AudioCodes Ltd (AUDC) 2005 Q4 法說會逐字稿

Good morning.

My name is Constance and I will be your conference facilitator today.

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

I would now like to turn the call over to Erik Knettel, Investor Relations with AudioCodes.

You may begin your conference.

Thank you.

I would like to welcome everyone to the AudioCodes fourth quarter and year-end 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 acceptance of new products and continuing product demand, the impact of competitive products and pricing on AudioCodes and its customers, products and markets, timely product and technology development, upgrades, and the ability to manage changes in the market conditions as needed, and other factors detailed in AudioCodes’ filings with the Securities and Exchange Commission.

AudioCodes assumes no obligation to update that information.

Joining us today from AudioCodes we have Shabtai Adlersberg, Chairman, President and Chief Executive Officer, Nachum Falek, Vice President Finance and Chief Finance Officer, and Ben Rabinowitz, Vice President Marketing and Sales for North America.

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.

I would like to welcome everybody to our fourth quarter 2005 conference call.

With me this morning are Nachum Falek, our Vice President Finance and Chief Operating Officer, and Ben Rabinowitz, Vice President Marketing and Sales North America.

Nachum will start by providing a financial overview of the quarter.

I will then touch shortly on the highlights of 2005 and describe the objectives and plans for 2006.

Ben will then discuss further Q4 2005 market trends, key achievements in the quarter, and expand on the progress made in our networking business this quarter.

We will then turn to Q&A.

Nachum?

Thank you, Shabtai.

In the fourth quarter, revenues were $30.6m, which represents 3% increase from the last quarter.

Getting into geographical and product mix, America accounts to 63%, Europe 16%, Asia Pacific 11% and Israel 10%.

We had one customer above 10%.

Our top 15 customer accounts to 59% of revenues compared to last quarter, 66%.

In terms of revenue by business group, then in the fourth quarter of 2005 the technology business group revenues consisted 56% of sales and the networking business group revenues accounted to 44%.

Gross margin was 59.9% compared to last quarter 59.2%.

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

Operating expenses increased from the third quarter level to approximately $15m.

This increase relates mainly to growth in R&D and sales and marketing expenses, and was in line with our expectation.

Headcount increased this quarter by 10 employees, which brings us to a total of 522 employees.

AudioCodes reported a net income of $3.9m, or $0.09 per share.

Short-term and long-term cash balances were $220m, compared to $217m last quarter.

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

DSO came in at 54 days, compared to last quarter’s DSO of 53 days.

Our guidance for the first quarter is as follows.

Based on our visibility at this time, we forecast revenues for the first quarter of 2006 to continue to grow modestly, up to a level of 5% compared to our 2005 fourth quarter revenues.

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

As you all know well, in the first quarter of 2006 FAS 123R will apply and we will be recording stock-based compensation expenses in our financial statement.

Including the application of FAS 123R, we anticipate net income per share in the first quarter of 2006 to be in the range of $0.04 to $0.05, based on an estimated 44m shares outstanding.

As a result of the application of FAS 123R, we anticipate that our non-cash stock-based compensation expenses will be between $2m and $2.5m in the first quarter of 2006.

Excluding the effect of stock-based compensation expenses, we anticipate non-GAAP net income per share in the first quarter of 2006 to be in the range of $0.09 to $0.10, based on an estimated 51m shares outstanding.

For the purpose of the EPS calculation, the number of shares outstanding includes 6.7m shares that are issuable pursuant to our senior convertible notes, and we add back the interest paid on the senior convertible notes.

We estimate that the estimated spend of non-cash stock-based compensation expenses will be allocated to the various line items of our income statement as follows - 10% to cost of goods sold, 40% to R&D, 35% to selling and marketing, and 15% to G&A.

I will now pass the call to Shabtai.

Thank you, Nachum.

Very pleased to report yet another growth quarter, and a record year for the full year of 2005.

This has been our 17th consecutive quarter growing revenues and profits. 2005 has been a very successful year, both including our networking business, also the Voice-over-IP carrier network.

Specifically, we have been able to come up with more mature products, specifically for the mid and high-density media gateway market.

