AudioCodes Ltd (AUDC) 2004 Q3 法說會逐字稿

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  • Operator

  • Good morning.

  • My name is Melanie and I'll be your conference facilitator.

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

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

  • After the speakers remarks there will be a question and answer period.

  • If you would like to ask a question during this time, simply press "*" then the number "1" on your telephone keypad.

  • If you would like to withdraw your question, press "*" and then the number "2" on your telephone keypad.

  • Thank you.

  • Mr. Knettel, you may begin your conference.

  • Erik Knettel - IR Contact

  • Thank you.

  • I would like to welcome everyone to the AudioCodes third quarter 2004 conference call.

  • Let me begin the call today with the brief Safe Harbor Statement, concerning AudioCodes business outlook, for future economic performance, product introductions and plans and objectives related there to 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 no obligation to update that information.

  • Joining us today from AudioCodes, we have Shabtai Adlersberq, Chairman, President, and Chief Executive Officer.

  • We also have Nachum Falek, Vice President of Finance and Chief Financial Officer.

  • I would now like to turn the call over to Shabtai Adlersberq, Mr. Adlersberq, please go ahead.

  • Shabtai Adlersberq - Chairman of the Board, President, & CEO

  • Thank you Erik.

  • Good morning and good afternoon everybody.

  • I would like to welcome everybody to our third quarter 2004 conference call.

  • With me this morning is Nachum Falek, our Chief Financial Officer.

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

  • I will then focus on the business highlights and market trends that we have experienced this quarter.

  • We will then turn into a Q&A session, Nachum?

  • Nachum Falek - CFO

  • Thank you Shabtai.

  • In the third quarter, revenues were up 23.1 million which represent a 21% increase from the last quarter.

  • The increase in revenue is a combination of internal growth and the consolidation of Ai-Logix’s results for the first time over the full quarter.

  • Gross margin were 58.3% compared to last quarters 57.9%.

  • The improvement in gross margin is due to higher sales volume and several bulk products mix in the quarter.

  • Operating expenses increased from the second quarter level to approximately 12.3 million.

  • The increase consist of two key element.

  • The first one relates to the consolidation of Ai-Logix’s results over the full quarter, and the second relates to new recruitments during the quarter.

  • The increase in operating expenses was inline with our expectations.

  • Head count increased this quarter by 15 employees which brings up to a total of 424 employees.

  • AudioCodes reported a net income 1.2-1.6 million or 4 cents per share.

  • Short-term and long-term cash balances were 94 million compared to 90 million last quarter.

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

  • DSO's came in at 48 days similar to the previous quarter.

  • Our guidance for the fourth quarter is as follows.

  • Based on our visibility at this time, we forecast revenue for the fourth quarter to increase between to 5-10% and we forecast earnings per share of 5 cents based on approximately 44 million shares.

  • The guidance is based on an initial backlog of 60%.

  • I will now transfer the call to Shabtai.

  • Shabtai Adlersberq - Chairman of the Board, President, & CEO

  • Thank you Nachum.

  • First and foremost, I think it is important know that this is yet another very strong quarter for us.

  • This is essentially our 12th consecutive quarter, actually completing three continuing years of growth and investments and I think the managed results we presented speak for themselves.

  • Given more importance [inaudible] to look at the trend and to think our position is a clear established provider of gateway technology to the Voice-over-IP market that's expanding at a rate of 40% a year, that is the most component known to date; this is the key take away.

  • Further I think all I could say this quarter and I will expand on this immediately is truly a consolidation of our business model.

  • I think the business model that we have developed selling directly through the large entities which in our opinion at the end of the day will be the pillars of the majority of the network gearing that market so as to surf and we will get to that immediately.

  • Some specific highlights of the quarter, we had a very strong demand for our products both on the technology side and the media gateway and the server product.

  • Varying points is that we are seeing from quarter-to-quarter and this quarter is basically a record quarter, more willingness, more openness of leading OEMs to adopt outsourcing trends and basically embed our gateway to their portfolios.

  • So this core really marks a record in initiation of gateway products evaluation by the customers.

  • We have seen that across the boards for wireline and wireless and I will speak about wireless immediately.

  • Think in terms of the quality of the design wins those that we have gathered this quarter are very important and we hope to announce more such evaluation and design wins religiously in the quarter, and now with much more willingness by the product line marketing and by management and executive indulgence fees to work with AudioCodes to try and mitigate those suppliers.

