AudioCodes Ltd (AUDC) 2006 Q1 法說會逐字稿

Good morning, my name is Amanda and I will be your conference Operator today.

At this time, I would like to welcome everyone to the AudioCodes first quarter 2006 earnings conference call.

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

After the CFO’s remarks there will be a question and answer session. [OPERATOR INSTRUCTIONS].

Thank you.

Mr. Knettel of Investor Relations for AudioCodes, you may begin your conference.

Thank you.

I would like to welcome everyone to the AudioCodes first quarter 2006 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 market 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 Financial Officer, and Ben Rabinowitz, Vice President Marketing and Sales, North America.

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

Mr. Adlersberg, please go ahead.

Thank you Erik.

Good morning and good afternoon everybody.

I would like to welcome everybody to our first quarter 2006 conference call.

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

Nachum will start by presenting a financial overview of the quarter and will then provide guidance for our second quarter of 2006.

I will then highlight some of the key achievements for the first quarter of 2006.

Right after me, Ben will discuss the developments in more details and will focus on key market trends and the progress we have made in our networking business.

We will then turn into the Q&A session.

Nachum?

Thank you Shabtai.

In the first quarter revenues were $31.3m, which represents 2% increase on the last quarter.

Getting into geographical and product mix, then America accounts to 59%, Europe 20%, Asia Pacific 14% and Israel 7%.

We had one customer above 10%.

Our top 15 customers accounts to 52% of revenue compared to last quarter’s 59%.

In terms of revenues by business group, then in the first quarter of 2006 the Technology business book revenues consisted 56% of sales and the Networking business book revenues accounted to 44%.

As I begin the overview of our income statement I would like to remind you that Q1 is the first quarter that will include the impact of FAS 123R, or employees’ stock option expenses, in our GAAP financial statements.

The stock option expenses for the first quarter of ’06 was $2.6m or $0.05 per share.

Please note that our GAAP income statement is included in our press release.

In the first quarter of ’06 pro forma gross margin was 59.9%, which is similar to the gross margin we had on the first quarter of 2005.

On a GAAP basis, total gross margin was 59.5%.

Our total pro forma operating expenses increased on the fourth quarter level for approximately $15.3m.

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

On a GAAP basis with the effect of FAS 123R, operating expenses for the first quarter were $17.2m.

Headcount increased this quarter by 21 employees, which brings us to a total of 543 employees.

Pro forma net income for the first quarter was $4.3m, or $0.10 per share.

GAAP net income for the first quarter was $2.3m, or $0.05 per share.

Short term and long term cash balances were $227m compared to $220m last quarter.

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

DSO came in at 52 days compared to our last quarter DSO of 54 days.

Our guidance for the second quarter is as follows.

Based on our visibility at this time we forecast revenues for the second quarter of ’06 to continue to grow modestly up to a level of 5% compared to our first quarter of 2006 revenues.

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

Including the application of FAS 123R, we anticipate net income per share in the second quarter of ’06 to be in the range of $0.05 to $0.06 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 $2 and $2.5m in the second quarter of ’06.

Excluding the effect of stock based compensation expenses, we anticipate non-GAAP net income per share in the second quarter of ’06 to be in the range of $0.10 to $0.11, based on an estimated 51m shares outstanding.

I will now transfer the call to Shabtai.

Thanks Nachum.

We’re very pleased to report yet another growth and record results for our eighteenth consecutive quarter.

The first quarter of 2006 has been one of the busiest quarters we witnessed ever in terms of our activity with our OEM partners and service providers.

During the quarter we had a very intensive activity with a leading OEM.

We have adapted and integrated our product into their own solution.

And then we had increased activity working with more service providers supplying our networking products.

During the quarter we have expanded our success in areas of fixed mobile convergence, specifically [inaudible] area.

Ben will talk about it.

We have expanded our operations in fixed applications and broadband access applications and we have been able to partner with some of the leading global players that we reported through the quarter.

Some of the names are Liberty Global, Microsoft, Qualcomm and others.

IMS remains a key focus area for us.

We have increased investment both in our high density gateways in our media server activity to the IMS network, the [deployments] that we look to seek gaining momentum in late ’06 and in 2007.

We have been able to grow our sales of our mid and high density media gateways.

And we have continued to strengthen our reputation as the top leading vendor of media gateways and media servers.

AudioCodes’ brand today is recognized fairly broadly by service providers all over the globe.