We have grown our reputation for high quality and performance of our products within the carrier network community.

We have applied cost reductions which made our products much more competitive going forward.

We have been able to secure strategic design wins with some of the leading telecom equipment vendors and service providers.

And we have created a pipeline that will enable further growth, substantially in the later part of 2006 and 2007, and substantially executed on our initiative to develop direct relationships with leading service providers.

Financial highlights for 2005.

We grew revenues 40% to about $115m.

Earnings have been more than doubled, to $13.4m.

We have been able to maintain very high gross margin, about 59%, and our operating income grew to 11.6% of sales versus 6% a year ago.

Other achievements that we count in 2005.

Networking business grew more than 60%.

Mid and high-density media gateway business more than doubled this year.

We have secured Tier 1 service provider design wins with some of the leading providers in North America and Europe.

And we have created pipelines for 2006 [inaudible] and 2007.

We have done that directly and through our OEM partners.

We have increased the rate of Tier 1 OEM and NEP media gateway in [customer wins], and we believe that will further fuel growth in 2006 and 7.

Beyond that, in our technology business, we have been able to [take the place of that growth].

In terms of looking forward to 2006, we see enough catalysts that will keep growing our markets, keep growing our sales.

The media gateway market should grow about 25%.

We take that number from a report by Synergy from the third quarter of 2005.

All in all, the market for gateways, low, mid and high-density, would grow to be greater than $1b.

The media server market, where we are a leader, will grow from $70m and almost double to $140m.

We see a lot of design activity, very intensive activity of high networks, and we are substantially successful in the media service business in that.

And we look for business also to our media gateway in the IMS world, which we believe in 2006 will be substantially more trial and early phase, and then we believe IMS is coming to play more in 2007.

Voice over IP over broadband is becoming very active in the market, considering growth in cable, in fiber networks being deployed, ADSL, WiFi and then WiMax, which will come to market some time in 2007.

And on top of that, we see very intensive activity surrounding fixed/mobile convergence.

We see a lot of effort with the large service providers to converge their wireline and wireless networks in that [VA] process that will be a very good market for us further.

So providing an initial outlook for 2006, we believe we will continue growing our revenues and profits.

We currently plan on growing our revenues in the range of 25 to 35%.

We believe we will be able to control expenses and achieve lower growth rate before OpEx that should be around 16 to 20% in terms of growth.

Regarding earnings, we plan to achieve higher earnings growth and we predict now that to be between 30 and 40%.

We are dependent, to a large extent, on the pace of deployment of networks.

Should the pace of new network deployment pick up in the second half of 2006, we believe that we could even grow those targets that I have mentioned for revenues and earnings.

And last, we will continue to have a focus on M&A as a catalyst for growth beyond our organic growth.

I will now turn the call to Ben.

Ben?

Thanks, Shabtai, and good morning to everyone on the call.

I’ll now go a little deeper into our performance, share our progress in defining our go-to-market strategy, and also discuss some of the market trends that will fuel our growth long term.

As Shabtai and Nachum mentioned, in 2005 we grew 40% from $82.8m to $115.8m.

Year over year, our networking business grew over 50% and our technology business, which includes chips and blades, grew over 20%.

In general, our technology business enjoyed more consistent growth quarter over quarter, while the networking business tends to fluctuate.

[Some small] service providers [inaudible] still on a trial basis so early in our Voice-over-IP deployment.

However, 2005 was not just about our revenue and profit achievement.

It was also about preparing for the future and gaining momentum for the long term.

During the second half of ’05 we secured very important design wins and partnerships, and we anticipate these wins will drive new revenue growth in the second half of 2006 and early 2007.

We also diversified our customer base.

We now have more Tier 1 network equipment provider customers, revenue producing customers, heading into 2006 than we did in 2005.

We have more distributors.

We have more system integrators.

And just as important, we’re executing on our push/pull sales model.

We now have more service providers and [bars] demanding our products, including multiple Tier 1 wireline service providers in Europe and North America, a Tier 1 wireless carrier, multiple MSOs, as well as a [porter] with some bars that are supplying Voice-over-IP solutions direct to the enterprises.

