AudioCodes Ltd (AUDC) 2007 Q2 法說會逐字稿

Good afternoon and good morning ladies and gentlemen and welcome to today's AudioCodes second quarter 2007 earnings teleconference.

For your information, this conference is being recorded.

At this time I would like to turn the call over to your host today, Mr.

Erik Knettel.

Please go ahead, sir.

Thank you, [Armadine].

I would like to welcome everyone to the AudioCodes second quarter 2007 earnings conference call.

Let me begin the call today with a brief Safe Harbor statement concerning AudioCodes' business outlook or 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, possible disruption from acquisitions, the ability of AudioCodes to successfully integrate the products and operations of acquired companies into AudioCodes' business, and other factors detailed in AudioCodes' filings with the Securities and Exchange Commission.

AudioCodes assumes no obligation to update that information.

In addition, during the call we will refer to non-GAAP net income.

We have provided conciliation of non-GAAP net income to our net income according to GAAP in our press release and on our website.

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 and General Manager of Session Border Controllers and Media Server business lines.

I would now like to turn the call over to Nachum.

Nachum, please go ahead.

Thank you, Erik.

Good morning and thank you for joining us on today's conference call to discuss AudioCodes' second quarter results.

I will start by presenting a financial overview of the quarter.

Shabtai will then review the highlights for the second quarter.

Then we will discuss the second quarter market plans and key achievements and we will then turn into the Q&A session.

Before beginning the financial overview of the quarter, I would like to note that the following discussion will include GAAP numbers and pro forma numbers.

Our second quarter pro forma results reflect adjustment for the following two non-cash items -- stock based compensation expenses, which totaled $1.8m in the second quarter of 2007, and amortization expenses relating to the acquisitions of Nuera, Netrake and CTI, which totaled $600,000 net of taxes in the reported quarter.

Full reconciliation of the pro forma results discussed on this call to GAAP results is currently available for review on our website, and in the press release issued yesterday.

Getting to our quarterly results.

In the second quarter revenues were $38.4m, which represents 5% increase from the last quarter.

As a percentage of our revenues, sales in America accounted for 51%, Europe 29%, Asia Pacific 13% and Israel 7%.

We had one customer above 10%.

Our top 15 customers accounted for 42% of our revenues compared to 48% in the previous quarter.

In terms of revenue by business group, in the second quarter our Technology business group accounted for 36% of revenues compared to 41% in the previous quarter.

And our Networking business group accounted for 64% of revenues compared to 59% in the previous quarter.

In the second quarter of 2007, pro forma gross margin was 58.3% compared to last quarter pro forma gross margin of 58.6%.

On a GAAP basis, gross margin was 56%.

Our total pro forma operating expenses increased from the first quarter level by $500,000 to approximately $21.5m in the second quarter of 2007.

The increase in our operating expenses was a result of the inclusion of the operations of CTI in the second quarter, which totaled $750,000.

On a GAAP basis, operating expenses for the second quarter were $23.4m.

Headcount decreased this quarter by two employees, which brings us to a total of 695 employees.

This decrease includes the addition of 30 employees from CTI.

Pro forma net income for the second quarter was $1.4m, or $0.03 per share.

GAAP net loss for the second quarter was $1m, or $0.02 per share.

Short term and long term cash balances were $131m compared to $133m quarter.

The decrease in cash balances is attributed mainly to a $5m cash payment in connection with the acquisition of CTI Squared.

DSO came in at 61 days compared to last quarter's DSO of 68 days.

At this time we are maintaining our guidance for 2007, as we estimated on our previous conference call.

Based on our visibility at this time, the forecast revenues on an annual basis for 2007 will be in the range of $155m to $160m.

We estimate our non-GAAP earnings per share of $0.12 to $0.15, but at this time we anticipate earnings to be at the high range of the forecast.

We also estimate our GAAP loss per share to be in the range of $0.14 to $0.11.

As for our third quarter revenue plan, we currently have an initial backlog that's above 50%.

I will now transfer the call to Shabtai.

Thank you, Nachum.

In my brief today I will focus on the key highlights of the second quarter of 2007.

Then I will leave it for Ben to cover the different areas of activity in more detail.

The sequential growth (technical difficulty) increase in our profits in the second quarter compared to the previous quarter, we are pleased to report a return to a position of growing revenues and earnings.

I believe that most notable this quarter was the fact that we have been able to perform very strongly in the Networking business.

And that area was in fact the same compared to the first quarter of 2007, and we grew about 30% compared to the second quarter of 2006.