We have been able to secure exclusive design wins.

And we have created a pipeline that will fuel future growth.

We have continued to penetrate and sell directly to leading service providers and we believe that that trend will take up pace in coming quarters.

So, some -- now to some of the financial highlights of the quarter.

While revenue grew modestly, 2.3%, with this -- the good work 2005, the operating expenses grew only 1.5%.

Overall, net margin increased nicely this quarter from 12.7% last quarter to 13.8% for the first quarter of 2006, which is fairly closely to our stated target of achieving 15% net margin.

We have also been very efficient in growing our earnings.

Net income grew 10% quarter over quarter versus the fourth quarter of 2005.

And if we compare it to a quarter a year ago, earnings grew 46% from $2.9m to $4.3m.

In terms of our business line performance, we have seen success in the Networking area.

CP sales declined this quarter.

There was no specific reason for it.

On the other hand, sales to both core network media gateways and media servers grew substantially, more than 10% quarter over quarter.

That gives us hope for upcoming quarters to see increased sales and growth in the Networking business line.

We capped the investment substantially in working with our partners and in -- and working intensively on program management, product evaluation, [in situation], testing and deploying.

And we believe that we have been able to create a very sound basis for coming quarters’ growth.

Lastly, we have invested substantially in trying to identify possible M&A targets.

We hope to be able to conclude one such acquisition in 2006.

As we look [forward into] 2006, we see the same [categories] that we have mentioned before remaining strong.

We believe that the media gateway market will grow nicely, 25%.

We believe that the media server market is expanding based on our win with Nortel and service design with [inaudible].

We believe that we’ll grow our activity in the media server market.

Again, we are working intensively on design and being integrated into IMS network solutions, [lots] of activity in terms of our fixed mobile provision, voice over IP over broadband, and many other areas.

So, when looking back to the guidance we gave at the beginning of the year, in terms of growing our revenues we have provided a guidance that’s between 25 and 35% of client growth.

We have not been able in the first quarter to achieve that yet.

But we still do believe that we -- in coming quarters we’ll be able to achieve higher growth.

On the other hand, we have been very successful on maintaining our lower growth rate of the operating expenses, which should -- will be between 15 and 20%.

So, in that aspect that story has been very successful.

And all in all, in growing our earnings, which we guided for a growth of between 30 and 40%, we believe we are there.

So, all in all, on the bottom line -- on the earnings line, we are doing just fine.

And with that I’ll pass the call to Ben.

Thanks Shabtai and good morning to everyone on the call.

In our previous call we discussed design wins and market trends so to fuel our growth in the second half of 2006 and 2007.

In particular, we discussed voice over broadband, wireless, fixed applications, all leading to migration of IMS networks.

Moreover, we discussed given these trends how we are diversifying our go-to-market strategy by pursuing closer relationships with service providers, building up our distributors and [buyers] and collaborating with [applications there].

I will now go a little deeper into how we are executing our plans.

First, as we discussed on our last call, voice over broadband is the key driver for future growth.

As many of you now know, AudioCodes supplies media gateways to Liberty Global.

For those of you who are not familiar with Liberty, and have not seen their recent press release, but you can find on our website and provide some information.

Liberty Global’s network has approximately 23.6m homes.

And they announced that they currently have 2.3m [broadband] new subscribers.

This is mixed between CDM and voice over IP.

In Europe, EPC, a subsidiary of Liberty, has supplied voice over IP in seven European countries and plans to introduce voice over IP in traditional markets this year.

Liberty is a good example of our demand creation model where our sales can create a demand for our product, and the network equipment provider, in this case Nortel, sells and integrates our products into the network.

In addition to Liberty, we continue to secure additional cable wins with [server], including a recent one with a cable operator in Eastern Europe.

Moreover, we anticipate that voice over broadband will converge with IMS as cable [apps] as many of [inaudible].

So, our cable wins actually position us well for future IMS evolution.

Second, AudioCodes continues to make good progress in wireless.

Last quarter we [success] fixed mobile convergence.

This provides one number, one sound, one voice mail per person for all their landline and mobile voice needs, whether they are in the house or outside.

Fixed mobile convergence also enables service providers to offer low cost yet high quality wireless service inside the home or in the office, and still charge a premium for mobility outside.