In terms of specific sales regions, in North America we continue to improve quarter over quarter.

We did a lot of hard work in 2005.

We reorganized the teams, we upgraded the teams, and we’ve diversified our customer base.

We’re now not just about selling into OEMs.

We have a lot of Tier 1 network equipment providers.

We have relationships with large distributors and ISPs.

We’ve recently secured media server wins in IMS and conferencing solutions.

We have media gateway wins, in fixed mobile convergence and UMTS.

For our blades we achieved IBM preferred vendor status.

For CPE we have secured many more distributors, including Peracom.

Another good story for us was in Europe.

We saw some very nice growth there year over year with our high-density gateways.

We’ve secured multiple Tier 1 operator wins, either via our network equipment providers or system integrator customers.

With CPE, we’ve secured wins of second and third tier operators in Sweden, Germany, Italy, Russia, Romania, among other countries.

And we expect to see additional benefits as we continue to invest in opening in-country offices.

South America was also a good story in 2005.

We had design wins in wireless, wireline and cable operators from various countries such as Brazil, Chile, Venezuela and Panama.

In terms of market trends, we’re continuing to see a transition that’s been apparent for a few years, where ISPs and OEMs are going from their CDM platforms and moving on to IP-based platforms, as well as going from proprietary APIs to SIPH.

As an example, we recently secured a very important design win with a conferencing vendor who was going from a CDM platform and are now building an IP-based platform.

Once they started that transition, they needed someone to help them with media conferencing and media server-type technology, and we were able to do that.

They then realized, just like on this call, you can have a IP-based platform but you still have a lot of people calling in with their CDM phones from work, from home, from their wireless phones.

And that’s why they needed the comm activity between the legacy network and IP, and therefore needed media gateway technology.

Again, AudioCodes was able to provide that.

And then they were able to go from working with proprietary APIs from other vendors and be able to use SIPH, a standard controlled protocol to control both their media gateways and media servers.

And of course they needed a partner to help with integration and testing, and AudioCodes is particularly good at that.

So there is another case where we’re helping an ISP or OEM transition from a CDM platform to an IP-based solution, and we can see that trend continuing.

We are also working closely with partners such as IBM.

We just recently, as I mentioned, achieved preferred partner status with them, to work with ISPs and OEMs to help them transition from our open platform and transition to IP.

And as part of that, we announced our open solutions network program, which really creates the marketing framework for [bars] distributors, technology partners, to work with that ethos and our solutions and bring them to market.

In terms of other trends that will accelerate the market long term and impact the second half of 2006 as well as 2007, first is clearly Voice-over-Broadband.

And many of you that have been following the analysts in this area know that for many years everyone was talking about next year would be the year for voice in cable and next year would be the year for Voice-over-IP and cable.

Well, 2005 was finally the year that Voice-over-IP clearly happened in the cable market.

Of course, Voice-over-Broadband is even broader than the cable market.

And from a recent iLocus report there’s now 17 to 18m Voice-over-Broadband subscribers in North America, Europe and Japan, and we are very well positioned with multiple OEMs and systems integrators to supply the leading cable companies in the world, both in North America as well as Europe and South America.

[Inaudible] in terms of wireless, wireless in our view is the biggest Voice-over-IP accelerator overall.

At this point they’ve started in this area, so we expect something in 2007 and 2008, that the wireless operators will get a lot more serious about Voice-over-IP.

First we see it with fixed/mobile convergence, and there’s a lot of market drivers for fixed/mobile convergence.

It’s not just a technology story.

First enterprises were on it.

Many CIOs of Fortune 500 companies see ways to save millions of dollars if they could get their workers who currently sit at their desks next to their desktop phones and use their cellphones and spend $0.05 a minute on a call versus the fractions of a penny that they could spend on a CBX call.

MSOs want it, not only because they want to offer bundled solutions, but they know they have to come out with something that’s just new too.

They feel the competition from maybe [Ilex] and ISD-CCPs.

But they’re also worried about [inaudible] providing conference over IP and they know that they need to offer a very advanced bundled solution, with something new that can allow them to own the customer.

And then, of course, there’s the wireline operators.

