

The thing is that this quarter was a major change, mainly in that with regard to the products that we sell and the sales of Media Server we have replaced the old legacy product that we have been receiving when we did the acquisition a year ago with our platforms.

It’s giving our platform providers better margins.

That is the key factor that drove our margins down.

Going forward, we expect that more and more of our sales will be based on our platforms.

Therefore, we think that we should be able to maintain and grow the gross margin.

Okay, and then just one last question on the implications of the Brooktrout partnership.

What do you think you can get out of this kind of a partnership, and what does it add to you, and what do you bring to them?

It’s a great match between two companies where one company has got a very strong base in technology and products, and the other one has got a very market twitch.

Right now, Brooktrout sells mainly in the US market, about 80% of its sales in that market, and has got a much larger sales force.

So it’s a natural co-operation between us and them.

I think we continue to invest in advancing state of the art in the blade business, and Brooktrout is being able to take that market to their high-density applications.

And so from a momentum standpoint, would it be more the end of the year that you think that you’d see some results from this?

It’s not particularly in the second quarter, but is it post-second quarter we should see some momentum?

Well, actually, there’s some integration and initial testing that’s being done, has been done, in the first quarter and this quarter.

We do expect that usually design times for Brooktrout customers will range between three and 10 months.

So I would expect that we will see some more substantial sales out of that co-operation agreement in the last quarter of this year.

The last quarter?

And then sorry, one last question.

In which geography do you believe your fastest growth potential is right now?

I know where your biggest numbers are right now, but where do you think the most momentum is right now, what part of the world?

Well, actually, we did see -– we have to divide ourselves -– we do sell into OEMs.

We started to sell to some other service providers, community, basically all over the world then, and basically, there’s a mix.

So right now, there’s no specific geographical region that’s stronger than the other one.

I think we see growth both in the US market, and in the Far East, where our Voice RP has picked up nicely.

Also, Europe is lately, mainly East Europe is going nicely lately, so those are maybe the regions we now point at.

Okay, thanks very much.

Your next question comes from Carter Driscoll of IRG Research.

Good afternoon, gentlemen.

I just want to follow up a little bit on the collaboration with Brooktrout, if I may.

Is there any potential that they may be able to leverage your distribution in the Far East, in particular, and sell some of their products?

Is that possibly one of the impetuses from their side?

Obviously I don’t necessarily want you to speculate on your collaboration, but is that something that’s potentially down the road?

We are in the initial phases of that partnership.

I think it’s going pretty well, and we feel good with our partner.

We do not want to [approve] that, but at this stage, there are no such plans

Okay, and then following up, you guys have talked about penetrating other service provider markets.

You had a couple of nice announcements with [Fiberhome] and Astral.

Can you talk about whether you see any change in the adoption?

I mean, I know you talked about 3G potentially, in the first quarter, beginning to see some additional clients, but maybe you could focus on the Cable side, and maybe geographically, where there might be further opportunity in either Cable, maybe number one, and then Wireless, number two?

If you could just give a better sense on how you are going to diversify away from the Wireline side?

Right, at this stage, we are less active in the Cable market and actually also, we had one substantial design win this quarter in Europe.

We really do not have much activity in that space.

So I don’t think that Cable will contribute much to our revenues, percentage wise.

Hopefully we will see more Wireless coming into play in 2005, but I think, all in all, we do expect at this stage that Wireline will consist of the majority of our revenues.

Okay, all right, thank you gentlemen.

Your next question is from Jeffrey Myers, of Intrepid Capital.

Thank you.

The first question is I guess your rule of thumb that you used to have was that you would take your backlog at the end of the previous quarter, and double that, and that would be your guidance.

I guess last quarter and this quarter, you have sort of 60% backlog coverage.

What I’m wondering is, are you just being more conservative or is some of the backlog now longer-term backlog, so you don’t include it in your guidance for the next quarter?

When we talk about backlog, we only mean backlog for the current quarter.

But as we said, by saying 60%, we only wanted to emphasize that we’re getting into the quarter with a good backlog on our side.

But it is better than what you used to do, which was, I guess, you said 50% backlog coverage?

You can say so, although last quarter, we also, in the first quarter we also, at the beginning, at the time of the conference call we had 60% also.

Right, okay, and then not to nit-pick at all, but your guidance for 10% sequential growth next quarter, you know, is down somewhat, I guess, from the previous quarters of last year, and this last quarter.

Is there any seasonality in that?

Again, are you being conservative or what’s the driver there?

It’s Shabtai.

No, we’re simply being cautious.

We said that we can do 50% this year.

We are confident that we will grow at that rate, and we have done in Q1.

We did 13%.

Just on the safe side, we provided guidance, but we don’t see any bit of worsening in our business.

Okay, great, thank you.

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

Your next question comes from Yianki Shree of Bear Stearns.

Hi, congratulations, guys.

My questions were answered, thank you.

Your next question is from Robert Cass of Sevens International.

Hi, Shabtai and Nachum, great quarter.

I have a question about, I guess I always ask you on the conference call about the [dreadful] market, and where you products fit into the market?

I think in [indiscernible] there’s a misunderstanding about the potential of your market size, and where your products are being used.

If you can address that, please?

Yes, basically our focus is on the Media Gateway market.

We see exciting reports by synergies, we’ve studied that market.

Right now they estimate the market in 2004 to be a roughly $600m market.

Going forward, it should grow at 40%, year-over-year.

It should get to $1.7b in 2007.

Now, that is divided into three main categories – low-density media, medium and high-density.

We target the low and the mid-end.

Those two market segments comprise roughly 50% of that market.

So we target this year, although the market is about 300% it is also combined chips, blades and systems, and going forward we would target roughly a market that will be close to $860m in 2005.

Would you ever get into the high-end density?

Yes, we do believe that with growing experience in deploying, we have developed in the last 18 months the relevant experience in deploying low-density gateways.

We are right now entering our mid-density period.

We believe we will be a player in 2005 and 2006, and we do believe that coming up with some of our higher density products we should be able to start to get into the high density market in the second half of 2005 and 2006.

And do you think margins on the high density will be the same as low and mid density?

Yes, roughly the same.

The main contents in each such gateway is usually the Voice RP processing, and we are mainly, through very efficient designs, and through cost reduction programs, are going, usually from the same gross margins, that’s about 65%.

Thank you very much, great quarter.

Again, to ask a question, please press *1 on your telephone keypad.

Your next question is from Jonathan Half of UBS.

Thank you.

Shabtai, can you comment on 10% customers this quarter please?

We have won such customers.

Okay, could you also comment on your relationship with 3Com?

Yes, those are very good relationships.

We see continuing growth of sales with 3Com, and we are still getting to a better co-operation on one new project.

Do you see them becoming a 10% customer in 2004?

I’m not sure.

I don’t think so, no, not at this stage.

Okay, and finally from me, about $100m in cash.

Just give your thoughts on that level of cash?

Are you comfortable with it?

Do you need more, can you do less?

At this current stage with no acquisition.

We definitely feel quite balanced and strong.

Should we add one such transaction, is depending on whether we give our cash or shares, then that will be assuming whether we would need for cash.

At this stage, with such strong cash reserves, basically we are starting to add positive net cash throughout the corporation, does not threaten our size to go to the market.

Great, thanks a lot.

There are no further questions.

Are there any closing remarks?

Yes, this is Shabtai, I would like to thank everybody who took part in our conference call this quarter, and we look forward to seeing you on the next conference call.

Thank you.

Goodbye.

This concludes today’s conference call.

You may now disconnect.