In addition, fixed mobile convergence allows hybrid carriers of wireless and wireline operatives to maintain and control customers as fixed to mobile substitution occurs, allows cable operators to be a first mover in offering a premium service.

As we speak with these various operators we continue to see validation in the market.

Indeed, in this quarter we announced our relationship with Kineto.

And together we are providing a fixed mobile convergence solution for a leading network equipment provider.

More importantly, we are making progress with service providers.

First, with our network equipment provider customer we have secured two wins with Tier I GSM operators in Europe with the [claimant] accepted in the third quarter.

Also, we are currently in four additional trials with Tier I operators and we expect to add even more trials in the next two quarters as well.

While there is this roll-out of the handset availability, we believe this marked momentum will show there across wireline, wireless and cable operators.

Moreover, as fixed mobile convergence deployment migrates IMS in the future, our media gateways will already be well positioned in the network.

And we also expect our media servers to support fixed mobile convergence applications.

Also this quarter we announced our collaboration with Qualcomm for CDMA EV-DO Rev.A networks.

As many of you know, the current CDMA networks are not optimal for voice over IP since the [down] [inaudible] is optimized for downloads for searching the web and not provide directional application for just voice.

EV-DO Rev.A, on the other hand, promises much higher bidirectional [analogue] and quality of service.

And in our announcement with -- in collaboration with Qualcomm we are enabling a more efficient, higher quality implementation of voice over IP in the EV-DO Rev.A network and anticipate participating in lab and trial activities with EV-DO Rev.A towards the end of the year or early 2007 with our media gateways and media server.

Consumers and enterprises will benefit with better chat applications from using wireless on [SIP] and better voice quality on their cell phones that will enable landline substitution.

In our last call we also discussed [inaudible] applications and we made progress there as well.

As an example, AudioCodes announced this quarter on a phone collaboration with Microsoft the [inaudible] platform enabled unified messaging with their Exchange Pro, which is expected for release later this year and in 2007.

This application will enable enterprise employees to manage and control voice mail in their Outlook inbox, and also new capabilities such as following their calendar from a track [again], and being able to reschedule a meeting and send an update to all attendees using speech recognition.

Exchange “12” can communicate with our gateways using SIP and we will interconnect with PBX.

In terms of further market, Microsoft is selling its Exchange server and AudioCodes will be selling its gateway separately through distribution channels.

AudioCodes and Microsoft will be training a network of unified messaging training specialists to support VARs and enterprise.

We are also providing additional options for distributors and resellers with our announced relationship with [portal of] Digium.

Digium is commercializing [inaudible] historic [DBS] software as are in bundle with our media gateways [of late].

In terms of service providers offering the support solution, we secured U.S. wins in Brazil, Spain and other countries.

In addition, again, as part of our demand creation we have secured a win with a Tier I operator in North America who are transitioning from a CDM messaging solution to an IP based messaging solution.

This is also an example of the messaging platform that we’re using for [inaudible] and on [inaudible].

In this solution we are providing our highly available mid-density gateways to connect CDM customers to IP based messaging platforms.

Deployments are expected to occur later this year.

So in summary, as we grow we continue to take advantage of opportunities in wireless, voice over broadband, and SIP applications, which will all eventually converge on IMS to our network.

In addition, we are also continuing to broaden our partnerships and diversify a better market strategy by building closer relationships with service providers, network equipment providers, OEMs, distributors, value added resellers and application vendors to provide more choices, more mobility and more useful applications for consumers and businesses.

We believe the progress we made in the first quarter will fuel our growth in the second half of the year and 2007.

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

[OPERATOR INSTRUCTIONS].

Your first question comes from Vivek Arya of Merrill Lynch.

Good morning and thank you.

Shabtai, if the voice over IP industry is growing at 25 to 35% then why is AudioCodes only growing at 15% year on year, at least in this quarter?

Is it a case where AudioCodes has to diversify in other segments, into other geographies?

Or is it a case that our market share shift, if you could give us some insight into that?

Right, well, basically our sales -- key sales [output] go through two main directions.

One which is towards our OEM partners and the second one is sales directed to service providers which just started about a year ago.

We need all to realize that much of the investment going on today at AudioCodes is directed to -- through the likes the likes of [Mobil], [Lupton] and other companies.

And those investments will not produce linear income side by side with the investment.

One needs to realize that there’s rather a long fixed, sometimes 12 months, of investments of developing extra features adopting, integrating, testing, supplying initial networks.