Many are aware that wireline operators are losing subscribers, so the real issue for them is that the under-30 trend is simply not signing up with wireline carriers, that today someone typically under 30 has their cellphone, can move into their new apartment or have their new job, don’t sign up for wireline service.

But this is a market segment that wireline carriers aren’t using, they’re simply missing.

And they need help to get them, and they see fixed/mobile convergence as a way to do that.

Of course, there’s also DVD over [a bay] and UMTS CSMs that will bring Voice-over-IP to wireless as well.

Certainly DVD over [a bay] we’ll see more of in 2007/2008 stories, but at the end of 2006 we expect to be involved in pilots [inaudible] as well.

And as I’ve mentioned before, in SMC, DVD over [a bay] and UMTS, AudioCodes has already secured very important wins with our media server and media gateway.

Third is SIP application.

SIP application fundamentally is about taking isolated applications today, like voicemail, conferencing, IM, SMS, etc., and starting to bundle them together, converge them.

As an example, to get a voicemail on your landline phone at work and then get an SMS message that a very important customer has just left you a voicemail.

[Inaudible] work in a distributed environment that combines present IM audio and video conferencing together.

Or in terms, from a consumer perspective, do what we did at a demo with IBM at SuperComm, which is to combine prepaid gaming, Voice-over-IP and conferencing, all in one application, so that teenagers can play a video game and trash talk over each other over a conference call using Voice-over-IP.

All of these applications require media processing.

All of them will require media server ports as well as comm activity to leverage the network, which means media gateway ports.

And AudioCodes, as Shabtai mentioned, we’re very well positioned, especially on the media server front.

And then SIP applications will be running on an IMS converged core.

Many of you have heard about IMS.

Fundamentally, you can think of it as it’s about an agnostic access network and choice.

And both of these are very important to AudioCodes.

When you think about the access network and the converged form, many of you have seen very nice slides with clouds but the truth is that taking alternative access networks and converging them is very complex.

It’s very hard.

Each of the access networks have [definite] issues.

Often you’re looking at six months of convergence with WiFi, you’re dealing with lots of packet laws and packet solutions.

When you’re looking at wireless, you’re looking at capacity issues.

Wireline has different signaling issues.

This is hard stuff.

When things are hard and it requires media gateways, it’s good for AudioCodes as this is an area where we’re good.

We’re good at the top, both coding, voice compression, signaling, echo processing, etc.

So we expect to take advantage of that.

Then IMS is about choice.

It’s about enabling best of breed and multi-vendor environments.

Many service providers that we seek would not want to go back to the days of having one vendor providing all the equipment and are looking for choice and things.

And this will open up the door to AudioCodes, because they have multi-vendor environments and also protocols.

Then we’re having also success in this area, as Shabtai mentioned.

Important media server and media gateway wins, which means looking into [finance] over the next one to two years.

So overall, in 2005 we showed consistent growth as a company.

We’ve certainly broadened our customer base.

And we expect to benefit from the positive market trends and our recent design wins as we head into the second half of 2006 as well as 2007.

And now I’ll turn the call back to the Operator for Q&A.

Operator?

[OPERATOR INSTRUCTIONS].

Your first question comes from Vivek Arya of Merrill Lynch.

Hi, good morning.

Shabtai, my question is, when I look at your second half ’05 versus first half ’05 performance, sales grew 9% second half over first half.

So what specifically -- and when I compare that to the 25 to 35% growth you expect for ’06, what gives you the confidence that the second half ’06 will be much better than first half ’06?

I think we have mentioned I think the key thing here is the pace of deployment of our new networks.

We believe that carrier networks in terms of enterprise are still not in deployment phase yet.

We see initial trials.

We see initial network deployments.

But we believe that the majority of the Tier 1 service providers will only start somewhere in late 2006 and 2007.

We base that on our experience of big issues, the need to test the products, to evaluate them, put them into limited use and then deploy.

So it’s a process.

It’s a process that takes between six to nine months, sometimes even 12 months.

Now, we’ve been able to secure some very important design wins, including service providers.

We know of two of them in the last quarter, fourth quarter.

In addition, we’ve been successful in winning some very important NEP accounts.

