AudioCodes Ltd (AUDC) 2004 Q4 法說會逐字稿

Good morning.

My name is [Dechanta], and I will be your conference facilitator.

At this time, I would like to welcome everyone to the AudioCodes fourth quarter and full year 2004 earnings conference call. [OPERATOR INSTRUCTIONS].

Thank you.

Mr. Knettel, you may begin your conference.

Thank you.

I would like to welcome everyone to the AudioCodes fourth quarter and full-year 2004 earnings conference call.

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; primary product and technology development upgrades and the ability to manage changes in 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 Adlersberg.

Mr. Adlersberg, please go ahead.

Thank you, Erik.

Good morning and good afternoon, everybody.

With me this morning is Nachum, our CFO.

I would like to welcome everybody to our fourth quarter and year-end 2004 conference call.

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

I will then focus on the business highlights, our key achievements in the fourth quarter of 2004, our focus for 2005 and market plans.

We will then turn it into the Q&A session.

Nachum?

Thank you, Shabtai.

In the fourth quarter, revenues were $25.2m, which represents a 9% increase from the last quarter.

Gross margins were 59.2% compared to last quarter's [58.10%].

The improvement in gross margin is due to higher sales volume and favorable product mix in the quarter.

Operating expenses increased from the third quarter level to approximately $12.6m.

The increase relates to growth in R&D and sales and marketing expenses at AudioCodes, reflecting an increasing investment in customer-related development activity.

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

Headcount increased this quarter by 21 employees, which brings us to a total of 445 employees.

AudioCodes reported a net income of $2.6m, or 6 cents per share.

Short-term and long-term cash balances were $217m, compared to $94m last quarter.

The increase in cash balances is attributed mainly to offering of convertible notes we did back in November.

DSO came in at 52 days, compared to last quarter's 48 days.

Our guidance for the first quarter is as follows.

Based on our visibility at this time, we forecast revenues for the first quarter to increase between 5 to 10%, and we forecast earnings per share between 6 and 7 cents, based on approximately 44m shares.

This guidance is based on an initial backlog that's higher than 55%.

I will now transfer the call to Shabtai.

Thank you, Nachum.

First and foremost, this is a very strong year-end quarter, and a very successful end to a very profitable year 2004.

This has been our thirteenth consecutive quarter of revenue growth and the third straight quarter of strong earnings.

In many ways, I believe we can say that 2004 for AudioCodes was the year where we've got back to our future.

We added substantially on our industry position, and with Voice over IP becoming a telecom world mainstream phenomena, we believe we are on the right track to continue growth.

We are coming into 2005 with a larger product portfolio for any customer base, and much stronger strategic alliances and partnerships.

2004 has been the first fully profitable year for 3 years of heavy investments.

This is the third year of revenue growth in a row.

We have total growth of 87% over 2003, substantially above our original plan of growing 50%.

And we -- if we take a larger [factor] on a yearly basis, which will go over 2002, we grew more than 200% in 2 years.

We have achieved our profitability goal of 10% net profit in the fourth quarter, and that's a remarkable milestone.

We achieved our target of growing those gross margins to 59.2%, and we've basically hit above our business model.

This result points to a level of efficiency, company wide, in maturity and infrastructure that basically allows us to continue our growth in coming years.

We've seen progress being made across all our business lines.

Of the traditional Technology business, which comprises of chip and board sales, we saw a nice growth of 30% over 2003, and that has been further enhanced by the recently acquired AudioCodes Ai-Logix division.

On our Networking business, comprising media gateways and media servers, we have seen tremendous progress of growth of 100% above 2003, all-in-all 200% in sales.

A very nice growth for a business line that has just been established in 2002.

To give you a better idea, in 2002 we have sold less than 3m products in the Networking business.

This year, 2004, we have sold more than 35m of that product line.

This growth can be generally attributed to our comprehensive and wide voice over IP market growth.

The market is believed to be growing at an average rate of 40% annually, and the fact that it's growing on all market segments - wireline, wireless and broadband access - gives further weight to good growth.