  • As you know, we have seen an increase in our activity in the market in responding to specific activities in various expense where we see, which are being adopted more and more within the two carriers offering [inaudible] new broadband networks and we have seen substantial increase in activities at -- into wireless as compared to other markets such as [inaudible].

  • Finally, I think this quarter really marks very successful integration of Ai-Logix, this is the first quarter that we have basically embedded their operation and we have already seen contributions to the bottom line.

  • In terms of our activities -- relative to give more color to some of the things that we have done this quarter.

  • I think -- we are gaining more and more record missions to the performance, to the long-term commitment if we are in that specific process, product line and we are becoming one of the best cost performance product on the market.

  • Our immediate density gateway is right now at evaluation with a large entity and we hope that as of the first quarter of 2005 it will be embedded into designs and into the [fields].

  • Our low-end gateway have been selected by an OEM in the Far East basically using [back loaded] gateways to provide for deployments in cellular networks and we plan to announce that design win in coming weeks.

  • Then we are basically towards almost completion of another resale [remains] for our gateways with another very sound OEM in that region.

  • We have been basically embedded into our [phase] responding to various new network enquiries in various countries, those have been basically made in East Europe, in select countries such as in Latin America and we have been basically used and fulfilled by some of the large entities, some of which we really do not have at the moment [inaudible].

  • On the wireless side we have seen nice success for our gateways -- all of these are being employed and deployed in this full square and we have shipped the first series of mid-density gateways for wireless solution and [inaudible] about this project through that OEM.

  • We have been short listed on the wireless phase with one more large and leading cellular network provider for [synergy] applications and we expect and we have seen similar such initial discussions with just another vendor again both GSM and UMTS applications.

  • That’s on the NEP front, on another front this is regarding to us we have been active mainly in developing countries.

  • We have been deployed mainly in East Europe, in several countries there, and we have basically tested and evaluated and hopefully we will go into market with one of the leading North American -- service provider to the SME market.

  • All in all, I think all those design wins and improved activities, design activity really show that our business model is really put to work and really have seen continued growth.

  • Really, we see the large entities and some of them declared that broadly -- asset sales and the sale shifting business model basically, from being an equipment vendor into a solutions provider.

  • Our focus on the best of bridge strategy, which is [funding] with those entities and relying on very strong subs, which integration and cooperation really worked for us and by building and maintaining a very strong R&D team that's fully focused on media gateway technology and media server technology.

  • We are gradually core-by-core becoming more and more established as a two-year leader in that market.

  • We believe that our best -- instead of going directly and selling to those providers and instead having our entities really pull itself everyday and [inaudible] about consolidation in the Voice-over-IP market.

  • All in all, we feel less and less independent [inaudible] vendor and the trend is really that the majority of the networks will be deployed by those large entities.

  • Well, our common fear is that our investment and focus on wireless media gateways really allows us to hope for one of the most advanced open bridge wireless/wireline media gateway and our ability basically to set up from a very simple G.711 applications and then onto other low bit rate solutions both in wireline, cable, and wireless, there is a key benefit in completing four design wins.

  • All-in-all with the continued trend of reduced R&D spending by the major communications infrastructure provider, or check with us winning more and more design wins really accelerate.

  • That is very briefly the financial side of the business.

  • It grew nicely quarter-to-quarter, but even more than that presenting year-over-year almost 100% is really a great win for us, great achievement.

  • This is already second quarter where we present positive or correcting the net income and increasing of growth margin this quarter closed our long-term business model income for us.

  • We have experienced strong cash flow, we have seen strong backlogs because of the quarter very strongly in July, and weakness in others, that weakness expanded into the first two weeks of September.

  • But as of that time and mainly in October we experienced strong purchasing levels.

  • All-in-all this ability in the market, is still where it was, still very short.

  • All we can see is into [differing] quarter, but again judging on our ability to grow at least as the market grows which is 40%, we feel confident that we can maintain that growth going forward and that’s why we have basically planned for this quarter again between 5-10%.

  • Very important to note on our marketplace, the Voice-over-IP market, a very strong M&A consolidation process.

  • And we've seen very strong trends to our building solutions into the IMS architecture, IMS and for IP multi-media sub-systems and we've seen several acquisitions by the leading vendors in that market, but basically of those Lucent Technologies, Telica, Alcatel is still positioned in the space, special wireless, EDIAL, Cisco, and [inaudible].