Again, integration of our products into their solutions and to the specific releases takes time.

So when we combine on a timeline those wins, we believe that we will start to see those deployments maturing and starting to bear fruit in the latter half of 2006 and substantially in 2007.

If I had to back that with some research information, we’re looking to Synergy.

If you’re looking to Synergy, related to [the third] quarter, we can see that they see 2006 still as a transition year.

They see more substantial deployment should start in 2007 and be very strong in 2007, 8 and 9.

So we’ve been able to win accounts, we’ve been able to get into trials but it takes time for the market to develop and that is why we are more optimistic about it taking off in 2006.

Okay.

The other question, Shabtai, I have is this is the second sequential quarter when your networking segment has not performed as well, but in ’06 you actually expect networking to provide more of the sales.

My question is, as your networking segment grows faster than technology, what will be the impact on gross margins?

I related to it about six months ago in our July 2005 conference call.

We indeed do see higher gross margins on the technology side.

So while we are able to maintain currently gross margins at about 59%, going into the second half of 2006 and more into 2007 you will see lower gross margins.

At this stage we still believe that we should be able to maintain about 55%.

But as you can see, while I was predicting that six months ago, it’s a slow process.

It doesn’t happen overnight.

Again, it’s tied up to the pace of deployment.

And right now we do believe that we should be able to maintain control over our [inaudible].

And last question, Shabtai, if I may, is in the last two quarters your America segment has picked up very well, even though U.S. carriers still continue to prioritize last-mile upgrades over Voice-over-IP, whereas your European segment has not done so well in the last two quarters on a sequential basis.

So what are the trends that you see, U.S. versus Europe, in Voice-over-IP deployment?

Thanks.

Okay.

When you referred to North America, I think Ben did a great job in North America in [reducing] our operations there.

We started with a somewhat mild result in 2004.

We have substantially replaced the sales organization in 2005.

We [inaudible] to show more design wins both on the technology side and the networking side.

So we believe that in North America we now have a very strong organization that is ready to take on what’s coming up.

In Europe we have been very successful, substantially in terms of sales in Eastern Europe.

Also, we have won a very big project in that region that basically made the first half of 2005 stronger than the second part.

All in all, we believe that we are adding sales people in the regions, in the local countries.

We believe that we are strengthening our operation and therefore we believe that Europe will pick up again in 2006.

Thanks, Shabtai.

Your next question comes from Marcus Kupferschmidt of Lehman Brothers.

Hi, everybody.

I just want to clarify, I’m sorry, I missed something, Shabtai, when you gave the guidance, when you talked about controlling expenses and you talked about something, did you say 15 to 20% growth was the targeted growth for operating expenses for the full year ’06?

Yes.

Okay.

And I guess one of the things I’m wondering about is can you give us a sense of where you think the operating margins of the business can go, maybe the second half of the year and looking out more longer term at this point?

Hi, Marcus, it’s Nachum.

Basically we are targeting to get close to 15% on a quarterly basis by the end of this year, meaning by the end of ’06.

It’s a general guideline and this is where we are expecting to get, assuming we will do the 25 to 35% growth on the revenue.

Okay.

Sorry, just to clarify, you said that the second half picks up as you thought.

I didn’t understand the end of Shabtai’s comment.

My phone broke up.

When you said you mean the original guidance for ’06.

The guidance for ’06, as Shabtai mentioned --

Yes.

Right after you said earnings could grow 30 to 40%, you said if the second half increases as we think, and then my phone broke up.

Yes.

Basically what I meant was that we are depending substantially on how fast our networks will be deployed and how soon we are going to be involving those deployments.

Then I’ve related to the fact that should that state increase, then we should expect higher growth.

But it’s really dependent on the market evolution.

Great.

And then, just bigger picture, as we think about the business looking out to ’06, we’ve talked a lot about the networking growth.

What should we think about the technology business growth outlook for ’06?

I assume the dollars of sales in ’06 should still be bigger than networking, correct?

Yes.

All in all, when we combine the blade operation and the chip operation, we believe that they will grow rapidly at 20%.

So while we predict higher growth for the networking, we still believe that in 2006 technology will still consist around 45 to 50% of our revenues.