On top of that, the recognition of AudioCodes brands as a prime net upgrade, voice over IP, media gateway and media service provider, delivering performance and committing better and larger resources for the advancement of media gateway technology, really puts us at the front of many of these [areas].

We also have been able to forge better strategic partnerships, in cooperation with leading telecom [indiscernible].

Among them are, [let's see, HOT Tel], 3Com, NEC and others.

Much better infrastructure, and we have also strengthened our financial strength by basically [giving a] convertible notes transaction in November of 2004.

Beyond that, we have invested substantially in reducing costs in our product lines to secure a good cost structure going forward in 2005.

And we intend to introduce to the market in 2005 a few such new products that will enhance our margins and ability to compete with a lowering of selling price.

Bottom line, we have established a position of the leading vendor of media gateway and media servers to the network equipment providers.

1 of the most important events in this quarter has been our ability to qualify the first and best performing gateway in a very comprehensive test, which has been conducted by the European Telecommunications Standards Institute, ETSI.

In 2 events, in June 2004 and September 2004, 10 different gateway vendors have been tested for overall performance.

That included our recorded quality, echo translation performance, package [loss] performance, and a few more parameters that affect quality.

I believe that everybody will agree with me that the quality of voice over IP is 1 of the major criteria by which they have to select their provider.

And I'd like to report that AudioCodes' Mediant 2000 gateway is the only [similar] product that has passed and exceeded the requirements in all of those tests.

This is a very remarkable achievement for the Company.

Other highlights of the quarter.

We have been successful with 2 leading OEMs, in sales and testing of our mid and high-density products, and we've seen nice sales in this quarter for those products.

We have gained more new OEM media gateway product evaluations in each area of activity.

We have signed with NEC.

NEC basically selected our Mediant 2000 to build their [CP] media gateway of choice for a deployment of MegaGen voice over IP networks.

We have signed HOT Telecom for voice over IP over cable in Israel, projects that will be headed by Lucent.

We have signed another resale agreement with a leading APEX player; we cannot disclose the name.

Beyond that, we have gained hard sales of 58 products for access applications.

Those trends are visible, very evident and alive in Europe, in the U.S. market and other places in the world.

The number of RFCs for new voice over IP network deployment is gradually growing, and we participate in many of them.

We have seen wireless becoming a main driver of voice over-IP in many different market applications, among them 3G, fixed/mobile convergence, Wi-Fi and we believe we will see WiMAX and other activities.

Even more prominent is the fact that CDMA, the leaders of voice over IP using the EVDO technology by looking at voice over-IP as the technology of choice to provide voice connectivity over packet evolution.

And beyond that, we continue to see customer momentum in our -- across the cable market.

Throughout 2005, in view of all that activity, is going to be a year of continuous investment.

We will see improving activity and investment in areas such as wireless applications.

We will need to support our OEM partners and strategic partnerships.

We will have to increase our support of network components on a global basis, and we intend, therefore, to increase the level of investment both for R&D, marketing and sales.

On the sales front, we have extended our presence in the world.

We have established our presence in India and in Mexico, and we plan to add more countries in 2005.

On top of that, we have had quite intense activity around M&A.

We are looking at various opportunities in the market [linked to] our leading position, our financial strengths, our ability to become a leader in that market, drives several companies to get a good option for consolidation going forward.

So coming back to our 2005 financial plan, we enter the first quarter of 2005 with a strong backlog that is slightly above 55%.

Visibility still is not improved, just as we reported in our previous quarters.

We cannot see beyond a quarter going forward.

In terms of our financial plan for 2005, we plan to continue to grow revenues organically between 40% and 50%, and grow expenses between 12 and 18%.

Meaning we will be growing in revenues and profits.

We intend to maintain gross margin at a level of high 50s.

Beyond that, we intend to reach a profitability goal of about 15% in the second half of 2005.

