AudioCodes Ltd (AUDC) 2005 Q1 法說會逐字稿

Good morning, my name is Julie Ann, and I will be your conference facilitator.

At this time, I would like to welcome everyone to the AudioCodes first quarter 2005 conference call.

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

After the speaker's remarks, there will be a question-and-answer period. [OPERATOR INSTRUCTIONS].

Thank you.

Mr. Knettel, you may begin your conference.

Thank you, Julie Ann.

I would like to welcome everyone to the AudioCodes first quarter 2005 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 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.

Okay, from AudioCodes we have Shabtai Adlersberg, Chairman and Chief Executive Officer, and we have Nachum Falek, Vice President of 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.

We would like to [audio difficulty] welcome everybody to our first quarter 2005 [audio difficulty] earnings conference call.

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

Nachum will start by presenting a financial overview before I will then focus on the business highlights.

I will review market trends, the achievements in the first quarter, and we will expand on the progress that we have made in our networking business before.

We will then turn to the Q&A session.

Nachum?

Thank you, Shabtai.

In the first quarter, revenues were 26.9 million, which represents a 7% increase from the last quarter.

Getting into geographical and product mix in Americas' accounts to 56%;

Europe, 21%;

Asia-Pacific, 12%; and Israel, 11%.

We had one customer above 10%.

As we mentioned on our previous conference call, we will report revenues by technology and networking business groups instead of the breakdown into chief subsystems and systems.

The Technology Business Group includes revenues of chips, modules, and boards.

And the Networking Business Group includes revenues of media gateway and media servers for CPE and core network applications.

In the first quarter of 2005, the technology business grew revenues consist of 55% of sales and the networking business group revenues accounted to 45%.

Gross margins were 59.4%, compared to last quarter's, 59.2%.

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

Operating expenses increased from the fourth quarter levels to approximately 30 million.

This increase relates mainly to growth in R&D and sales in marketing expenses a total growth reflecting increasing investments in customer-related development activity.

The increasing operating expenses was in-line with our expectations.

Headcount in previous quarter by 27 employees, which bring us to a total of 472 employees.

AudioCodes reported a net income of 3 million, or $0.07 per share.

Short-term and long-term cash balances were 210 million, compared to 217 million last quarter.

The decrease in cash balances is attributed mainly to a 10 million payment related to the Ai-Logix acquisition.

The decrease in cash balances was offset by a positive cash flow from operating and financing activities.

DSO came in at 49 days, compared to last quarter's DSO of 52 days.

Our guidance for the second quarter is as follows -- based on our visibility at this time, we focused revenue for the second quarter to increase by about 5%, and we forecast earnings per share of $0.07, based on approximately 45 million shares.

This guidance is based on an initial backlog that's above 50%.

I will now transfer the call to Shabtai.

Thank you, Nachum.

We are very pleased to report yet another growth quarter.

This has been our 14th consecutive quarter of growth, both in revenues and in growing profits, and most especially, this is a quarter of very strong operating income and net income growth.

A sense of achievement is even more pleasing to us simply because this quarter we have witnessed some weakness in the Voice over IP in North America and the telecom markets.

And with some of the other players in the industry exhibiting that weakness we are very glad to report our growth in our revenues and profits.

The results of this quarter further reflect the fact that we have built a very strong infrastructure, the fact that the Company is going forward, and to be able to take advantage of the evolution of the Voice over IP marketing in the coming years.

It also underlies our ability to continue and execute on our strategic objectives, which is trying to become a leading vendor of voice media gateway and media server, and grow our Voice over IP networking business in the growing markets.

Highlighting some key achievements on the financial side this quarter, we grew our revenue 76% year-over-year, despite a seasonally weak first quarter from many in the telecom industry.

We grew revenue income at [7%] compared to Q4, while increasing operational expenses by only 3%.

We are very pleased with the continued growth in the operating income which reached a level of 3 million.

That is compared to a lot, of 600,000 a year ago, and up 27% growth over the first quarter of 2004.