  • And it's very clear that all of the leading players really take positions, try to build for themselves the best portfolio they can have.

  • In my assumption we will see some slow months from today, we will not see many independent private companies acting independently in that market and therefore, in that process we see ourselves as basically obliged to evaluate more and more M&A facilities to perform such acquisition in the market.

  • Getting back to Dialogic's, we had a very good [inaudible] to work with them, strong growth very similar to our growth in revenues.

  • They have been contributing that to our profit line and they are well above the original plan of 30% in 2004, and over these other two [inaudible] on co-aligning our product line road map as those are already being evaluated by some fellows successfully.

  • One announcement that we make is bit unique to what we have done is joint progress was announced by Ai-Logix and NSC -- Natural Speech Communication, an affiliate of AudioCodes to combine [VoP] technology with Ai-Logix to provide [VoP] application and support for the [inaudible] market.

  • Getting back to a summary of VoP, looking to 2004 we have been substantially outperforming our original plans while we are originally planning to grow 50% a year.

  • We will grow 80% this year, should we accomplish this growth.

  • Now we are on target with gross margin of about 68%.

  • We have been able to achieve this for a net income of 7% of revenues and coming very closely to our target of reaching 10% net income by the end of this year and net income by the near of 2005.

  • All-in-all on the profit line while initially planning on achieving this even middle of this year and earnings of about 5-6% at the end of the year, we should be able to complete this year with 11 points for 2004.

  • Trend for 2005 should [inaudible] dissimilar unless the market will change its place.

  • If the market continues to grow the way we see it growing in 2004 and expanding at 30% a year, we should stand at achieving at least that type of growth.

  • So right now we are planning for 2005, achieving a growth of between 40-50%.

  • And we just have basically completed my summary for the business highlight of the quarter and we are turning to Q&A.

  • Erik?

  • Operator

  • At this time I would like to remind everyone, if you would like to ask a question press "*" 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 Jonathan Half of UBS.

  • Jonathan Half - Analyst

  • Thank you.

  • Hi, Shabtai and Nachum.

  • Can you give us the traditional breakdown you usually give us product as well as geographies please?

  • Shabtai Adlersberq - Chairman of the Board, President, & CEO

  • Yes, the system product line, [technical difficulty].

  • Jonathan Half - Analyst

  • Hello?

  • Operator

  • Your next question comes from -- [technical difficulty]

  • Nachum Falek - CFO

  • -- 13% and Israel 12%.

  • Operator

  • Your next question comes from Troy Jensen with ThinkEquity.

  • Troy Jensen - Analyst

  • Hi, congratulations over the nice quarter gentlemen.

  • I don't know if there is anyone else on the line, just misread you guys, but it sounds like there is a whole bunch of echo on the line and no one heard the numbers you just broke out Nachum.

  • Nachum Falek - CFO

  • I'll repeat it, no problem.

  • For the system product line we are 29%, subsystems 60%, [chip] 11%, and in terms of geographical sales mix 61% in North America, Europe 14%, Asia-Pacific 13%; and Israel 12%.

  • Troy Jensen - Analyst

  • Okay, prefect, much clear this time.

  • Hey, my question was, could you maybe quantify what your wireline percentage was this quarter.

  • Nachum Falek - CFO

  • We are sorry, but we usually don’t break it between wireline, wireless, and cable.

  • We express all this only in terms of product lines.

  • Troy Jensen - Analyst

  • Would you, would say that a bulk of the business is coming from wireline and just kind of to figure out, you know, what wireline/wireless cable mix could look like in '05 or beyond?

  • Nachum Falek - CFO

  • Well generally I think we need to think about 2004 as being matured through wireline.

  • And I would quantify that those -- I don’t have the numbers in front of me, wireline could take more than 95% this year.

  • Things going forward we will see shift towards converged wireline and wireless and more and more wireless, but still I think you will not see that coming to full impact before probably latest to later in 2005 and in really in a full blown way in 2006.

  • So, slow initiation both on wireless and cable will take time to translate into revenues in time of the year.

  • Troy Jensen - Analyst

  • Got it, and Shabtai just so, a correction to you; did you say regarding the acquisitions in the next 12 months was that something that AudioCodes intends to announce or do you just speculate there will be more in the industry?