As to Q1 guidance that Nachum provided before, we believe we will be able to continue our growth at the rate of 5 to 10%.

We will keep investing in R&D and media marketing and sales, and therefore we predict our earnings to be between 6 and 7%.

With that, I have concluded my introduction, and we'll turn into the Q&A session.

Erik?

[OPERATOR INSTRUCTIONS].

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

Hi, Shabtai and Nachum.

Congratulations on a good quarter and good guidance.

I just want to clarify the profitability target for the second half.

Is that bottom line or operating income?

That's bottom line.

Bottom line?

Great.

And Shabtai, could you give us a little bit more color with regards to the gateways?

What's selling right now as far as density, and what do you expect will be selling more in 2005?

Do you see a change in that?

Well, the trend looks the same as it looked before.

We see our Mediant 2000.

It's a gateway that sells primarily into 2 categories, TP applications for putting [WANs or e-WANs] and then [trunking] the applications for putting [APEX] in e-WANs.

We see a lot of success in that product.

We will see increased revenues.

That has been our leading product.

That's the product that has won the ETSI award.

Beyond that, the Mediant 5000, as I've mentioned before, has gone through thorough testing with a partner.

Beyond that, we have seen another vendor selling our high-density media gateways, and we believe that in 2005 both segments of mid density and higher densities, we should be able to increase the level of sales substantially.

Okay.

And what do you see with the media server?

For the media server, we have been able to grow this year nicely, a few tenths of a percent.

We believe that we will need to invest substantially more. 1 of the key areas for application of the media server is wireless, the IMS environment, and we will need to add more functionality such as video and other features.

But all in all, I believe that among our competing vendors in that market, we feel we are on the state-of-the-art and we will push for more design wins.

We do have several companies now evaluating our products beyond our current [set].

And a last one from me, with regards to the M&A.

Could you give us a little bit more color on what exactly are you looking for at this point?

Yes.

We have an emphasis on the networking business and mainly in the area of media service and some complementary gateway markets.

We are evaluating various companies.

We try to identify those that will provide a continued growth going forward, that have got an established customer base and that would present a good fit for our current company culture and performance.

Okay.

Congratulations and good luck.

Thanks, Ittai.

Our next question comes from Frank Marsala of First Albany.

Hi, gentlemen, how are you?

Again, a good quarter.

The questions I have are really, could you give us a breakdown of your revenues into some categories of how you have changed the way you are thinking through the pieces of your business?

Could you give us a breakdown of those into whatever categories you are thinking about today?

Yes.

The system product line was 33%.

Subsystem was 59%, and chips are down for 8%.

In terms of geographical sales mix, 63% in North America, Europe 13%, Asia Pacific 12% and Israel 12%.

We had 1 customer about 10%, and then starting this quarter, we will report revenue by Technology and Networking business groups, instead of the breakdown into chips, subsystem and systems.

The Technology business will include revenues of chips, modules and boards, and the Networking business will include revenues of media gateway and media servers, both CPE and core network applications.

In the fourth quarter of 2004, the Technology business group was 58%, and the networking business group accounts for 42%.

Okay, thank you.

The other question, that is on design wins.

In the past you've talked about wireless activity having increased.

You reiterated that today.

But in the past you've also talked about being short-listed for another wireless carrier, I think it was in the GSM area, perhaps UMTS.

Could you give us an update, where do you think things stand in that regard?

Yes.

We are on an ongoing basis competing on RFCs for networks.

Basically, we have been chosen by 1 more vendor, it's our gateway of choice for wireless applications.

To date, we have not won yet any projects but we are [indiscernible] these solutions.

We do see a trend for harmonized wireline and wireless applications, and therefore we believe that we will be operating in more projects.

We have -- The majority of our sales of gateways in the fourth quarter have been to the wireless base.

And as I've mentioned before, the fact that the CDMA world and Wi-Fi world can see more wireless areas adopt for [indiscernible] to voice transport technology, we believe that we will see increase of that segment.