And only then it will work out.

So, there’s a cycle, I would say, of between a year and a year and a half before we will see revenues coming up and ramping.

And I think this is what you see.

We have been reporting in the last three or four quarters of intensive activity through such partners.

We need to realize that those sales are not developing yet and will develop.

We start and we still believe that we will see the initial ramp-up of those sales in the second half of 2006 and 2007.

The other part of the investment goes into direct sales into sservice providers.

And again, we are going direct to market -- direct to the service providers and more the end user for only short periods of time, this is only about a year since we began.

It takes time again to [accept it].

It takes time to start to get going.

The word, however, is getting around.

And the brand is getting stronger.

So, we are creating more and more initial trials and initial deployment.

All in all, I believe that if you take other companies which sell directly to service providers and have done so for the last four or five years, they are already in the continuing sales cycle.

We are in many respects in our networking year somewhere [through] that cycle.

So, I think in that regard I would recommend some patience.

We are winning accounts.

We are not losing to competition.

Well, in -- I -- we wouldn’t say never but we are in most cases winning.

But those accounts take time to develop.

And this is the process of the relative lower growth rates versus the overall industry.

So, do you expect the year-on-year growth rate on a quarterly basis to reach an inflection point in the fourth quarter of this year or first quarter of next year?

It’s hard to point out the specific quarter, but I’m -- my personal belief is that, indeed, 2007 is going to be substantially better in terms of revenue.

And two other quick questions, [I think] gross margins have been very strong at 59% last, if the growth is going to come in the future from networking, do you anticipate gross margins to stay as strong?

Or they could perhaps trend down, if you could give us a sense of that?

We do think that in the near future we’ll be able to maintain the gross margins that we are seeing today, although looking a year from now or so it will probably go down a [lot].

So, we’re 58% or mid 50s, but it’s too soon for us to give you any accurate estimate.

And just one last question, as SG&A costs declined about $200,000 this quarter, was it just seasonality?

Or is there any other specific reason for that?

Nothing in specific in order of the debt.

Expenses related to staff, etc, but it will stay probably at this level and might grow a few percent quarter to quarter.

Okay, thank you.

Okay, thank you Vivek.

Your next question comes from Ittai Kidron of CIBC.

Yes, nice upside on the bottom line.

Shabtai, I had a couple of questions for you with regards to the second half of the year.

It’s good to hear that you’re sticking to the annual guidance.

But that implies that in the second half of the year you’ll have to achieve well above 10% sequential growth in either the third -- well, in fact, in both the third and the fourth quarters.

Now, I know you’ve had very nice design activity, but in order to get just to the mid-point of that you’ll really have to get into the mid-teens as far as sequential growth.

Will it be fair to assume that the lower end of your revenue guidance is more reasonable for the year at this point?

So, taking into account the performance in the first quarter, I would agree with you, yes.

Okay.

And would that -- takes into consideration continued weakness in the CP business?

Or do you expect that business to bounce back?

Not necessarily, we still need to look further to understand where this weakness came from.

I know specifically of at least big account in 2005 that had a low level of purchases through the first quarter -- in the first quarter and now seems to come back.

We don’t see any real reasons for our sales to decline.

And we believe that we should pick up again on the CP side in coming quarters.

And then a question for you, you did very well this quarter in Asia Pacific and in Europe.

Will it be fair to assume that the strength in Europe was somewhat related to Liberty?

And if so, how would you expect Europe revenue to shape up in the second half of the year?

Yes, Europe was strong.

I wouldn’t -- I would not relate it directly to the accounts.

I think, all in all, we see East Europe becoming a good market for us, specifically Russia and other countries.

We also have a much better sales coverage these days.

We -- and we have indicated that in our press release.

We are investing substantially in growing our infrastructure of our sales offices around the world.

And we believe that, at least in East Europe, we’ve done a good job.

We are picking up on filling the missing position in West Europe.

And, all in all, Europe is a good market this year.

We look to do the same in Asia Pacific.

Latin America shows a very nice growth pattern at this stage.

And two questions with regard to that, Eastern Europe is that mainly cable?

And second, with regards to Liberty how should we think about the ramp in that account over the next 24 months?

So, this is Ben.

When it comes -- first, I’ll say about Liberty.

It’s going to fluctuate and it’s just a general comment about the cable market in general.

It’s -- there’s no -- we’re certainly making a lot of progress in terms of voice over IP.