We believe that the trend we see in the second quarter will reassess to our business strategy, our business synergies and to refocus on our growth area so we can demonstrate competitive advantages in the market and thus to stay on top of the market evolution and make us ready to return to the growth that has characterized our business in previous -- in the five previous years.

Moreover, with growing recognition for our reputation and our recognition for the quality and value of our products and status in the market, as perceived by customers, partners and market players and was evidenced by design wins that we've been able to make this quarter.

We captured more momentum, more mind share, and we believe that is paving our way towards the same growth in coming years.

Touching more on the business highlights of the quarter, we've been able to achieve both the revenues and the earnings targets that we have put for ourselves.

I'd like to note that second quarter financials will include CTI Squared, acquired business, which is not profitable yet, and that (inaudible) organic business earnings were higher than disposals.

Operating income almost tripled from the first quarter.

With extreme positive cash flow from operations, $2.7m, will allow us to invest more in our business.

Another encouraging fact is that we've been able to reduce our customer base concentration to about 42%, meaning that we have less exposure to one customer falling in revenues from outside.

We've been focusing substantially and putting a lot of effort in making OpEx procurement plans.

The key plan has been established.

We've been able to reduce about $200,000 in the second quarter and we will present much higher savings in coming quarters, Q3 and Q4.

Most important, we've been refocusing our business strategy.

We now focus much more on the CPE business, selling directly to service providers and selling through OEMs in the enterprise space.

And we complement that possibility with our ability to present and drive to market high density, mid density gateways and media server products.

We've put a lot of effort internally to improve our internal processes.

And we believe that by adding more focus to that functionality we should be able to improve our operation within the portfolio.

We have invested substantially in strengthening our sales operations all over the globe.

We have added sales people and supported them in various countries.

And we believe that that will contribute to our sales going forward.

Referring to some of the shortfalls that we've witnessed in the first [half] 2007, the dollar has been attributed mainly to three areas - weakness in Nuera APAC sales, [accredited] sales of Blade, and inability to present growth and ramp up in some of the acquired businesses.

The Net has been able to present a complete recovery.

We've added more resources.

We have much better management in place in the exposed areas.

We have South East Asia performing very well.

We do have more that has to be done on the North APAC region, but all in all APAC came back to life.

In the Blades business we have witnessed further decrease in our revenues.

Revenues continued to slide, although to a much lesser extent than happened in the first quarter.

We now believe that we are not far from stabilizing that line.

So the fact that that product line is now down to 45% of revenues, and we believe we will be able to manage any further decline in our business, a lot of confidence in our ability to continue to grow revenues more from the Networking side, which is now 64%.

Last Networks, we have to invest much more both in our product management, both in product and the sales force and focus in the market.

Focusing more, in more detail in some of the areas that we have been engaged in starting the second quarter of 2007, as we've said in our press release it's grown more than 10% over the previous quarter and more than 30% over a year ago.

We have very good momentum in the 3G markets with growing sales and initiating our sales group, new service providers, new OEMs, our partners such as Microsoft and we are going to invest much more in increasing and growing that portfolio.

For the (inaudible) and the Media Gateways we are increasing our sales there.

We believe that by focusing on our mainstream markets and with some niche opportunities we will continue to grow there.

We have good pick up in the Media Services business from both a leading Q1 service provider in Europe.

And we have some large potential with the leading provider, Q1 provider in North America.

The Nuera business has been pretty much contained.

At this stage we believe that expenses will reduce now matching more sales levels and, therefore, we do not believe that that business will impact our operations going forward.

One point -- one further point to note is the fact that we have very strong APAC sales from Nuera business.

At Netrake, as I've said before, new products have been introduced in the quarter.

And we have high investment plans to increase in competitiveness in the session border control market and secure data market.

As I've mentioned before the Blade business we've seen similar trends to the first quarter.

However, I believe we've seen the majority of the decline.

And we believe that any further decrease will be manageable.

Just to say one more word on our position in the market.

According to latest market reports by synergy, we are performing rather well.

Combining the low density and the mid density market, we are now about 9.5%.

We have 9.5% market share.

We are right now number four.

And if we focus more on the mid density market, that market we have grown from 6.3%, 7.3%.

We are fifth in that ranking and we believe that we will continue growing that market.

All in all adequate sales in the mid density gateway market were increased by about [60%].

And with that I will pass the floor to Ben.

Thank you.

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

Today I will review some of the key market opportunities that we are enabling, and discuss how these opportunities will fuel our growth in our enterprise and carrier business lines, especially over the next six to 24 months.