But would you expect, Shabtai, that the Wi-Fi voice can be an '05 opportunity and then the EVDO voice would be more an '06 thing, or could that actually be something that happens in '05 as well?

That is generally, indeed, what we believe will happen.

Still, you know, the introduction takes time, the evaluation for its trial.

So we believe that voice in conjunction with Wi-Fi will be more the second half of 2005.

And indeed, in CDMA we believe that that would be more into 2006 and 2007.

Beyond that, there is 1 more application in CDMA that is being sold today where our gateway is being used.

It's a different system architecture and network of architecture that can use our products today.

Okay.

Thanks very much gentlemen.

The next question comes from Alex Henderson of Smith Barney Citigroup.

Hi, this is Nigel Frank calling in for Alex Henderson.

Just a couple of housekeeping questions.

What was your headcount last quarter?

I don't have that number.

As I mentioned, this quarter we increased employees by 21 employees, and it brings us to a total of 445 employees.

And you mentioned a number regarding backlog.

I didn't catch the context, in which field that is.

A backlog of 55%, what were you saying there?

Yes, it's 55%.

We have [indiscernible] out of the forecast we gave for the current quarter.

Okay.

And can you -- could you -- I know you don't break it up, but can you comment as to, at least directionally, your deferred revenue?

Did that increase or decrease in the quarter?

We do not comment about that.

Sorry.

Do you have a book-to-bill number?

Again, no.

But I can tell you that it's usually more than 1.

All right, thank you.

The next question comes from Steven D. Levy of Lehman Brothers.

Thank you.

Just a couple of follow-up questions.

You mentioned that there was 1 10% customer in the quarter.

Would you expect that for the full year 2005, you would have a 10% customer?

It looks like it, yes.

Okay.

And then, in the fourth quarter, could you tell us what your top 15 customers represented, in terms of total?

I think you've done that with the --

The top 15 accounts for 60% of revenue in the fourth quarter.

Right.

And then lastly, there was a specific application for your gateway, which is in Israel, HOT Telecom, for the cable operators.

Have you already deployed that?

Have you recognized revenues?

And are there other opportunities that have come about because of that?

Our equipment has been deployed, actually.

It's working in a non-deployment environment.

No, we have not recognized yet any of those revenues.

And we believe that, indeed, that opportunity later, together with our system integrator and other cable companies will do a deployment.

And then just lastly, a clarification on when you say the backlog is more than 55%, that's of your first quarter guidance or of the full year?

First quarter.

First quarter?

Okay.

Great.

All right, thank you.

Sure.

Our next question comes from [Rysak Aria] of Merrill Lynch.

Hi, good afternoon.

Shabtai, usually in the past quarters you have said that the backlog is comfortably above 60% and this time I'm hearing the number of 55%.

So if you could comment on that.

Is there anything more that we should read into that, or is that just seasonal or should we be concerned about the fact that it's 55% rather than 60% that you have experienced in the most recent quarters?

Well, I don't think you need to be too concerned.

Actually it proves we have added the newly acquired Ai-Logix division to our revenues.

Their booking, it is really done on very short lead times and therefore, their build-up of backlog is different than ours.

Currently we believe we are on the same pace as previous quarters and we should -- we have predicted this quarter growth of 5 to 10%, very similar to what we said a quarter ago, and a natural growth [that supports itself].

I see.

And can you comment, Shabtai, on the long-term mix between systems?

I'm referring to the previous segmentation of systems, subsystems and chips.

Like this quarter, you said 42% Networking, which I assume is systems and media gateways and media servers, and Technology is 58%.

My question is, how do you see the evolution of that mix, and what impact does that have on your gross margins?

Okay.

So generally, we have seen growth in the last 3 quarters, on a quarterly basis, on the system side.

Meaning we have increased our system sales content out of the overall Company.

If I'm not wrong, previous quarter systems were 29%.

This quarter we are 33%, so that's an increase.

Previously, we have not included Ai-Logix, which is more sales into enterprise, and therefore we -- the percentage was lower in the third quarter than in the second quarter.