And then, continued growth, you would assume going forward, there would be nothing to make you think, technology changes or what-not?

We believe that generally, on an annual basis, we should see technology continuing to grow at the rate of 20%, 20 to 25% per year.

That is what we see, what we expect.

Sounds good.

Thanks.

Thank you.

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

Congratulations.

And Ben, thanks for the review.

It was very informative.

Shabtai, again, looking into the second half, can you tell us if you expect a change in your direct to indirect mix?

I know up until now you have been mostly indirect, but do you think that over time that will change?

Well, as I mentioned before, one of the key objectives for 2005 was to get into more direct relationships with service providers, promote the strength, performance and quality of our products to the planning teams at those companies.

We’ve been successful in doing that.

And we believe that substantially in smaller countries, with smaller operators, we will go direct.

Whenever we get into projects which involve Tier 1 service providers we would usually go through some of our NEP partners.

So it’s a mix.

And while Tier 1 service provider networks are substantially larger in [fill], it’s hard to say where the key -- the lion’s share part of this bundle comes, either direct or through the NEPs.

But all in all we see the two projects successful going forward.

And how would you say we should expect your headcount to change throughout the year?

I think it will be related substantially to our growth of operating expenses.

About 60 or 70% of our expenses are related directly to people.

So when we talk about increasing expenses by 8 -- 16 to 20%, I think that would apply as well to the headcount.

Then for Nachum, with regards to your guidance for the next quarter, you mentioned on a pro forma basis, if we use the 51m shares, 6.7m coming from the convertible.

Can you tell us what would be the interest number we need to neutralize in order to get to the EPS?

[650,000].

I’m sorry?

[650].

That is the 2% we are paying on the convertible on a quarterly basis.

Right.

And your operating margin target for the year, that’s on a pro forma basis or GAAP?

Which one?

The 15% that you believe you can hit in the end of the year.

No, it’s without the option there.

Okay.

Thank you very much.

Good luck guys.

Our next question comes from Troy Jensen of Piper Jaffray.

Congrats on a nice quarter, guys.

I’ve got a couple of questions for Shabtai.

Could you remind us when the Nortel exclusivity expires and maybe what you guys are doing or what your comfort level is that Nortel is going to continue to work with you primarily?

Right.

Exclusivity should expire either March or April 2006.

We are relatively comfortable with that situation, simply because we’ve been leading in terms of investments in features, in our performance and in doing integration work with the sales up-switch.

So at this stage we don’t see any reason why that relationship will not continue just because the exclusivity is not in place.

Okay.

Perfect.

And then just on the bigger picture here, Voice-over-Broadband.

Between the cable MSOs, the portals and the R box, I’m curious to know where you feel you guys are better positioned and who you think wins this game longer term.

Okay.

So we relatively came a bit late to that market.

We have invested more in the wireless markets.

We’ve been successful lately in winning several cable accounts, both on the service providers and the OEM front.

We believe that should our efforts finally be successful we will know that in a period of three to six months from today.

We believe that we will be successful in both Europe and North America.

Okay.

And then just one for Nachum.

Any way you guys could break down what you think your percentage contribution is coming from carrier deployments for higher densities, versus some of the low and mid for the enterprise?

Sorry, Troy, we do not break it down like that.

We only break it down according to our product lines, [inaudible] and technology, as I mentioned.

We won’t get into any more details than that.

Okay.

Understood, guys.

Good luck going forward.

Thank you.

Our next question comes from Rami Rosen of Oscar Gruss.

Yes, good afternoon.

Can you give us the breakdown of sales between fixed line, wireless and cable?

Rami, we usually don’t break it down according to the specific segments that you mentioned.

But, at this point, the majority of revenues are coming from wireline.

It has been in the last couple of [trips].

So at this point it’s still the majority is wireline and other than that, we won’t get into more [inaudible].

Okay.

But is it similar to the last two quarters, for instance?

Nothing dramatic has changed in the last couple of quarters.

And do you expect that to change significantly towards the second half ’06?

Well, it depends on the mix of the success of our design wins.

As Ben mentioned, we are designing to a leader in the wireless world that included us in their fixed/mobile convergence.