First is the emerging unified communications market, and our enterprise business by product, including our MP, Mediant 1000 and Mediant 2000 are already well positioned and designed in to enjoy the growth expected from this market segment in 2008.

Second, for our carrier business line we continue to [finish] market.

For example, we are securing wins with Tier 2 and 3 service providers in the emerging markets.

We are also designing into OEMs offering our Media Gateway to large call centers and government institutions.

In addition, we continue to see progress although not as fast as we'd like to in fixed multi-convergence and wireless.

Now we will dig a little deeper.

First, in terms of the unified communications opportunities, we have designed in our partners with the market leaders.

For Synergy Research, the top five global IP telephony vendors are Cisco, Avaya, Aegis, Optical Lucent and Mitel and Gitel.

This group represents 1% of the IP telephony market today.

We have close partnerships with three of the top five, and are selling gateways to four of the top five.

Moreover we are selling to the second tier as well, with Freecom as one example.

Just as important we are the only gateway included in Microsoft Global Ignite Tour which marketed Microsoft Office communication server, also known as the OCF solution.

And we feel confident that we will gain significant share of Microsoft OCF post GA later this year.

In unified communications the value chains have matured, and will be an important driver for Voice over IP deployment.

Not only is the VoIP community large but the communication servers are now more of a standard space of enterprise, provisioning and management, and most importantly easier integration of third party equipment and application.

As a result, a new unified communication value chain has been enabled, as traditional server companies such as Dell, IBM and similar companies are about to become major channels to deliver Voice over IP in unified communications enterprise.

This ecosystem creates several marketing opportunities for AudioCodes.

Our customers and partners have brought us into relationships with the leading unified communications and space channels, as well as the systems integration arm of Tier 1 service providers.

Indeed, these channels particularly like to standardize on our medium one-sized platform.

And we have designed many of the leading unified communications venders, with homologated worldwide, and offered TRI, BRI, FXL, FXS and(inaudible) and more on one platform with the highest quality voice and speech aesthetic.

In terms of specific opportunity, [AudioCodes] projects that the multi-service business gateway market will grow from 800m in 2007 to over 2.6b in 2011.

With our Media Gateway and SBC know how, coupled with our OEMs, partners and channels we are well positioned to enjoy significant growth in this market place in (technical diffculty) years.

Second, as I mentioned earlier, for our carrier business lines we continue to find niche opportunities.

We signed a contract with a market leader and large call center.

We will be supplying our Mediant 5000 in many Fortune 500 and large outsourcing call centers in the coming quarters.

We continue to make progress as well with a number of OEMs and government opportunities that will drive Mediant sales.

We are also taking advantage of the penetration of Voice over IP in the Tier 2 and 3 service providers in emerging markets.

Typically in niche opportunities there is a local softswitch integrator that sees AudioCodes as the natural partner.

These softswitch system integrators they have a specific area of expertise that we are able to leverage.

As an example, we are working close with Xener in Asia and Talis and Centric in Europe.

They partner with us because of the quality of our products and our ability to customize for local needs.

As an example, Talis needed a special full year implementation and Xener needed a special PFBN signal implementation for their market, typical make our partnerships work.

Moreover, with the large operator in South East Asia this quarter we will place their voice compression over CDM solutions and have our biggest single shipment of Mediant 8000 gateways to date.

In addition, Voice over IP is still in its very early stage in being implemented in mobile convergence and local networks.

But we are seeing some progress.

One customer worth noting is T-Mobile.

And some of you in the U.S.

may be familiar with T-Mobile's TV commercial of hot spot at home, which has been a successful fixed mobile convergence launch at the end of June.

We expect to see continued fixed mobile convergence and wireless opportunities.

Indeed, through our NEC customers AudioCodes is already selling Media servers for wireless [encoding], including gateways to secure fixed mobile convergence.

And Media Gateways that enable fixed mobile convergence to connect to 3G MSD.

To summarize my discussion, in both our carrier and enterprise business lines we are making progress.

We're seeing growth in our reported networking revenues, as well as securing key design wins in emerging market segments ensure a bright future for AudioCodes.

And now I will turn the call back to the operator for Q&A.

Operator?

Thank you.

(OPERATOR INSTRUCTIONS).

We will now take our first question from Ittai Kidron from CIBC please go ahead.

Hi guys.

Congratulations on a good quarter.

Nachum, can you talk a little bit about the operating expenses?

It seems like that excluding CTI your operating has actually declined quarter over quarter.

How should we think about that through the rest of the year?