But all in all, we see always continuous growth in our media gateway sales to the market.

I see.

And 1 last question, Shabtai, is that the Ai-Logix acquisition, can you give us a sense of any synergies that you may have obtained to date?

That is, have you been able to incorporate some of your own in-house technologies into Ai-Logix products and transition some of their largest customers onto more of a voice over IP infrastructure?

If you could give us a sense of synergies on the revenue and cost side.

Thanks.

Yes.

Right now, sales of voice usually characterized by product evaluations, it can go between 3 to 6 months and then the customer buys the design, and then ramp up. [VR output] are being tested right now by several of Ai-Logix's customers.

Beyond that, we have matched between 1 of the investments we made at a company specializing in speech recognition, called NSC.

Their product has been marketed by Ai-Logix to close to [20] of their customers, and is right now being tested and evaluated for use.

So we believe that in 2005 we will see Ai-Logix selling AudioCodes' original products for more than 10 or 15% of overall [their] sales.

Okay, thank you.

Sure.

Your next question comes from Reg King of RW Hambrecht.

Great, thank you.

Shabtai, I was hoping that you might be able to help us understand a little better what are some of the new features and where we might see the cost reductions in the new products you're planning to introduce in '05?

Right.

Well, 1 of the areas, as the market grows and indeed, the huge potential in the market [size] -- [some numbers] from a recent IDC report released this month, IDC predicts media gateway comp sales as being, all-in-all 700m in 2004, and should grow to about 1b in 2005, more than 45% growth.

Now, as the market grows, there's definitely tougher competition.

There's a drive for lower costs and therefore to stay competitive.

We have invested substantially in 2004 into 3 new products.

Some of them already -- 1 product that basically, it's at a stage and should be shipping already in this quarter, and then, 2 more products coming later in Q2 and Q3.

All in all, we believe that maintaining a very low cost structure in media gateway technology will allow us to be competitive in the market and sell through our partners.

And Shabtai, all 3 products are related to your media gateway group?

Yes.

And then secondly, you talked about the wireless business and the VoIP being a strong proportion of your growth for the quarter.

Can you give us a sense of what you are seeing from your customers in wireline and cable deployment?

We definitely see wireline continuing growth, mainly in network deployment [indiscernible] and alternative carriers.

Those carriers are seeking to provide voice services using Voice over IP as a means of access to their newly built fiber networks.

Beyond that cable market, still not major sales in that market.

We do not believe there are much sales at this stage, but we indeed see activity with more OEMs and we believe that in 2005, we will see more of that.

So, on the wireline front, gradual growth.

On the cable front, we believe that 2005 should probably be a year of [further growth from] deployment.

Great.

Thank you very much.

Sure.

The next question comes from Jonathan Half of UBS.

Thank you.

Congratulations on a great quarter.

Can you -- Nachum, you ran through the re-segmentation quite quick for me.

Can you repeat that and maybe add a little bit of details regarding what the changes are between the old and the new segments?

And maybe if you can also provide us - maybe not now, but maybe later - with the details of how the quarterly revenues would have broken down in 2004 with the new segmentation.

Yes.

No problem.

Let's start with the new segmentation.

The Technology business will include revenues coming from chips, modules and boards.

That's 1 segment.

The second is the Networking business group, which includes media gateway and media server, or both CPE and core network applications.

In terms of the last quarter of 2004, then the split was 58% into the Technology business group and 42% into the Networking business group.

Okay.

But [indiscernible] generally, the way you're describing it here, is that something that is -- the Technology should be the subsystems and the chips, or is there something coming out of the subsystems which is moving to networks?

Yes.

The analogue media gateway used to be part of the subsystem group and now it's part of the Networking.

Okay.

Your gross margins have increased, I think, since Q3 '01, pretty steadily.

And it sounds from your comments and your guidance that you don't think that will continue or actually maybe even decline.

Is that correct?

And if so, can you maybe elaborate on why or why not?