We see usually there would be an initial shipment, initial launch and then it would take time to get experienced with it and how to market it, sell for it and work out any kinks in the network.

So, there is more experience and we’ll start to move more and more.

But again, they build out and they add customers and then they build [it] again.

And there’s intervals in between.

So, it’s not a steady state of revenue.

It’s still going to be real choppy and for the rest of 2006.

And in terms of Eastern Europe, I believe, there is a mix, in terms of -- we’ve had some success in cable.

But we’ve also had a lot of success from a CTE standpoint working with second tier operators.

So I think that business is sound.

Very good.

And lastly on M&A, Shabtai, you mentioned you expect some [technical difficulty] between now and year end.

Could you tell us though what should we expect for?

In the sense of, what are you targeting either from a product or from a vertical standpoint?

Yes definitely.

As we have stated before, we look to focus our areas -- our efforts, I am sorry, in the areas of [media gates] with media servers.

And that is basically where we look for a possible acquisition.

But we also may look into some new various growth although we do not see this growth in those areas, such as [session control], the control market and others.

So -- but those are the areas where we would look, either to acquire a market share, customer-based end, or some unique new technology that we may look to further develop.

Very good guys.

Good luck.

Thanks.

Your next question comes from Alex Henderson of Citigroup.

Thanks.

I was hoping to ask a couple of questions here, one was on the tax rate.

Can you give us a little bit more clarity what the tax plan ought to look like the next couple of quarters?

It was a little lower than we had anticipated this quarter.

Yes, it was a little bit lower than the previous quarter.

But looking into the future over the next couple of quarters, it will probably be around 5% tax rate.

Okay.

Second, when you look out into the back half of the year, you seem to be betting on a couple of fairly large programs that will ramp to cause that acceleration in revenues that is inherent in your guidance.

And I was wondering if the visibility of those contract timing is as good now as it was previous six months ago?

Or whether there’s been any erosion in the visibility of the timing of those deployment and revenue recognition opportunities?

Simply because these contracts do tend to push out, historically, as more things take longer than expected than come in faster than expected.

This is Ben.

I think the answer is actually our design win activity is a lot like -- you could look at our revenue and that it’s quite diversified and balanced.

So while some may slow up, others may be on schedule.

We were not expecting that all would hit in order for us to achieve our growth.

So the way that we are tracking and moving along with our projects, we continue to have the same comfort that we had three or six months ago.

So again, there’s -- it’s not that we need one or two to kick in, as a means to achieving our growth.

We think there’s a balance there.

As well as, of course, growth from our existing customers that will help us in the second half of the year.

Could you tell us what are you seeing, as far as your customer base is concerned?

Are you seeing any slowdown from contracts with say Nortel, Lucent, Alcatel, because of the slowdown -- because of the M&A activity that’s going on in this space?

We haven’t seen any slowdown in terms of the M&A activity.

I think we are all moving forward.

But, of course, some of those companies you mentioned are very seasonal companies.

So we would naturally expect to see different activities from them in fourth quarter versus first quarter.

But that’s all we really saw, we didn’t see an impact from [that could happen as] M&A’s being discussed and employees being diverted.

We haven’t gone into that.

Are you seeing the GSX-1000 more in competitive build -- competitive bids?

No.

It’s, again we are -- in terms of most effective where we are going after, and getting be a finalist, it’s not something that we are running in.

Thank you.

Thanks.

Your next question comes from Troy Jensen of Piper Jaffray.

Thanks for taking the question.

Shabtai, first for you, just a follow-up on Alex’s question, this confidence in the back-half reacceleration, is it just one or two design wins, is it four to five?

Can you quantify the number of what you class as bigger opportunities that are in your pipeline?

Right so, it’s more around five.

I think some of the names have been [thrown] several times in various research notes that we receive from you guys.

So I think it’s a bunch of projects.

And it’s not one or two specifically that we count on.

But in your assumptions, do you just think that one or two of them start to ramp?

Are you expecting the more -- see modest contribution from all five here, starting in Q3, Q4?

No, we don’t specifically -– or at least one or two that, based on our timelines that we know from our [capital] [inaudible].

And there are others that should kick in, we are not always aware to the specific timeline.

And there could be some either slippage in or factor our purchases from one or two of these accounts.