Finally, we have made [another step in increasing] our net income to a level of 11% of revenues, and we have been able to maintain a very high level of gross margin in the [ROPC.]

All-in-all getting to the Voice over IP market, the market continues to grow. [In our last session] beyond market studies from individual research, and this year we believe that we will see a growth of about 40% across the service providers segment.

Our focus is on [no status] and [Mediant Gateway], the market size this year is about -- is forecasted to be about 280 million.

That would represent 28% growth from 2004.

In 2009, that market should grow to 880 million.

All-in-all we expect a 33% combined aggregate growth rate between 2005 and 2009.

All-in-all in the [indiscernible] predicted that Q1 would be lower in certain segments of the Voice over IP market, probably due to seasonally weakness.

In general, we felt we could [indiscernible] the North American markets, mainly with second year OEM.

Our revenue mix is something we reported when we went down from 63% in Q4, 2004 to 56% in this quarter.

Another encouraging point in that view is the fact that while that second year OEM [indiscernible] North America effected us, we've been able to compensate that with very substantial increasing in our Europe sales, which were 21% compared to only [13%] in the first quarter of 2004, and that is mainly due to increased sales of [CPE] Mediant Gateways into service providers market.

All-in-all we believe that if we're going to service providers, such as Cable TV operators and [indiscernible] sales will ramp up deployment of residential Voice over IP services we'll see increased and recap of growth both in Europe and North America.

All-in-all we are focused substantially on a two-prong strategy.

We focus on OEM sales, prudent [T1] OEM, and then we're developing parallel sales through local system integrators through the service providers market.

We will add very good positioning in the marketplace in the first quarter.

We feel that we're gaining a lot of recognition for our brand and all our capabilities and performance.

We have made a few stabs in the OEM arena, I will touch them afterwards.

And we also have begun to sale more into the service providers market.

In terms of the evolution of bookings and sales in the quarter January and March has been quite a reasonable month.

We felt some weakness during the middle of February.

Most notable is the progress that we have made in our networking business.

Basically, in 2004, we invested a lot in building a sales team for the service providers market, and indeed, we have been successful in achieving design wins in the service providers market this quarter.

All-in-all we are developing a push-and-pull strategy which promotes all of our performance in brands with the service provider, and we are working on fulfilling a lot of those requirements for Q1 OEM products.

If I could touch on some numbers just to reflect that, not to mention that networking points were up from 42% last quarter, 45% this quarter, is expecting to account for the increase in revenue this quarter, all-in-all the business of networking has been growing substantially about 10%.

A few more data points [very equal] to note.

There is a shift in our sales mix that includes OEMs and service providers.

In the fourth quarter 2004, 85% of our revenues growing through OEMs, and only 15 went through system integrators.

This quarter we sold 79% through the OEMs, and a portion sold directly into service providers through system integrators went up to 21%.

Another very encouraging data point is the customer concentration.

If we take the substance of customer parameter to go back one year, [indiscernible] were 77% in Q1, 2004.

It went down to 60% in Q4, 2004, and this quarter 15 [indiscernible] customers have been only 53.

That shows less dependency on [indiscernible] and much more for the base of customers.

Touching some of the highlights of the quarter in terms of our sales going to the various markets, in the wireline markets we have witnessed very strong CP sales, both in our analog and Mediant Gateways and our low density Media Gateways.

In [indiscernible] to that we started to show some signs of sales of Mediant to Media Gateways.

Our Mediant Solution has been selected by a large OEM to be part of his solution.

We have been designing that solution into a Q1 service provider in North America.

We are [self-explicit] with a similar platform as another large OEM, and we have filled some more deals with European and foreign companies including our Mediant Systems Gateways into their solutions.

We believe that all-in-all we will see much more sales into the Mediant systems market throughout the last two quarters of this year.

In [indiscernible] to the success in the wireline business we have made first steps in the cable market, very nice steps.

Our project is [offset,] it comes and goes on schedule.