In addition, we may see some success in the cable market.

So it very much depends on the mix of success that we would enjoy with our partners.

And it’s not -- but still, I would assume in 2006 wireline will consist the majority of our sales, probably above 85% or so.

Okay.

Thank you.

The next question comes from Alex Henderson of Citigroup.

Thanks.

I was just wanting to get some clarifications on a couple of technicals, to start with.

So you’re saying that you should add back 650,000 to the interest income line, [opposite] the 51.

Is that what I heard?

Only on the calculation of the EPS.

It’s not -- net income will stay the same.

When you have contracts, when you do the calculation of the EPS, you need to get back the interest and to add the shares.

So I take the existing interest level and add 650 to it?

Yes, but you’re not changing the P&L, Alex, you only --

I understand that.

That’s the mechanics of it, right?

Yes, exactly.

Alright.

Okay.

So is there an impact on the tax rate from that and what’s your tax rate guidance for the year, please?

We are talking about -- specifically we only give guidance for the current quarter.

I can say that looking at ’06 in general the tax should be almost the same, maybe a little bit higher than it is today, meaning it will be probably something around 5 to 10%, no more than that.

5 to 10%.

Again, Alex, it’s only an estimate.

It’s too early [inaudible].

Alright.

And when you gave the guidance on earnings of 30 to 40% growth, was that 30 to 40% growth on an EPS basis?

Yes, over ’05.

Yes, EPS though, right?

That would imply $0.41 to $0.44.

It depends on the range, yes.

But we are talking about cents, yes.

Okay.

And then can you give us a little bit more clarity on what’s going on in Europe?

The European business has been down quite sharply each of the last two quarters.

What’s going on there and why is that happening?

This is Shabtai here.

Hi, Alex.

Again, it’s relating specifically to a large project that we had in the first half of 2005, and where we haven’t shipped much in the second half of 2005.

I see.

And going back to the periphery guidance, I’m still a little confused about how you get visibility on this growth rate for the first -- for the full year.

The guidance that you gave for the first quarter is substantially less than your full-year growth guidance.

So that would imply a much higher rate of growth than your average growth rate guidance in the back half of the year.

Are there specific projects that you can identify that have already been won, already been -- the RPs have already been decided on, that are in the pipeline that you’re pointing to?

Or is this a general view of things should improve, therefore -- how much granularity do you have on that acceleration in back-half revenue that gives you that confidence?

Alex, this is Ben.

Let me start by answering.

So there’s two aspects to that.

One is we do have a new Tier 1 network equipment provider win.

When we get these wins, it takes quite a while to go through their integration cycle, and then go through their -- we know their schedule on when we become GA as part of their exclusion.

And that certainly comes into our thinking.

And then the other aspect is the dependency on their customer wins and when they believe they are going to deploy, which of course can change.

But that’s the background on our thinking.

So you have pretty good clarity on half of it, or 50%, or 25% of it, or 75%?

How much of the visibility is predicated on these wins that have already occurred as opposed to stuff that’s on the come?

Well, unfortunately we cannot name specific wins that we have.

I can tell you that we count on two service provider wins and three to four OEM wins.

That are already in the pocket or that are on the come?

We have won those accounts, yes.

And that represents a meaningful part of that back-half ramp?

Is that the way I should be viewing that?

My answer to you, Alex, would very simply be that without any new major ramp-up in any of those accounts, I would expect our ongoing growth to be up to 5% on a quarterly basis.

This is just my personal prediction.

But any one of those four accounts should start to ship in second half of 2006 will contribute to a larger growth.

I see.

Okay.

Okay?

That’s helpful.

Thank you very much.

[OPERATOR INSTRUCTIONS].

Your next question comes from Ted Jackson of Dougherty & Company.

Shabtai, Nachum and Ben, good morning.

Hi.

A couple of questions for you.

First, with regard to different data points, could you give me the specific numbers for depreciation, amortization and CapEx?

And then I also missed the growth number that you put out relative to what you saw the media server market growing.

I will start with the depreciation and amortization and [inaudible].

Yes.

Could you give me depreciation and amortization separate, please?