But all in all I think, as Ben has mentioned before, the fact that it is a diverse and clearly, I would say, not small number of accounts, we have reason to believe that we will see a ramp-up in the second of 2006.

Shabtai, you made some comments too in your prepared remarks about, I think it was, business activity at an all-time record high as for your corporation.

Is that newer design wins that are going to be six to nine months out?

Or is this wrapping up these current big ones that you working on?

No, it’s really working towards the big OEMs now.

Those programs are sometimes lengthy, very demanding in terms of testing stability of our products, integration, time to prepare for deployment.

So the first quarter has been the busiest quarter ever in terms of the need to support about five large customers, all demanding good direction to issue to our various different things.

So that gives us the confidence that we are guiding towards greater sales in the second half of this year.

Yes.

And this is Ben, if I could just add to that?

You could think of greater activity in terms of the new AudioCodes that’s now calling on service providers.

So in the past, if you think about all the OEMs that we have to chase versus today, all the service providers that we can chase in Asia, Europe and North America and South America.

And now that we have a sales team that we are building up to call on these various operators, there’s a lot more activity going on.

So we are seeing a lot of positive discussions occurring with -- directly with the service providers.

And we have a team that’s deployed to take advantage of it.

So that’s a lot of various [driving] activities that we are seeing in the market place.

Yes.

And then two others move over to Nachum now.

So Nachum, a lot of the -- obviously the expenses for these integrations work happening now, and over the past couple of quarters.

Do you expect to expect to see better leverage Q3 and Q4 as these bigger deals, and as the revenue start to ramp?

Without getting into specifics, it’s true that part of the investment we already did, and we already seen, is part of -- on the P&L.

It should [appear] we are expecting to grow our revenue faster than it’s [been] so far.

As I mentioned for the current quarter, the guidance is, as I just said at the opening remarks.

Okay.

Understood.

And last question, I’ll get out of line here, but you’ve had -- given the break-out between OEMs and system integrators, and I didn’t hear it this quarter.

And I don’t think I got it for fourth quarter either.

So I was wondering if you could give us that information if possible?

Actually we don’t have the breakdown currently.

So sorry about that.

Okay.

Understood.

Good luck going forward.

Thanks.

Your next question comes from Reginal King of Nollenberger Capital.

Great.

Thank you.

Nachum, I was hoping if you could help me with a -- just a couple of financial questions here?

First the financial income looked like it’s been pretty strong for the last couple of quarters.

Can you give us some feel for what we should expect over the rest of this year?

Obviously it depends on the interest rate that we will get.

If nothing will change it will stay on the current level.

Great.

Thank you.

And then, if I heard right in your prepared remarks, and it looks like in the press release, the share count is 51m.

Did I get that right?

Or is it actually 44m?

Both actually.

It’s 44m for the GAAP income statement and 51m for the non-GAAP income statement.

The difference is the 6.7m ordinary shares from our convertible notes.

Got you.

Okay.

Great.

And then can you help me a little bit with this new sales team that you have been building out, calling on the service providers?

It sounds like, during your prepared remarks, you indicated that this is something that you will leverage for a period of time to create demand.

But then there is going to be a change-over period.

About how long do you expect that you will leverage this sales team?

And what’s the change-over period to when you go back to relying more on your OEM sales?

Well really we see this all very synergistically.

In other words, we see us creating additional demand for our products, and which will enable our customers actually to sell more.

So we view that they are working side by side.

It’s just a matter that we can actually put more revenue and more opportunity into the same funnel.

So that’s how we are viewing it.

I would say in addition to that, is that while our customers are looking for, -- let’s say, a software company is looking to sell media gateways as part of their network solution using our media servers, they may not be looking for every single opportunity within that service provider.

Where to find every opportunity where could you put a media server, where could you put a media gateway?

And I think that’s where our sales team can find additional opportunities in the large service providers.

And then also make sure that we are getting the right level of attention, and finding the right opportunities in our Tier 2 and Tier 3 operations as well.

So we see this as a net add to help us get more growth, and more opportunities both in service providers that are using our equipment today and service providers that, perhaps, we haven’t had access to previously.

Great.

Thank you very much.

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

Thank you.

Good morning Shabtai, Ben, Nachum.

A few questions for you.

Nachum could you tell me what the amortization, specifically, was in the quarter?

And what you expect it to be going forward?

Depreciation was $600,000 and it will continue to be on that level.

Amortization is $200,000 and it will continue to be on that level as well.