  • Shabtai Adlersberq - Chairman of the Board, President, & CEO

  • Well, there will be more in the industry but definitely AudioCodes is continuously for the last so many months, evaluates or meets in our strategic business plans and we continuously try to identify those technology pockets and companies with good customer base and revenue base that will fit into our strategic plan, so I do expect both industry and AudioCodes to be active in the next 12 months.

  • Troy Jensen - Analyst

  • Got it, well, congrats on the nice quarter and keep up the good work guys.

  • Shabtai Adlersberq - Chairman of the Board, President, & CEO

  • Thank you very much.

  • Operator

  • Your next question comes from Todd Smith with America’s Growth Capital.

  • Todd Smith - Analyst

  • Thank you.

  • Hi guys.

  • My question is on seasonality, you know, you have been in a rapid growth phase for the last, you know, two years, so you anticipate as you grow revenues that you are going to see more seasonality in the business, you know, better Q4s and potentially Q1 being a little weaker?

  • Thanks.

  • Shabtai Adlersberq - Chairman of the Board, President, & CEO

  • Yeah, the seasonality that I can sense is usually second quarter is a record quarter in our shipments.

  • We usually tend to see increased rate of [COs] coming into Q1 or Q2.

  • Q2 is usually our strongest and the same trend builds into July.

  • Usually summer led itself to a very weak, obviously, we are talking about August and this year we are seeing in the first two week of September, but then we believe that Q4 is getting back to the same level.

  • So that is the correct way to quote the seasonality we have been seeing.

  • Todd Smith - Analyst

  • Okay and in terms of gross margin, you reached kind of -- close to your target anyway or you reached it, can we expect margins around this range or even higher?

  • Nachum Falek - CFO

  • Going forward, I can only estimate that it will be around these ranges meaning the gross margin will -- in the near future will be between 58-59%.

  • Todd Smith - Analyst

  • Great.

  • That's all.

  • Thanks.

  • Operator

  • Your next question comes from Frank Marsala with First Albany Capital.

  • Frank Marsala - Analyst

  • Hello, gentlemen, how are things today.

  • Question really is about the traction that you are seeing in wireless and I am trying to get a sense of that, the regions of the world where that’s more particular, is that U.S., is it North America as a whole or is it other, I am just trying to get a sense of where that might be?

  • Nachum Falek - CFO

  • See our activities is usually made towards the large entities and those are, say both in North America and Europe and in the Far East.

  • In terms of the specific market through which we see that activity going on, right now a lot of activity around expansion of 2G networks and that's happening both in the U.S. and in other regions where you have GSM deployed.

  • We do see really a lot of activity trying to get to combine second generation or third generation stack of products over it and that is what we see.

  • Frank Marsala - Analyst

  • Okay.

  • Then just out of curiosity, could you update us on the status of the shop registration that you have out, is it currently live and then again could you remind us what the -- what your thoughts are going then?

  • Nachum Falek - CFO

  • As far as we understand, you know, the shelf is effective of this [inaudible] that’s our understanding.

  • Frank Marsala - Analyst

  • Okay, thanks very much.

  • Nachum Falek - CFO

  • Sure.

  • Operator

  • At this time I would like to remind everyone if you would like to ask a question press "*" then the number "1" on your telephone keypad.

  • Your next question comes from Reg King with WR Hambrecht.

  • Reg King - Analyst

  • Great, thank you.

  • Nachum I was hoping that you could help us with the large customers for the quarter, do you have any 10% customers for the quarter.

  • Nachum Falek - CFO

  • Yes, we have one 10% customer.

  • Reg King - Analyst

  • Okay.

  • Do you reveal who that is for the quarter?

  • Nachum Falek - CFO

  • Sorry?

  • Reg King - Analyst

  • Did you tell us who that was?

  • Nachum Falek - CFO

  • I usually don't --

  • Reg King - Analyst

  • Okay.

  • Nachum Falek - CFO

  • -- but we got only one this quarter as we had one in the previous quarter.

  • Reg King - Analyst

  • Okay, great.

  • And then secondly, we are seeing, as you guys have indicated, we are seeing some acquisition activity to-date, expect to see some more in the future, as you've indicated, some of your customers actually are involved in some of this acquisition activity, can you talk to us about the opportunities you see there and expanding your business going forward versus threat of possibly some of that business going in-house?

  • Nachum Falek - CFO

  • Well actually we have enjoyed lately from the fact that some of the acquisitions that were made by the large entities basically, get us to become suppliers not only of those small private companies, but we then become suppliers to those entities.