And -- because assuming that your revenue grows into your targeted range that's roughly 5% to 6% on a sequential basis for next of the two quarters, how should we think about OpEx growing in those two quarters?

Ittai you are absolutely right, if you take CTI out of the equation our OpEx actually decreased quarter to quarter.

As Shabtai mentioned this is part of our OpEx control plan.

It's the (inaudible) and during -- started to implement during first quarter.

And we will hopefully see results during the second half of the year.

And taking into account the guidance that we gave for the revenues, we do believe that we will get to the higher range in terms of EPS for capital gains.

And as I said, on a non-GAAP basis, it should be between $0.12 to $0.15, although we do think it will be closer to $0.15

What is the headcount at the end of the quarter?

And where do you expect that to go to year end?

Headcount at the end of this quarter, of the second quarter was 695, which is actually a decrease two employees comparing to the first quarter.

Take into account that we added another 30 coming from CTI at the beginning of the second quarter.

Closing was on April 2.

And what are your hiring plans between -- Shabtai you mentioned that your hiring on the sales side, so how should we think about the headcount growing between now and year end?

It's very hard to forecast the exact headcount growth.

But as we said, and Shabtai mentioned, we are planning to grow, and we might recruit new people as a consequence.

Very good.

And Shabtai a question for you, looking at the June split it looks like, as you mentioned, Nuera came back a little bit, up in Asia Pacific.

But I was just -- so we saw a very nice bounce back over there.

I guess the question is, if more a reflection of a delay of revenues from the first quarter are true and consistent, what do you think would be consistent this business also going forward?

And also perhaps you can address the decline in North America.

How should we think about that region as we move into the second half?

Right, so we do believe that our sales Asia Pacific region sales are working rather well.

The fact we know more of the attracted supplier with some of the leading service providers in that region really helps us to enhance our sales there.

So we feel pretty good about that.

We do believe that in North America sales are usually attached to the customer base we have.

At this stage there are no new design wins in the cable space.

So you either attach to the performance of our customers, and as we've been it's pretty flat at this stage in North America.

However, we believe that well we have one activity that should bear for the coming months.

And with that effort we should be somewhat a pull through in North America.

All in all, as I said before, from a mainline perspective, the Nuera business is contained.

We adjusted expenses to hedge sales and we feel pretty good about that business expansion region.

Very good.

And lastly Nachum with regards to the gross margins, to what extent the decline over there has been impacted by the change in mix between networking and technology and how should we think about that mix going forward?

So as you mentioned Ittai, gross margin is affected obviously by the mix between networking and technology.

You need to take into account that the volume has an affect also on the gross margin.

Our target, as we mentioned previously, is to be in the range of 58 and eventually gross margin will go down, but it's too soon to really discuss it into any other details at this point.

So 58 is definitely a target for this year, and being in the next for -- in our gross margin.

Very good.

Good luck guys.

Thanks.

Thank you.

We will now move to our next question from Vivek Arya from Merrill Lynch please go ahead.

Good afternoon guys.

My question -- a couple of questions.

First again to go back to the expense part, which I think is really the biggest control point that you have near term.

If you were able to lay off employees this quarter were restructuring costs associated with these layoffs, were they included as part of your pro forma expenses?

In other words, are your expenses probably overstated this quarter because you laid off these employees?

Yes Vivek you are right, taking into account that we did reduce the employees at the same time that really included the guys from CTI, it's true that there will be -- should be decreasing our OpEx into the third quarter in regards to the, this plan that we mentioned, this OpEx control plan that we mentioned.

So it is possible then third quarter and fourth quarter OpEx stays sequentially flat to perhaps even good?

Yes, in regards to the second quarter.

On the other end we also need to take into account any actions that we will do during the third and the fourth quarter.

So at this point taking everything into account we are still maintaining the guidance that we gave in terms of our EPS.

I see, because I am just somewhat surprised Nachum.

Most of your peers actually pro forma out restructuring expenses.

So they represent OpEx excluding any of these restructuring expenses.

But you have been probably more conservative to include them.

But if you look at the normalized ramp expenses, do you think it's possible that they get back to the $15m, $16m by quarterly run rate that they were at last year at similar top line?

No, Vivek.

In terms of the second quarter there wasn't any meaningful restructuring costs.

Getting back to last year's expenses, obviously since then we did some acquisitions, so it will be very difficult, and I don't think we will get there.

Okay.

The other question has to do with your Blades business.

It has been under pressure for several quarters.

Obviously it's coming down as a percentage of sales.