It's hard to predict exact gross margins that we'll experience, and as Shabtai mentioned, we do think we will be able to maintain this gross margin and stay in the high 50s.

You said you are allowing for continued improvement in Q1 at least?

Again, sometimes it's very hard to predict right now.

It depends on the mix of products, on the volume.

But I do think we will be able to maintain this gross margin and really stay in the high 50s.

I can't get into more specifics than that.

Sorry Jonathan.

Okay.

And in terms of your operating expense guidance, I think you said 12 to 18% year-over-year, is that correct?

Yes, that's our prediction at this time.

Okay.

Can you give us an idea of what that number was, if you're able to, organically in '04?

We do not have that number, since our numbers right now, we are doing Ai-Logix as part of them.

We will try to extract those numbers and provide those later.

Okay.

Great.

And last from me please, is the tax rate -- I think this quarter was a little bit higher than I was modeling for.

What do you expect it to be in Q1 and maybe for the year?

I think that the range will be probably between 3 to 5 or 6%.

Great.

Thank you.

And good luck going forward.

Thanks Jonathan.

[OPERATOR INSTRUCTIONS].

The next question comes from Jeff Myers of Intrepid Capital.

Great.

Thanks guys.

Just a qualitative question, I guess.

If you look at your sales to service providers versus your sales to enterprise, qualitatively which are stronger now?

And within service providers, which type of service providers are seeing the most strength?

Right.

So we made a quick analysis just before the end of the quarter.

When we're trying to identify mix between sales, true OEMs, and then sales that are done through our system integrators, we believe that this quarter we are at about 85 or 85 to 90% on the OEM front and about 10 to 15% on sales through systems integrators.

Okay.

And then the OEM sales, do you have any sense what percentage of those are going into carriers versus going into enterprise, or it's hard to figure that out?

In the past we used to, again, we do not take that number with that, and I don't think anything has changed.

But 2 quarters ago we reported our sales to service providers at roughly 60% and above, and sales to the enterprise to be below 40%.

We do not think that there was any major change in this quarter.

Okay.

And then within service providers, most of the sales are going to wireless, do you think?

No, not necessarily.

As we have said, true OEM sales to the wireless market, but with some of the network built outside, [indiscernible] alternative service providers, we go directly through system integrators.

Usually that is done in much smaller networks.

Right.

And do you have any idea wireless versus [CLACs], which of those is a bigger piece right now?

I would -- We haven't looked into that division of numbers.

So it's hard for me to say.

But my gut feeling is that still wireline is substantially the bigger portion of our sales.

We will strive to get that number and provide it for you.

Thank you.

Sure.

The next question comes from Rami Rosen of Oscar Gruss.

Yes.

Good afternoon guys, and nice results.

Shabtai, you mentioned earlier that you won the agreement with HOT through Lucent.

Is there additional business between the [indiscernible] or was it just a one-time event?

We definitely are working with Lucent on other fronts.

I guess we are part of their solution to the enterprise space, [a firm called Celerate].

And basically we are being offered in other places in the world, not only in cable application but also in enterprise applications.

Okay.

Another question I have is with respect to your marketing goals during '05.

Is there any intention to focus on the European market?

Yes.

We are going through some changes internally.

This is something that -- this is a [target] going to hopefully end this quarter.

We intend to increase our presence generally in what we call EMEA, which is Europe and Middle East and Africa.

And we are definitely going to increase our level of investment in Europe.

Okay.

Thank you.

Our next question comes from Carter Driscoll of IRG Research.

Excuse me.

Good afternoon gentlemen.

A couple of questions, if I may.

I just want to follow up on some of the discussions on the cable opportunity.

And given the fact that it looks like you have increasing participation in some of these deals with Lucent, and obviously your long-standing relationship with Nortel, can you comment a little bit more fully about the opportunity domestically?

You have had a number of the large MSOs on the cable side talking about aggressively rolling out voice over IP in 2005.