  • So, good design wins that were made into private -- leading private companies are leading in fact later on to more sales into the large entities.

  • Reg King - Analyst

  • Great.

  • Thank you.

  • Congrats on the quarter guys.

  • Nachum Falek - CFO

  • Thanks so much.

  • Operator

  • Your next question comes from Rami Rosen with Oscar Gruss.

  • Rami Rosen - Analyst

  • Hi, good morning guys.

  • Rami Rosen with Oscar Gruss.

  • First question relates to the announcement that you made last week about the OEM related with 3Com, how significant do you expect this comp to become?

  • Nachum Falek - CFO

  • We do enjoy basically this OEM [inaudible] really summarizes one year of cooperation with the increase in our level of activities.

  • We have seen revenues growing to the level of multi-million dollar activities.

  • We are engaged in some development of a product that will be marketed by 3Com so, all-in-all a very good and impressing cooperation with Tricom.

  • Rami Rosen - Analyst

  • Okay.

  • Another question about the number of employees at the end of the quarter.

  • Nachum Falek - CFO

  • At the end of the quarter we have 424 employees.

  • Rami Rosen - Analyst

  • And do you expect any change in this number during the next quarter?

  • Nachum Falek - CFO

  • We might slightly increase it, but-- yeah, basically I would say that while we do intend on a general basis to increase revenues on a quality basis by much of 10% we on same line we would try to limit our expense growth to be no more than 2-4%.

  • So all-in-all we will add it but we will add them at a much slow rate, take this quarter and we had a 15 for each 420 that is around 4%.

  • Rami Rosen - Analyst

  • Okay, thank you very much guys.

  • Congratulations for the nice results.

  • Nachum Falek - CFO

  • Thanks very much.

  • Operator

  • Your next question comes from Greg Weaver with Kern Capital.

  • Greg Weaver - Analyst

  • Hi, I was wondering if you can give us a sense of the organic growth rate that you had?

  • Nachum Falek - CFO

  • Yeah, we do not break down and we will not going forward break down Dialogic's revenues and/or revenues from the organic [inaudible].

  • I would tell you that we keep similar growth trend that we have enjoyed in the last three years which we are continually saying that those are about 10% for us.

  • Greg Weaver - Analyst

  • Okay.

  • And maybe could you press around the sequential shift in your product mix here from -- looks like you had a lot more subsystems business this quarter and less systems?

  • Nachum Falek - CFO

  • Yes, the decrease on system percentages is mainly due to the consolidation of Dialogic's results into the sub-system product line.

  • This was the first quarter that we consolidated Dialogic's on a full quarterly basis, so the main change is due to this shift.

  • Greg Weaver - Analyst

  • Okay and I guess just lastly, could you remind us what on the P&L this equity and loss of affiliate company line items is all about?

  • Nachum Falek - CFO

  • Yeah, the line item is the affiliate company -- a few minutes ago, we --.

  • Greg Weaver - Analyst

  • I am sorry, the last part again;

  • I missed that.

  • Nachum Falek - CFO

  • The name of the company is Natural Speech Communication, that's the line.

  • Greg Weaver - Analyst

  • Okay, thank you.

  • Nachum Falek - CFO

  • Sure.

  • Operator

  • Your next question comes from Carter Driscoll with IRG Research.

  • Carter Driscoll - Analyst

  • Good afternoon gentlemen.

  • I am sorry, could you just mention that company one more time, having difficulty on the line, the company by the equity norms?

  • Nachum Falek - CFO

  • Sorry, the name is Natural Speech Communication.

  • Carter Driscoll - Analyst

  • Okay.

  • Would you -- can you at least breakout or comment whether Ai-Logix contributed positively to the bottom line for this quarter?

  • Nachum Falek - CFO

  • Again we don't breakdown Ai-Logix separately, but I can only say that according to the guidance we gave back in May, they have a positive bottom line.

  • Carter Driscoll - Analyst

  • Okay, can you give us an update on how the integration or how you see the cross-selling efforts of your media server and system business are progressing and whether, you know, you see this kind of as an integrated sell or kind of a complimentary sell, or whether you still see a lot of them being sold separately?

  • Nachum Falek - CFO

  • Right now, there is a separation between sales of gateway product and cellular product, but usually when you offer combined portfolio for both gateway and cellular into an entity that usually increases the level of cooperation that we can get with those companies.