Shabtai, can you give us an outlook what -- is it just a question of the customers or the market segments that you're exposed to in the Blades business?

Otherwise how is it possible that Voice over IP is growing but your Blades business is not growing?

I mean is this just a temporary phenomena or is there something more fundamental there?

Right, so the interesting is very simple.

Basically, Blades were used in the past systems, and were a product that enabled companies to get such market where costs (inaudible -- microphone not accessible).

These days, when they matured, when there is competition and then price pressure on products is increasing, the use of Blades is becoming basically a deficiency.

And, therefore, email solution could be provided based on Gateways.

And, so, the Gateways will be much cheaper to deploy rather than systems with Blades in them.

You will see much less Blades being installed.

But, now, if you would ask all companies who compete in that market, we learn that there are basically very few new design wins.

Most of the sales do shift from the other architecture which was based on Blades, to the new ones that are based on the Gateways.

And, therefore, it's an ongoing trend.

We do believe as well that as products keep turning, we'll see less and less decline coming forward.

But, still [technical difficulty] discovery and, in fact, if you will look into some of our old competitors are suffering even more as well.

Some of them actually go out into that market.

And just the last two quick questions, Shabtai.

Can you please talk a little bit more about the Microsoft relationship?

It sounds somewhat interesting, and could potentially be significant.

But I assume this is more of a 2008 type activity?

Can you just give us some more color on that relationship?

Yes, we do get a lot of encouragement on that activity.

We have been able to maintain top position at partner who Microsoft been helping to deploy that initiative of the [essen] communication system.

We do engage with many new enterprises.

At this stage, a lot of them in data sites, a lot of this in the last phases of testing and trials.

We do believe that we will see substantially more ramp up, as we have mentioned, in the beginnings of 2008.

But we do believe that that process is in spite of [legit] between for us and good brand recognition in the Enterprise space.

Got it.

And, just the question, Shabtai.

When you look at your major NEPs or OEM channels, like Alcatel-Lucent or Nortel or even Ericsson and others, there's a lot of internal restructuring going on in those companies.

Is that a good thing for AudioCodes or is that a negative thing in terms of the confusion that it --?

Or does it provide more opportunity for you or does it mean some fusion and perhaps some delays in coming up with new products near term?

Thank you.

Right.

So you really cannot refer to them as one mix.

You would have to differentiate between sort of well, divisions do they try to service providers [and that we call in] to the Enterprise space.

Let me just turn into the service providers, the price pressure is such and substantially such that there are no margins for being able to sell OEM through those companies.

Therefore, we even do not try to sell there and this is why we have developed a right go to market strategy for selling to service providers.

There is complete opposite phenomena in the Enterprise space where leaders, NECs, who participate in that space are relatively in much better position than those that participate in the service providers space.

Therefore, margins are substantially larger and they are much more often Seibel products.

So we do see direct actually some new very good design wins in the OEM space in the Enterprise.

But we seek much less partnerships in the service provider space.

It goes away.

Thank you.

[Yes].

Thank you.

[OPERATOR INSTRUCTIONS] We will now move to our next question from Marcus Kupferschmidt from Lehman Brothers.

Please go ahead, sir.

Hello guys.

Marcus.

I guess my first question was to clarify the comments about APAC.

I think the comment was that the sales at the APAC business is fully recovered, or is it starting to improve?

I want to understand.

In the second quarter we saw APAC sales recovering.

Recovering.

But I think you would like to do more in a normal kind of world.

I don't think you would view this as fully recovered.

Correct?

Yes.

What we have mentioned is that we are completely pleased with the operation in the south -- southeastern part of APAC.

We do plan to increase our workforce in the northern part.

And any -- can you give us a rough sense of what you think a normal quarter of APAC will look like in another two, three quarters after you think you're really -- you have returning there to the full rate whilst you're still selling on your traditional AudioCodes relationships in APAC?

Well, traditionally, we've been selling about 12 to 13% in APAC.

We do -- actually, we have written to, if I am not wrong, 12% this quarter.

And, of course, the ambition is to grow, but if we try to grow in other regions as well I'm not sure I should quantify that in percentage.

Okay.

My second question is to understand a bit more about where the margins are going.

I think in the past, you've hit a milestone of 10% net margin, assuming you're going to have a non-GAAP net income.

Maybe you could give us an update of when do you expect you could get there and what are the revenue levels needed to support that, given the restructuring cost you want to make?

Right.

So that has been, indeed, our target for many years.

We have changed that with the acquisition of new growth engines for the Company.

But while, with the organic original AudioCodes business, we should be able back enter operational efficiency by the end of year.