We have signed a commercial agreement with the leading cable operator with many properties on a world-wide basis.

We won a cable Voice over IP design in Latin America, and we just lately won another one in Europe.

So we see very encouraging signs of our ability to be successful market leaders in the Voice over IP cable markets.

In the media server market segment, we have signed a very new large OEM agreement in North America that would supply our high density media server platform to a leading North American service provider.

Unofficially, we know that we have won another small media server project with the leading OEM.

On top of that, through Nortel, our media servers are being deployed in many central offices of Q1 carriers in North America and in other parts of the world.

In the wireless space we have seen some new beginnings in activities.

We are involved into the current evolution of the fixed mobile convergence that's occurring in many places, and we believe it should go to market in 2006.

At the same time, we've been involved in activities regarding both Wi-Fi and voice over, [audio difficulty] [Wymax] and those are only for a [respect].

But still our ability to both show quality technology and high performance products that deliver will give us an advantage in those markets.

We have been offered a media gateway for wireless prodigy markets, TDMA and [UMPS] have been offered within two projects.

We are waiting to hear the results of those.

We are working on integrating our wireless media gateways into a rural telephony project with a leading OEM.

And at the same time we are looking at development in the CDMA market with the new video [REVA] to facilitate the use of Voice over IP with the CDMA markets in the next-gen.

On the product front we have added signaling capability into our portfolio deck allows to us increase our revenues from that point.

All-in-all we're making very influenced [indiscernible] in the OEMs and service through other markets.

I have in front of me a list of growing channel of opportunities and projects.

Each of them that represents a marketing project, and all of those are in different stages of [indiscernible] and product evaluation and hopefully we will see several of them culminating and taking off in 2005 and later on in 2006.

Among them true-up sales were [indiscernible] in 2005, and 5000 in cable markets with service providers in the Far East and in Europe.

All-in-all very intense activity.

Very remarkable quarter, Q1 has been in terms of our CP group.

We have substantially shifted more product, and Q2 is supposed to be a record quarter in terms of our shipments.

This quarter we plan to ship more of our Mediant Gateways and Digital Gateways than before.

That is based on our idea on backlog of [indiscernible] and projects that we have won.

In terms of our ability to increase and enlarge our portfolio products, we have announced two products, the Mediant 1000 that provides a solution for low density [CP] and [indiscernible] solutions.

And further we have launched a new series of analog media gateways that will facilitate the success of mediant advances, include service providers market.

All-in-all now coming back to our financial plan, we enter Q2 of 2005 with very strong backlogs with nicely about 50%.

Visibility has not improved yet from the previous quarter.

We still see only about a month into the quarter.

However, we seem to start seeing better flow and grow the base of projects presented to new network deployments, and we believe that that should result in strong base of revenues in the coming quarter, a large funnel.

We are, therefore, [indiscernible] our plan to grow revenues this year above 40% and keep expenses growth to between 12 and 18%.

We believe we should be able to maintain a high gross margin in the high 50s.

At the same time, we are investing.

We keep investing.

As Nachum just mentioned, that we have added 27 people this quarter, that's about 6%.

That would show you the confidence we have in our business.

The fact that we believe that all of those investments will be required in coming years when the Mediant Gateway market will grow substantially from being close to $1 billion.

So we would invest in R&D.

We invest in the [indiscernible] in all our sales offices.

We just established an office in Brazil, our [indiscernible] sales capability.

We did the same in India.

We [hired] a high ranking sales executive in China.

So we keep investing, and, therefore, we will see some of our profits being invested again in our operations.

We still maintain that we would like to achieve a 15% net income in the second half of 2005, and we believe that while we will keep increasing our investments in R&D and M&A, and sales, we will see Company growth of revenues this quarter.

And that basically summarizes my overview of the quarter and we will now turn into the Q&A session.

[OPERATOR INSTRUCTIONS].

Your first question comes from Carter Driscoll of IRG Research.

Good afternoon, gentlemen.