  • Carter Driscoll - Analyst

  • Does this put you more in direct competition with some other entities that you are both competing and account as customers?

  • Nachum Falek - CFO

  • Not really, we have taken the position that we would have a growth portfolio and we would alter that and our customers really have a chance of mix and match and speak what is complimentary towards a develop.

  • We have not seen cases where one product is not basically being evaluated because we compete on a different product in another application.

  • Carter Driscoll - Analyst

  • Okay.

  • And then lastly I told this again the, geographic breakdown I have got Asia-Pacific 15%, Israel is 12%, and that’s where I lost you?

  • Nachum Falek - CFO

  • 61% in North America and 14% in Europe.

  • Carter Driscoll - Analyst

  • Thank you gentlemen.

  • Nachum Falek - CFO

  • Okay.

  • Shabtai Adlersberq - Chairman of the Board, President, & CEO

  • Thank you.

  • Operator

  • At this time I would like to remind everyone if you would like to ask a question press "*" then the number "1" on your telephone keypad.

  • Your next question comes from Steven Chang (phonetic) with KingFord Capital (phonetic).

  • Steven Chang - Analyst

  • Hi, good morning.

  • I remember when a few quarters ago when you first acquired UAS you expected roughly 10 million revs per year and I am wondering is UAS performing to what you had originally planned.

  • Shabtai Adlersberq - Chairman of the Board, President, & CEO

  • Again, I am sorry but we won't break the UAS numbers separately, we can -- we can just say they are -- it's according to plan, now let say they did match the guidance we gave.

  • Steven Chang - Analyst

  • And secondly, as I understand it most of the UAS business would be with Nortel, do you have any -- are there other customers other than Nortel for your UAS product line?

  • Shabtai Adlersberq - Chairman of the Board, President, & CEO

  • The answer is yes.

  • Products is being sold today to other customers as well, also Nortel right now is still the largest customer.

  • Steven Chang - Analyst

  • Thank you.

  • Shabtai Adlersberq - Chairman of the Board, President, & CEO

  • Sure.

  • Operator

  • Your next question comes from Jonathan Half with UBS.

  • Jonathan Half - Analyst

  • Yes, thank you.

  • If my numbers are correct, actually I think the systems business was down in absolute dollars this quarter sequentially?

  • So, number one, is that actually -- is that correct and can you talk about, you know, what's behind that, also if you can talk about what should we expect in Q4 for the breakdown between the product lines?

  • And then finally, if you can comment or at least give us some guidance regarding operating expenses; they were up a little bit more than I expected this quarter.

  • I am just trying to figure out what the model was for Q4?

  • Thank you.

  • Shabtai Adlersberq - Chairman of the Board, President, & CEO

  • Okay, well, Jonathan to start to remember all those questions in row, but I'll try my best.

  • You know, yes you are right.

  • We had larger system products in the second quarter basically being mostly attributed to the fact that in that quarter there was a switch between the original UAS product.

  • It was our product and I would assume that with Nortel there were -- there was a phase of initial building the inventory.

  • And that is the main reason for that lower level of sales this quarter compared to the second quarter.

  • And your next question was?

  • Jonathan Half - Analyst

  • Regarding -- I mean just trying to figure out is that, how should we -- I mean what should we expect in Q4 regarding the breakdown between revenues similar to Q3, should we expect any changes?

  • Shabtai Adlersberq - Chairman of the Board, President, & CEO

  • Yeah, roughly I think we would expect just a 10% of first quarter.

  • Jonathan Half - Analyst

  • So business -- all business lines should be growing at about the same rate?

  • Shabtai Adlersberq - Chairman of the Board, President, & CEO

  • I would not say that, we do expect that going forward we will see more system sales and out of the subsystem sales we will see more forward sales.

  • But all-in-all we would see very similar, maybe change by a few percentage on a quarterly basis.

  • Not any dramatic change.

  • Jonathan Half - Analyst

  • Okay and then question regarding the operating expenses?

  • Nachum Falek - CFO

  • Yeah, so first of all the increasing operating expenses this quarter was mainly due to the consolidation of Ai-Logix over the full quarter.

  • Going into the future I can say that the OpEx will probably be higher than this quarter, but on very low percentage and most of them -- I mean obviously related to the number of employees we will recruit.