Still, the fact that we'll -- we will be investing especially for control market.

We'll be investing at the CPS market I think we would not attain that level maybe another three quarters.

But, all in all, I think we try to build here a very tough trunk up.

I mean we've many growth regions.

Therefore, we are willing to sacrifice operational efficiency in that range.

Thank you.

We will now move to our next question from Troy Jensen from Piper Jaffray.

Please go ahead.

That's a nice quarter, gentlemen.

Quick question for Nachum.

Can you talk about linearity in the quarter?

Your sales dropped nicely.

I was just curious to know how much business came in the third month?

Obviously, this quarter was more linear than the first one.

But the third month, I don't have the statistic in front of me, but I would say that's the majority in terms of probably above 30% was in the last month of the quarter.

Did you have a [handset]?

But it's true that -- I mean part of the reason the DSO went down was due to more linearity during the quarter.

Other reasons were obviously better collection, etc.

Got it.

Okay, then Shabtai for you.

You've mentioned briefly about investments in Netrake.

Just love to get your thoughts on how that business is going on acquisition.

Is there any more surprises there?

And when do you think we'll start to see the more inflection in the growth rates that business?

We should -- we will not see any more surprises, although we do, I'm pleased to say, that the period that it will take us to get to a much higher sales level will take some time.

We're doing that at this stage much more in the new service we just introduced.

We do intend to invest substantially more in -- on the sales front.

Design wins do take a lot of time, between six to nine months, a lot of differentiation between different projects.

So we are optimistic.

It's a new goal simply for us.

It's opened for us another floor to the service providers.

Still this will take time.

I don't think it will affect our overall direction, simply because we have been able to show this far we grow 5% and we believe that we should be able to continue that trend going forward with all the investments we make.

Got it.

keep up the good work, gentlemen.

Thanks [then].

Thanks.

Thank you.

We will now move to our next question from Carter Driscoll.

Please go ahead.

Yes, good afternoon, gentlemen.

Maybe you could talk more generally about what you're seeing in the stunning environment.

We're through over a month of the first -- for the third quarter.

Maybe break it down between Service Provider and Enterprise, where you're seeing some strength and what products do you see more opportunities in?

Or, well from at least the customer perspective, and maybe break it down between roughly North America, Europe and Pacific.

(Inaudible - technical difficulty)

Well just, generically, where you're seeing -- if you could break down where your (inaudible - technical difficulty and Enterprise front.

If you don't want to break it down geographically, that's fine.

But at least if you could differentiate between the two main segments you address.

Sure.

I mean we are generally seeing more and more acceleration on the Enterprise front, and this is for many reasons.

One is just that Enterprise Solutions are becoming more open and we're able to fit in with our (inaudible - technical difficulty) solution.

But Enterprise is -- on Voice over IP continue to move forward with that.

So that's where we're seeing more spending.

We're also seeing also within the Enterprise space that the [pulp] on our space in particular is becoming to migrate over to Voice over IP.

So those are the areas that we see most progress in.

Again, with Service Providers this is we've even made progress from the beginning.

The network, that's more of an evolution now.

I know we've talked quite a bit about the operating expense side.

I think you may have pre -- not to try to pin you down or anything, but (inaudible) is roughly 18%, an R&D target, is that still achievable given the commentary you've made about investing in Netrake and CTI Squared?

So Carter, as we've said, we will continue to invest in R&D with CTI and with Netrake.

Obviously we are investing much more than we planned according to the target model that you mentioned.

I don't like to discuss any operating modeling results for 2008 at this point.

It's too early.

Okay.

And, then, again, a larger question maybe for Shabtai.

You've just seen tremendous consolidation in this space, broadly.

Maybe you could talk about some of the trends there and your prospects?

Obviously it's a standalone business.

There aren't a whole lot of players left that have the types of solutions that you do.

What might be a characterization of someone that you might want to tie up with, obviously without getting too specific?

I mean is there a specific partner out there that you think would really drive your market share gains into the first or second or possibly third position?

And what type of opportunity you might be receptive to in that possibility?

Right, so basically I think if we start combining the overall Media Gateway market's outlook and, indeed, the type of players that's left, who play there, I think we are finding ourselves in a very good spot.

All in all, if you're look into forecast given by Synergy as to the size of the market you will see a market that somehow limits us to about 2b a year I believe in 2009.

Now, if you recount that the players in this market who are -- are substantially larger, some of the big companies, 20% of the 2b market is not a big market for them.

Therefore, we believe that -- I think it's a huge market for us.