A couple of questions, if I may?

The first question is, could you address the signaling capabilities that you've added recently, and what new opportunities it might open up to, or the way you may engage a customer?

Or some of the new competitive situations that you might also now encounter now that you offer signaling, and also just address some of the protocols?

Yes, what we have added these signaling seven capabilities into our gateways, that will allow us to provide a much more flexible solution into ability service providers working in the international markets.

Could you elaborate a little bit about some of the other vendors that you're seeing taking this approach, and whether you think it introduces some new competitive dynamic, or whether you think this just bolsters your I offering?

Well, mostly our gateway solutions [offer] will essentially include -- previously include into the enterprise and in those markets basically which rely on our other signalling incentives, such as [indiscernible].

Going to the SS7 capabilities will allow us to extend all of our solutions more in the area.

All right.

Can you talk about -- obviously, it's been well over a quarter that you've -- since you've raised the cash from the convert.

Could you give us an update potentially on where you're thinking and how an acquisition possibilities, at least elaborate on which technologies you might be evaluating?

Well, we are trying to focus on those companies that would bring us product portfolios and customers in the key areas that we focus on.

Those are primarily the media gateway and media server markets.

If we would be able to integrate a company that would increase the market share in those market segments, that would be the most influence on target for us.

Any particular geographic region that you think would be most complementary?

Right now most of the M&A targets, I would say, are in North America.

Thank you.

If you could also just elaborate a little bit of what you're seeing from the enterprise segment.

Do you expect that the first quarter was mostly due to the seasonally weak period usually following a fourth quarter budget flush?

Obviously, we have seen weakness from the enterprise through a number of other companies reporting, talking about weakness in February.

Has demand really returned to normalized levels through March, or was it just simply an up-tick over a very poor month of February?

It's hard to say.

Our focus is really more on service providers market.

And the enterprise market we sale substantially through our OEMs, so we do not adverse visibility into that.

We are in much better control for future evolution and growth of revenues in the service provider.

So I think that some of the weakness that we felt regarding the second year OEM in North America could be related to the weakness in the enterprise market.

But we are selling very little into that market segment, so less visibility into that.

Okay.

Thanks very much, gentlemen.

I'll pass it along.

Sure.

Your next question comes from Reginal King with WR Hambrecht.

Great.

Thank you.

First, Nachum, I was hoping that you could just review a couple of the numbers there that I was given during the presentation.

First, the geographical revenue mix, could you just review that once again, please?

Yes.

Americas accounts for 56 percent;

Europe, 21%;

Asia-Pacific, 12%; and Israel, 11%.

And just one more stat here.

Well, actually, you didn't give this stat, but can you give us at least a feel for the breakdown in the wireless/wireline mix?

And then can you talk -- was there a contribution from cable during the quarter?

Again, talking about wireline, wireless, and cable, we usually don't split the revenue between the three segments.

But -- yes, I would say that most of the revenue this quarter is still coming from the wireline business.

We saw initial sales into the cable space, but that represents a very small portion, [95%] and wireless was not bigger than that.

Okay.

Good.

Then Shabtai, can you give us at least your best feeling from, you know, talking to your OEM customers, talking to service providers, do you think that you've got any impact in the first quarter from consolidation in some of the U.S. carriers?

And do you feel that any of that is flowing into your second quarter here?

Again, we do not have any first hand visibility, so I just think that some of our customers, which are -- could be affected by that consolidation of the market could be delaying some of their decision to investments and probably projects that related to the climate of Voice over IP network.

And could be combined between wireline and wireless networks, and between two different carriers.

I would tend to think that that indeed would have an affect on the evolution of Voice over IP market in North America.

We do see completely different picture in other markets, most notably in Europe.

Those are differentiated markets, different service providers in different countries.

Those decisions are being made on a solid basis in the service providers, and therefore, we do not see any weakness.

Actually, we saw much progress on Europe in that regarding our [indiscernible] investments in increasing sales in Europe.