Yes. 870,000 in the last quarter.

And that’s depreciation?

No, it’s both of them.

We can’t break this down.

Both of them was 870 in the last quarter.

And CapEx was almost the same; it was 840.

Okay.

And then, Shabtai, what was the statistics you put out with regard to the media server market?

Well, based on the numbers we got from Infonetics, we know -- we estimate the market in 2005 to be 70m.

They predict the market growth of 140m.

We -- right now there are about two or three companies competing for the lion’s share in that market, which is niche.

We believe we have roughly 20% of that market.

And we believe that, due to our strength and scale, we should be quite successful in winning more accounts and more market share in that area.

Then the one question I have relative to more bigger picture is when you look into 2006, Shabtai, what do you see as being the bigger driver of network system sales for you - your media server business or your media gateway business?

And then, why?

What end market would you drive in that growth and why would you see one being more of a growth driver than the other?

Right.

So relatively the media server, which is roughly around 20 to 30% of our overall networking business, we believe since the market is a small market relatively and the media gateway market is substantially larger, we believe that as time goes on we will see increased media gateway portion.

But again, this is part of our deployment, and up to what’s happening in the market to determine whether we would grow substantially more in gateway.

So what you just said, the media server business is 20% of your networking business?

It’s about, I would say, a quarter for our networking business, yes.

And then just one final question.

You made some comment as it related to success within the cable market as of late, that you have seen success within both Europe and within North America.

And when you look at that opportunity vis-a-vis your guidance, do you see North America coming on line and being an important drive, or do you see it really being more European centrally or rest of world centrally?

Well, we make efforts in both regions.

We are successful currently in Europe, so we know for sure that that market will grow for us.

We are making similar efforts in North America and we should know in about six months from today whether we have been successful or not.

And how much of the guidance is based upon success within that?

None is based on that.

This is something that we keep in our pocket and it adds to what we produce.

Okay.

Thanks very much.

Our next question comes from Frank Marsala of First Albany.

Hi, everyone.

How are you doing?

Hi, Frank.

A question just to update us, if you can, on your M&A activities.

Have you -- it’s been a little slow there.

Are you looking at more things these days, are you looking at fewer things?

Just give us a sense of what’s going on.

Well, we do have several identified companies we want to partner with.

It always relates to market evolution, perception of investments in the other companies.

We make efforts.

I cannot guarantee success, but I can tell you that we feel that we should be able to hopefully at least one transaction in the coming 12 to 24 months.

And just to follow up on that, is it again expansion in the areas you’re already in or would this be new areas for you to address?

All of these companies are active in markets where we are active today.

So it’s the purpose of any transaction that hopefully we will be able to implement would be to enlarge our customer base and increase our market share.

Got it.

Okay.

Thanks guys.

[OPERATOR INSTRUCTIONS].

Our next question comes from Marcus Kupferschmidt of Lehman Brothers.

Hi.

Just a follow up to Alex’s question.

It was very helpful when you gave us a sense of some of these new customers that you’re looking for that can help to generate some nice growth in the second half of ’06.

Maybe another way to help give us more comfort about your projections would be, if you think about those customers, how many customers do you think could be over 10% of sales in maybe 3Q ’06 or 4Q ’06 or 1Q ’07?

Thank you.

Marcus, that is very hard to tell at this point in time.

We have not seen yet any from quarter two of sales into any of these accounts, so it’s very hard for us to relate this currently.

Okay.

But do a bunch of these have the potential to be 10% customers in those quarters, I would assume?

Yes, any of these accounts could potentially.

Let’s relate more to 2006, I will then be much more comfortable in predicting that these accounts should grow to be somewhere between 3 and 5% each on an annual basis.

So we don’t expect growth in 2006 and 7.

Organically, let’s put the numbers there, that would be roughly at 180.

But any of these accounts should be a 5% [meaning] in 2007.

Sounds great.

Thanks.

Thank you.

At this time there are no further questions.

Mr. Adlersberg, are there any closing remarks?

Yes.

I would like to thank everybody that took part in our conference call today and I am looking forward to see everybody on our next conference call.

Thank you very much.

Bye.

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