So I guess I'm a little curious as to why, given the strength of your solutions and the strength of your relationships with some of the leading OEMs, that you don't think it's a bigger opportunity in 2005.

Well, I would say that -- well, again, looking into the number of players in that market, in the U.S. domestic market, it's practically about a very small number of players.

And the relationships, our sales go through NEPs, or network equipment providers, such as Nortel and others.

And our sales into that market are pretty much determined by our ability and our [vulnerability] doing those projects.

So not being deeply involved in our prior direct sales, it's hard for me to comment or predict.

And therefore, being conservative, I would say that we have no ability to predict our revenues coming from the cable market.

Okay.

Would that -- which leads me into my next question, would that lead you to be a cable, say, media gateway supplier as one of the leading opportunities for the M&A activity discussed earlier?

Or are there such a variety of activities that -- or opportunities that specifically focusing on cable might not be the best way to gain entry to that market?

Well, we do try to identify opportunities in many areas, and we look to cable as well.

And it's an ongoing search and discussion.

And at this stage we have no reason to say that activity towards media gateways in that market is more important than other areas.

We look as well into the [NL] services market, media server applications, platforms and other technology.

Do you -- Can you help us with perhaps a little bit more specific criteria?

You mentioned some of the parameters being they have to have a strong customer base and generating revenue.

Would you look for only accretive acquisitions or could it be at least somewhat dilutive?

Could you help just frame the discussion about where you may be looking?

Yes, obviously we would prefer a company that is already generating profits.

But in my case, if that company would be able to produce substantial growth and profit in coming years, 2006 and beyond, then we would also consider that.

Again, I think keep a fine balance always between our operational results and the size and magnitude of the opportunity and the potential of the opportunity.

So we would prefer profitable businesses but we may choose also to buy a company that's not profitable at this stage.

Okay.

Now I know that you talked about not wanting to break out the Ai-Logix contribution.

Could you at least discuss whether there was a bigger percentage of sales this quarter than last quarter?

Ai-Logix continued to grow at a similar rate to AudioCode's organic growth.

And all in all, we see the acquisition running very well and according to our plans at the date of acquisition.

So all in all, we do not think Ai-Logix should become an enigma.

Going forward, [with either] growth rate in revenues and our profits, it's good business because that is linked to our core business.

And it's part of our Technology division.

Great.

And then just a final question.

If you could just reiterate some of your final comments, talking about your 2005 goals.

I know you're talking about organic growth of 40 to 50%.

I assume that now includes Ai-Logix?

Correct?

That's correct, yes.

And then expenses up 12 to 18% and aggregate year-over-year, and gross margin in the high 50% range.

Did you discuss a bottom line target?

I thought I heard 1 of the questions clarifying whether you were talking about operating or bottom line net income.

Was there a discussion about an actual bottom line number for 2005 that I missed?

No.

We did not mention any of that.

We simply said that while we have been able to reach 10% net profit this quarter, our goal and our business model is to get to 15% in the second half of 2005.

Okay.

And actually, I'm sorry, last 1.

Nachum, the share count for next quarter, I think you did mention it.

I apologize if I missed it.

Yes.

It's 44m shares.

44m.

Thank you very much, gentlemen.

Sure.

The next question comes from Ittai Kidron of CIBC World Markets.

Hi guys.

Just 1 question to clarify.

The [home] taxes, should we expect, given the fact that you have more activity in the U.S. now with Ai-Logix, to actually see tax expenses going forward in the range of 3 to 5%?

Yes.

I did mention that I think that going forward we will have 3 to 6% in terms of tax rates.

And it includes both taxes worldwide.

Okay.

Thank you very much.

Sure.

At this time there are no further questions.

I will turn the call back over to Mr. Adlersberg.

Thank you.

We would like to thank everybody who took part in our conference call today.

And we look forward to seeing you all in our investor visits and our next conference call.

Thank you very much.

This concludes today's AudioCodes fourth quarter and full year 2004 earnings conference call.

You may now disconnect.