I think, competitively, we should be stronger in gaining market share from the largest player.

We basically have less and less interest in such in the smaller segments of the market.

In terms of competition, we do believe, and I think that is evidenced in some of the design wins that we have been making this quarter.

We are perceived to be a market leader, so situation of quality and performance, overall performance of the product.

We are investing substantially in the Service side giving our products close supporting them, I think then, they will -- if we are in that space.

Therefore, I believe that, strategically, our position in that market is quite good.

On the other side, we do see some of the weaker players, the weakest competitors, (inaudible).

And we believe that these are momentums and increase our design win space in the market.

Think we -- we should be battling at the very high upper side, directly in that market.

So, all in all, I think, strategically, we are in good shape.

But to move to sideways, I'm not sure the business signs for us are looking in that area.

We do have other products yet to integrate and, if successful with the acquired businesses, we're doing that.

And I believe that we should be looking more into that part of the business in 2008.

That was a good explanation, thank you.

And then, just lastly, an update of where you are in the consolidation area for your facilities combining together on Texas and New Jersey?

We're not ready to give details, Carter.

I will just say that in terms of our OpEx budgets, combining any office in the States will not make any meaningful change into it.

Thanks for your time, gentlemen.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS] We will now take a question from Ted Jackson from Cantor Fitzgerald.

Please go ahead.

(Inaudible - technical difficulty) As the line is pretty bad we will move to our next question from Marcus Kupferschmidt from Lehman Brothers.

Please go ahead.

Hello guys.

I was dropped off the call, so I apologize I didn't hear Shabtai's response to my question about 10% net margin.

If you could quickly just give me a sense of when you think you could achieve that at a revenue level and then I'll go onto a couple of other questions to ask on that topic?

Thank you.

Okay, very quickly, we do put 10% as our target, which we will be investing into Netrake mobility secure marketing to the CPS there.

I believe that that target will be achieved probably three to four quarters from today.

We do believe that, by the end of this year, we will be substantially more between 5 and 10, probably more in the higher range.

Okay.

And, so, I want to understand, in terms of just the key drivers of the OpEx.

We're talking about investing more in CTI and (inaudible - technical difficulty).

We're talking about nonetheless taking some cost out of some of the acquisition.

OpEx in dollar terms you think goes down slightly over the next couple of quarters from here?

Actually we have mentioned that we do expect OpEx to go substantially lower than this quarter.

Right, but fourth quarter, would you expect it to come down again because of further benefits from restructuring moves?

I'm not sure, because, as I told you, we do intend to invest at the same time basically in the Session Border Controller market.

So, all in all, I believe that there should be maturity over this time, if not all of it in the third quarter.

Okay.

And you said shutting down facilities is not a driver of taking cost out of the business, so what are the key drivers to take the OpEx down for AudioCodes?

I think we are trying to limit our investments.

In previous years we've made a large investment in many product areas.

At this time we are trying to focus in more specific products, therefore investments in R&D should drop to about 18% of revenues, while, in the past, these could be 25%, 23%.

Other growth, or the relation of comparable products that was done in other companies that were acquired with AudioCodes.

On the other side, we do spend much more now on sales and [in] (inaudible).

Right and could you just repeat how much CTI revenues and OpEx was during the June quarter?

We cannot comment on that in detail.

We -- I will just say that there are not many to our operation at that time.

You still expect it to be about 2m contribution for the year of sales, which is what you said on the last quarterly call?

Well, roughly.

I mean this is just the beginning of the adoption of that company, so we do not expect any major change in coming quarter.

Okay great.

Thanks.

Thanks.

Thank you.

We will now move to our next question from Irit Jakoby.

(Audio starts in progress) inventories increased this quarter.

Irit, we just heard the last two words of your question, so if you (inaudible) --

I'm sorry.

I wanted to ask about the inventory increase in the quarter.

Yes, so inventory did increase.

But, again, I mean it's due to the forecast that we are seeing in the pipeline that we have, according to our operational plan and is not something that it's -- it's not something that it's in any of our operation.

I would -- don't expect that it will stay in that financial in the future.

Okay great.

And another question on Netrake.

Would you perhaps give a little more color -- you guys, you came out with two product announcements for Netrake in May on what you were seeing competitively now that those products are (inaudible - technical difficulty)?

[Sure].

So one is we substantially reduced our -- the cost of those products.

So we're now able to compete more effectively in terms of price.

We're also able to get to lower -- the lower end in terms of saleability as well, which is important since most service providers are just beginning to work with session border controllers.