And then Shabtai, I guess you just added a seven capability to some of your products here.

What in the near-term -- what is your -- can you give us a general focus of the R&D efforts?

Looks like you're still -- have a good focus here on product development.

Can you tell us what's kind of the near-term things you're looking to add to the product?

Right.

Well, a large portion of the focus goes into our Media Gateway and Media Server products, and Networking products, which keeps growing.

We keep investing in developing more futures into the small media gateways that gives us an advantage in winning projects.

At the same time, we are continuing to [develop] the Mediant [indiscernible] product.

And the high density product we believe that in 2005 we will see more increased sales of those products.

Therefore, lots of investments in the media density and the high density platform.

Great.

Thank you very much.

Sure.

Your next question comes from Ittai Kidron with CIBC World Markets.

Hey, guys, good quarter.

Nachum, you gave us the split of technology and networking.

Can you give it for the same quarter last year and for the fourth quarter what that would have been?

Actually, I don't have it in front of me, but we gave -- on the previous conference call, we gave the split for the fourth quarter, and I can fine it in a minute.

Okay.

So maybe in the meantime, Shabtai, you can give us a little bit more color on what you've seen in the last month in North America.

Are we seeing a return, you know, a little bit of slowdown you mentioned in the T2 OEM, is that coming back in March/April so far?

Or is it still continued weakness into the second quarter?

Yes, we kind of are receiving conflicting messages.

On one end, we on some budgets go lower, on the other end some parts of folks believe that we may have reached the bottom of it.

So we -- that is and maybe I'll connect that to the guidance we gave, is we do not feel ultimately confident that North America second-tier OEM markets will come back.

We are more cautious in our guidance this quarter.

So we still have a very strong backlog, essentially above 50%, but we're still not sure at this point in time that indeed we see recovery [indiscernible.]

Okay.

So assuming -- let's say this.

If North America comes back to the normal trends that you have seen in the fourth/third quarter of last year, would it be safe to assume that 5% growth sequentially is a conservative estimate in your opinion?

Yes, could be.

Okay.

And with regards to the P&L, you've had a nice jump in there in sales and marketing expenses.

How should we look at that going forward, and perhaps we can also elaborate on the interest income which was very low?

How should we thing of that now going forward now that you have the convert?

[indiscernible] So your first question then on the fourth of 2004, the technology business group accounts to 58%, and the networking business group accounts to 42%.

Looking at our financial income, then in the first quarter, we had lower financial income due to the increasing the projected forwards rate, which calls for an accounting treatment that required an accrual for lower interest rates in the future.

Again, looking into the near future, I can only assume that interest -- the financial income will be higher than on the first quarter of 2005.

At the range that we have in the past.

Let's say, in the fourth quarter or even a little bit before that.

Okay.

And with regards to the operating expenses?

In terms of the operating expenses, we can [just basically made it] -- we'll probably increase it between 4% -- 4 to 5% in each quarter.

Sequentially?

Yes.

Okay.

All right, guys, good luck.

Thank you.

Your next question comes from Vivek Arya with Merrill Lynch.

Thank you.

And good afternoon.

Shabtai if I were to look at -- if I were to breakup your business in technology in-between your core products and the Ai-Logix, and then networking between Mediant Gateway and Media Service, can you give us a sense of sequentially which of these set segments is growing?

Which one is flat?

Where you are see something of the negative trends?

Thanks.

Okay.

Right now in Q1 we are seeing the technology business rather flat.

More equal to the fourth quarter of 2004.

The networking business has been growing faster.

We have seen more than 10% growth in networking.

I see.

And within technology, Shabtai, can you give us some color on if you were to break it into the core AudioCodes products and the Ai-Logix's boards, do you see weakness in any of those?

Do you see any flat trends?

If you could give us some color on that.

Yes, actually all segments in the technology business were pretty much flat.

There's no big difference between our original billed plan and the one acquired from Ai-Logix.