  • Jonathan Half - Analyst

  • Okay and finally I mean the quality of the line wasn’t that great, so Shabtai in your comments I believe you said that you are targeting a 10% net income margin in Q4 was that correct?

  • Shabtai Adlersberq - Chairman of the Board, President, & CEO

  • We -- originally we are planning to achieve 10% net income in Q4 that’s correct.

  • Jonathan Half - Analyst

  • Okay, thank you and good luck going forward.

  • Shabtai Adlersberq - Chairman of the Board, President, & CEO

  • Thanks.

  • Operator

  • Your next question comes from Todd Smith with America's Growth Capital.

  • Todd Smith - Analyst

  • Hi, just had a quick question on tax rate, what do you anticipate going forward?

  • Nachum Falek - CFO

  • Going forward, I think it will be less than 5% in the near future.

  • Todd Smith - Analyst

  • And that would be, you know, through '05?

  • Nachum Falek - CFO

  • At the beginning.

  • I mean I cannot say regarding the full year, but at least for the fourth quarter and may be the first quarter.

  • This is -- I mean I don't want to forecast for the full year in '05.

  • But for the next quarter, it is, it will be less than 5%.

  • Todd Smith - Analyst

  • Great.

  • Thanks.

  • Operator

  • The next question comes from Rami Rosen with Oscar Gruss.

  • Rami Rosen - Analyst

  • Yeah, this is a quick question regarding the number of share that is recorded in the next quarter?

  • Nachum Falek - CFO

  • Yes, I did mention it will be, I mean the earnings per share right now is based on 44 million shares.

  • Rami Rosen - Analyst

  • 44 million shares?

  • Thanks.

  • Operator

  • Your next question comes from Carter Driscoll with IRG Research.

  • Carter Driscoll - Analyst

  • Yes, gentlemen.

  • Still on track to payout the earn-outs, performance earn-outs for Ai-Logix in the March quarter?

  • Nachum Falek - CFO

  • Yes, I mean no change at the moment and I expect the payment to be either in the first or second quarter of next year.

  • Carter Driscoll - Analyst

  • And that remains somewhere around $10 million?

  • Nachum Falek - CFO

  • That's the estimate we are seeing right now.

  • Carter Driscoll - Analyst

  • Okay, thank you, gentlemen.

  • Nachum Falek - CFO

  • Okay.

  • Operator

  • Your next question comes from Robert Katz (phonetic) with Sun West (phonetic).

  • Robert Katz - Analyst

  • Hi, Shabtai and Nachum, nice quarter.

  • I have a question about customer concentration; what percentage your top 5 and 10 customers represent in the quarter?

  • Nachum Falek - CFO

  • We usually give the top 15 only and I am afraid the top 15 customers were 68%.

  • Robert Katz - Analyst

  • Okay, thank you.

  • Operator

  • Your next question comes from Jonathan Half with UBS.

  • Jonathan Half - Analyst

  • Thanks for taking another one.

  • Shabtai in your comments you said that you believe that market -- you expect the market is growing somewhere near with a 40-50% in '05 and then you expect AudioCodes would be able to grow at least at the pace of the market, I am just wondering are you factoring in any acquisitions or is that just from the businesses that you currently have?

  • Shabtai Adlersberq - Chairman of the Board, President, & CEO

  • We are not factoring in any acquisitions in that calculation.

  • We assume that -- we are looking at the media gateway's market and at this stage we do not think that we need any support from any external acquisition for that, to achieve that.

  • Jonathan Half - Analyst

  • Great, thank you.

  • Shabtai Adlersberq - Chairman of the Board, President, & CEO

  • Sure.

  • Operator

  • Your next question comes from Jeff Patt (phonetic) with Overvise Asset Management (phonetic).

  • Jeff Patt - Analyst

  • Yeah, good morning.

  • Could you just go over the guidance one more time, thanks?

  • Nachum Falek - CFO

  • Jeff, in terms of revenue we said that revenue will increase between 5-10% and earnings will be 5/10th a share.

  • Jeff Patt - Analyst

  • Great, thanks.

  • Operator

  • At this time there are no further questions.

  • Mr. Adlersberq, are there any closing remarks?

  • Shabtai Adlersberq - Chairman of the Board, President, & CEO

  • Yes, please so, just like to thank everybody that took part in our conference today and basically we look forward to see all of you in our next conference call.

  • Thank you very much.

  • Operator

  • This concludes today's AudioCodes third quarter earnings conference call, you may now disconnect.