So it's allowed us to be more effective in terms of getting to the low end.

As we scale up are more price competitive.

And we're --- so many pieces need to work on investing in terms of the future, but [we've got the market lead].

And are those the direct sales or mostly through a channel?

Our business is pretty mixed in terms of direct and indirect.

But on the Security Gateway it tends to be more indirect and on the Session Border Controllers tends to be more direct.

Okay great.

Thank you.

Thanks.

Thank you.

We will now move to our question from Ted Jackson from Cantor Fitzgerald.

Please go ahead.

Can you hear me now?

Yes.

Okay good.

Sorry about that.

A few questions.

One of them, Nachum, is the CapEx bounced around a little bit.

Can you give us some guidance to what you see that being in the back half of the year?

It should be a little bit higher probably than the second quarter, but should be linear into what we did in the last couple of quarters.

And, then, at least on a GAAP basis, the tax rate jumped up substantially.

Is there anything in there that we need to know about?

No.

It should, again, stay in that percentage probably going forward as well.

In the 20 percentage range?

Yes.

In that range.

And why is that?

It might be a little bit lower than that.

But what --?

Can you tell, can you explain what (inaudible - technical difficulty) like that?

Is it -- are you getting more business out of your U.S.

operations?

I mean is there some kind of shift that would result in that happening?

Is it because of the acquisitions?

Can you just add a little bit more color?

Yes.

I mean probably because of the Belarus operation is much larger than it used to and therefore, that's actually the tax rate is a little bit higher.

Some of it is due to the acquisition and deferred tax liability that we have.

All in all I believe that we will stay on that range, maybe a little bit lower than that.

Well, if we were using a historical like a 15% pro forma rate, would there be a need for us to readjust that?

Sorry, Ted, can you repeat?

If we were using a, say, 15% tax rate for our pro forma models, would there be a need to readjust that rate upwards?

And if not, why?

You do -- I would leave it at the same percentage as it was.

I wouldn't change it.

(Inaudible)

Okay.

I mean you are referring to the GAAP right?

Well just trying to understand what the GAAP rate is and what made it to go up.

Is it something structural that's permanent that needs to be reflected in our pro forma models?

Yes, I - but, again, I mean, Ted, when you are looking at the GAAP you are looking at income tax.

It's not expense.

The majority of the reason relates to us changing the deferred tax liability due to the change in the amortization of the intangible assets.

So it's not actually an expense, and, therefore, you can -- that's the reconciliation between the GAAP and GAAP back basis.

Okay.

[Inaudible]

That's fine.

Two more questions.

One is in the first quarter part of the shortfall was a major customer with an [end of life] product.

And you had said that that customer was not going to go away and I was curious if you'd seen any kind of rebound with that major customer.

If you provide some color on that.

And, then, secondly, if you could give us a little color, just as it relates to A1 Logic and RAI Logics and if there has been any kind of recovery there with when this deal having closed and such.

Well, without getting into specific name, I would mention the -- any -- the customer that relates to in the framework there.

All in all it's in line with purchases we made in the first quarter.

And so Al logics business, again, in line with our expectation.

Okay.

And, then, you'd mentioned T-Mobile as a customer for you.

That's at a Security Gateway product or is that also Media Gateway?

Yes, I mean -- when we talk about design wins we don't always break it out by product.

But it -- it's related to what we felt through Netrake through Alcatel.

Okay great.

Thanks a bunch.

Good quarter.

Thanks Ted.

Thank you.

We will now move to our next question from Carter Driscoll from Stanford Group.

Please go ahead.

Hello guys.

I think you have put a number out there with Nuera that you thought you might have done 20m and then lowered that to roughly 10m for 2007's.

Is there some type of [distribution] we can not allow.

And, then, you also mentioned the Chips business.

I think previously you thought you could do somewhere around $15 or $16m.

Is that still an achievable target for this year?

Carter, we are not ready to breakdown the revenues again for Nuera.

But actually again, the Nuera operation is part of AudioCodes, it is part of Networking, and we have one sales force that sells all products, therefore it's very hard to really monitor or give any breakdown into it.

And the same goes for Chips.

It's part of our Technology business group.

Okay.

All right.

thanks guys.

Very welcome.

Thank you.

As there are no further questions I would like to turn the call over to your host today, Mr.

Nachum Falek.

Please go ahead, sir.

Thank you, Operator.

I'd like to thank everybody who took part in our conference call today.

We look forward to the next conference call.

Thanks and goodbye.

Thank you.

This will conclude today's conference.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.