I think I would draw your attention to the performance of some of our competitors in that market which actually went down substantially in revenue this quarter.

So I think our ability to maintain that technology business flat instead of competitive losing sales, that -- sales did that -- with sales as the weakness in the market we have been able to perform well.

I see.

Second question is, if I were to look at some of those competitors, you know, even though a lot of them reported some shortfalls during Q1, especially the smaller ones, you know, I did see a good backlog of Voice over IP related.

That is most of the weakness they reported was mostly due to their Legacy segments.

But Voice over IP for them actually grew.

So I'm trying to see, if we were to look at results Brooktrout and NMS is their business cycle, are their trends substantially different from what you see?

Are they similar?

How do we think of your business when you look at results from some of these other smaller competitors?

Right.

I'm not sure that -- well, we cannot say these two companies.

And I don't think that is the right time to further analyze comparisons with each of these companies.

But I think all-in-all we represent substantially much more Voice over IP products.

As a matter fact, I think that we really have very little legacy board business.

That is compared to both Brooktrout and NMS.

So we see a reasonable market, I would say, in technology in the North American markets, but still seeing that relatively we're doing pretty well, and almost confident that we are doing substantially better than any of our competitors.

Got it.

And one last question, Shabtai, Ai-Logix, can you give us an update, please, on how the integration is going?

Do you see synergies actually improving, or do you think we are still not at a time yet when sales cycles have ended?

And if you could just give us an update on how that integration process is going, and whether you are actually seeing Ai-Logix improve as a percentage of your sales going forward?

Thank you.

Right.

So I don't think that we have made great steps in integrating the assets.

I think that is a process that still goes on, that is the focus of the management team, both here and at Ai-Logix.

We believe that we are putting more [parts] into it in the coming months, and would hope that in the second half of this year we'll see much better integration and more success in terms of our products through Ai-Logix.

All right.

And quickly before I end, Sarbanes-Oxley, can you just give us a comment on that?

I know that you have more time to complete that certification, but how is the progress on that?

Thank you.

In terms of the progress of Sarbanes-Oxley -- although, we have delayed it in terms of the timetable, we are working on it, and I'm sure we'll be ready on time.

Thank you.

Your next question comes from Troy Jensen of ThinkEquity.

Hey, congrats on a nice quarter, guys.

Thanks.

A couple of questions -- I'll start off with Shabtai.

Juniper did an acquisition at Kagoor Networks, a session border controller, there is some speculation that AudioCodes may go that route.

Just wanted to hear your thoughts on where does the securities function need to reside?

Is it in the routers or is it in the media gateways?

Actually, Troy, this is a good question.

Which, you know, we looked into Kagoor, within this Company.

We are not planning that much on the enterprise market, therefore, integrating the session border controller into our gateway for enterprise did not make any sense.

So we still are not sure, but we do believe that maybe a router in enterprise certification would be a business.

Got it.

And moving to another question here.

You mentioned a new design win, I believe, for Media Server business.

Could you give any color -- is that a North American OEM?

Or any color on that would be helpful.

Well, we won a very lucrative media server business with the leading North American system integrator.

That product will go into a wide application with the leading T1 service providers in North America.

Okay.

Now, you guys responded to an RFP from Lucent for Media Servers, maybe earlier this quarter.

Any correlation there?

Sorry, Troy, but we cannot comment on specific OEM projects.

Okay.

Got it.

And then one for Nachum.

I apologize if you addressed this.

I jumped on a little late, but goodwill jumped up by 10 million bucks sequentially this quarter, and cash was down a little bit.

Was there a small acquisition in the quarter, or can you explain the change in goodwill?

On the change in goodwill is that the second and final payment with Ai-Logix, that additional 10 million.

Got it.

That explains it.

Thanks and good luck going forward, guys.

Thanks.

Your next question comes from Jonathan Half of UBS Investment Bank.

Thank you.

Actually my question was just now answered.

So nothing from me.

Thanks.

Your next question comes from Sujal Patel with Intrepid Capital.