So just $200 per quarter still?

Yes.

Both the total – let’s say $900,000 for both of them.

Okay.

And then do you see -- where do you see your CapEx expenditures being on a quarterly basis?

Probably around $500,000.

And then on the Liberty Global relationship, is it fair to ask or to suggest that you have begun recognizing revenue with them?

And perhaps had revenue with Liberty Global during the current -- the most -- during the first quarter?

Yes we’ve been recognizing revenue.

And then on the weakness in CTE is there any chance that that might be seasonally related?

Could be, but again, I think we cannot relate it directly.

Again, there are several big accounts which, when one fluctuates it will affect -- but overall the decline was a bit higher than 5%.

But we don’t see that as [a time] for anything.

It’s either seasonal or just trends [inaudible].

Then you have seen a picking-up, if you would, of that business second quarter to date?

Yes, we believe that we grow our sales to service providers deployment of CTE devices usually is in advance of deployments of either mid or high density gateways.

So we believe CTE will pick up nicely.

On -- through a belated move in to a broader question, with Liberty Global it’s clear you are working with Nortel in that relationship.

And it’s an interesting development in that it shows Nortel working with you, not only on the media server but also with the media gateways.

So when I -- you mentioned, for instance, this Eastern European cable win, was that something that you went out and did on your own?

Or were you partnered with Nortel in that too?

And is that part and parcel of a continued business strategy relative to Nortel?

Hi this is Ben.

That was again, that was us creating demand on our own.

In general, with the cable operators, they want to know the media gateway vendor directly.

So it’s not -- it’s typically not a relationship that we can hide behind.

We can to some extent with our media server.

But in terms of media gateway effort synergies it requires more of a direct approach.

We may go through others, but we always have to have a direct [approach] with the operator.

So with Liberty Global maybe, even if you might be fulfilling with Nortel, but you win it, that’s something you won 100% on your own?

Yes.

That’s something that we went on our own to secure.

Okay.

And then just lastly, relative to acquisitions, can you give us some color with regards to -- what your MO is, in terms of acquisitions [like] are generally accretive?

At what period of time is it your goal to have things contribute to the bottom line?

More along the -- how you look at things financially.

It is usually we look to acquire customers market share, and sometimes technology.

We usually look for companies with mature operations, companies who already have growth revenues.

And we believe that, since we work in similar areas with similar products and operations, if we close on an acquisition, those acquisitions should become accretive fairly quickly.

Nothing specifically [for first day] but in 2007 we believe that any such acquisition should contribute to our -- both top line and bottom line.

Okay.

That’s it.

Congratulations on the quarter.

Thanks.

Thank you Ted.

[OPERATOR INSRUCTIONS].

Your next question comes from Marcus Kupferschmidt of Lehman Brothers.

Hi, can everybody hear me okay?

Yes.

Hi Marcus.

Great.

Hi Shabtai.

I just wanted to clarify what I heard, just to make sure I am [calling] remotely.

But it sounds to me like the -- the thing about the quarter you had a highly [boost] confidence about the full-year outlook based on your existing customers plus some portion of what seemed like six key wins that was stated on the quarterly conference call a quarter ago.

It sounds like -- the point is that we still see those six wins and we are looking for a fraction of those wins to continue to kick in to get us to the lower end of the ’06 sales guidance, is that correct?

Yes Marcus.

That’s correct.

Great.

And in terms of the CP focus, can you give us a rough sense of, what percentage of the business would come from CP?

Or how we should think about your CP versus more finished systems at this time?

Well, we usually do not break down our networking revenues.

But in -- on a general basis you can assume that CP is still are not beyond 15% of our business.

This is not [inaudible] this is for us strategically I think, we see CP development opening for us the door into service providers.

And providing entrance of some, we really need to create leadership and basically gap versus competition on our higher density media gateways and media servers.

I am sorry, my phone broke up.

Did you say the CP is less than 50% of networking revenues?

Than 15% of overall revenues.

One, five.

Thank you very much.

You’re welcome.

Our next question comes from [Robert Highwick] of Argon Global.

Hi.

My question has been answered.

Thank you.

At this time there are no further questions.

Okay.

Thank you Operator.

So I’d like to thank everybody who participated in our conference call.

And we look forward to seeing you on our next call in three months.

Thank you very much.

Bye, bye.

This concludes today’s call.

You may now disconnect.