Yes, I actually just wanted to see if you could repeat your guidance.

I missed that earlier, what you said what your reference guidance would be sequentially?

Yes, on the second quarter in terms of the revenue, that will increase by about 5%, and we focus that into the shelf at $0.07.

I'm sorry, what was the last thing you said?

Aiming to shelf, $0.07.

$0.07.

Okay.

Thank you.

Okay.

Your next question comes from Frank Marsala of First Albany Capital.

Hey, guys, how are you doing?

Just really two quick questions as a lot of my questions have been answered.

Could you repeat, you said, backlog above 50%, is that five zero, or was it 660?

I have a bad connection.

550.

Okay.

And then as you look at your two groups, technology and networking, just from a gross margin standpoint, how would you compare them from a -- on a gross margin level?

Again, I mean, we can relate to gross margin only in general for all of your calls.

We -- you know, last quarter we had about 59%, and looking at the near future, we think we will be able to maintain gross margin in the high 50s.

But it varies in terms of product density, et cetera, so it is hard to give a general comment on networking and technology in terms of business growth.

Okay.

And just one last question on the technology group.

Kind of flat sequentially.

Just again I want to make sure I'm understanding correctly, you're saying that because your business is more service provider focused and not enterprise focused you've been able to see, the kind of flat, while some of your competitors, probably more enterprise focused, were declined?

Is that correct?

Am I interrupting that right?

Well, now I think we generally relate the flatness in the technology business more to the weakness of the second tier OEMs, North America.

That would be our [donation].

Okay.

Thanks very much, guys

Sure.

Your next question comes from Keith Dalrymple with Halpern Capital.

Good morning.

I was wondering if you guys can give a little color on the media server business?

For example, could you tell us how many media servers were shipped in the quarter, and how many total carrier deployments you have?

Okay, this is Shabtai.

Well, first, we are deploying many service providers central offices, and that is substantially true themselves.

We are a deploy of cost and charter, and for instance in many of the service providers.

As to how many units, I'm sorry, I do not have that number with me here.

But I would assume that -- I know that we have sold hundreds of media servers in previous quarters.

I would assume that this quarter -- let me see if I have -- yes, this quarter, we did pretty much on the same level of [indiscernible.]

Okay.

So that was in the hundreds.

And in the media server shipments, are these generally coupled with the gateway sale?

Not necessarily.

Sometimes yes, but the functionality is your media server functionality -- different functionality than the gateways.

Okay.

And lastly, you may have limited visibility into this, but could you potentially comment on the pace of carrier deployments, and whether they're going faster or slower than you would have expected at this point?

Well, I think there is one region, East Europe, which is very active in terms of new network deployments based on Voice over IP.

Other than that I think Western Europe is active as well, but in the lower scale.

And in other parts of the world, we have seen lower activity.

But, again, you need to acknowledge the fact that many networks do go through the first step of deployment, many trials, many evaluations.

We see many activities in the cable market.

I think the picture could substantially change in the second half of this year, in 2006.

Great.

Thank you.

[OPERATOR INSTRUCTIONS].

Your next question comes from Rami Rosen of Oscar Gruss.

Yes, hi Shabtai.

Hi, Nachum.

Shabtai, just a clarification.

Did you say earlier that annual growth exceeded 40% year-over-year?

Yes, the market according to synergy research would grow [40%] this year.

And just with respect to the geographical split expected next quarter, is it expected to be similar to what we saw this quarter, or to change in favor of the U.S. markets?

Yes, we have not done any analysis yet of our backlog, but we sent something that at least now there's no reason to assume the different mix of sales.

Okay, guys, thank you and good luck going forward.

Thank you.

At this time, there are no further questions.

Mr.Adlersberg, are there any closing remarks?

Yes, I would like to thank everybody for joining our conference call today.

And we look forward to seeing you in coming conferences in your next conference calls.

Thank you.

This concludes today's AudioCodes's first quarter 2005 conference call.

You may now disconnect.