AudioCodes Ltd (AUDC) 2008 Q4 法說會逐字稿

Greetings, and welcome to the AudioCodes' fourth quarter 2008 earnings conference call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow a formal presentation.

(Operator Instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr.

Erik Knettel.

Please go ahead.

Thank you, Diego.

I would like to welcome everyone to AudioCodes fourth quarter and full year 2008 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 US 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 and 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 a reconciliation 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 Mr.

Shabtai Adlersberg, Chairman, President and Chief Executive Officer and, Nachum Falek, Vice President, Finance and Chief Financial Officer.

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

Mr.

Adlersberg, please go ahead.

Thank you, Erik.

Good morning and good afternoon, everybody.

I would like to welcome all to our fourth quarter 2008 conference call.

With me this morning is Nachum Falek, Vice President of Finance and Chief Financial Officer.

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

I will then review the business highlights for the quarter.

And we will then turn it into the Q&A session.

Nachum?

Thank you, Shabtai and, good morning, everyone.

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 fourth quarter pro forma results reflect adjustment for the following three non-cash items; stock-based compensation expenses which totaled $550,000 in the fourth quarter of 2008, and amortization expenses relating to the acquisition of Nuera, Netrake and CTI which totaled $800,000 in the reported quarter.

As we reported yesterday in our financial report, we took a one-time impairment charge of $86m related to the impairment of goodwill, intangible assets and investment in affiliate companies.

The charge, which is subject to change based on completion of valuation procedures, was part of the Company annual impairment test, and reflects market conditions.

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 fourth quarter revenues were $38.7m, which represent 17% decrease from the last quarter.

Revenues for the fourth quarter of 2008 do not include $1.7m of revenues which were recorded as unpaid deferred revenues in connection with Nortel Group announcement of seeking creditor protection in January 2009.

As a percentage of our revenues, sales in America accounted for 55%, Europe 18%, Asia Pacific 15%, and Israel 11%.

We had one customer above 10%.

Our top 15 customers accounted for 49% of our revenues, compared to 54% in the previous quarter.

In terms of revenues by business group, in the fourth quarter our Technology business group accounted for 37% of revenues and our Networking Business group accounted for 63% of revenues.

In the fourth quarter of 2008, pro forma gross margin was 55.5% compared to last quarter's pro forma gross margin of 57.2%.

On a GAAP basis, gross margin was 54%.

Our total pro forma operating expenses were $20.3m, which is 5% less than the third quarter OpEx level.

Headcount decreased this quarter by 16 employees, which brings us to a total of 595 employees.

Pro forma net income for the fourth quarter was $800,000, or $0.02 per share.

Short-term and long-term cash balances were $115m compared to $159m last quarter.

The decrease in cash balances is attributed mainly to the buyback of our convertible note in the amount of $50m, which was offset by a positive cash flow from operation in the amount of $9m in the fourth quarter.

DSO came in at 69 days, similar to the last quarter.

Our guidance for the first quarter is as follows.

Based on our visibility at this time, we forecast revenues for the first quarter to be in the range of $30m to $35m.

We estimate our non-GAAP earnings to be breakeven, assuming the midpoint of the revenues range.

I will now transfer the call to Shabtai.

Thank you, Nachum.

Our fourth quarter 2008 was a down quarter for AudioCodes.

Similar to other companies in our industry, due to worsening economic conditions and a global economic crisis developing worldwide, we have incurred lower revenues and earnings compared to the previous quarter.

Our revenues in the fourth quarter declined by 16.7% compared to the third quarter of 2008, of which $1.7m, or 3.6%, is attributed to unpaid revenues related to the Nortel seeking court protection announced in January 15, 2009.

Despite the decline in the fourth quarter of 2008, 2008 has been a very good year for AudioCodes.

On the revenue side, we grew 10.4% over 2007.

On the earnings side, non-GAAP net income increased 47.5% above 2007.

All in all, we have strengthened our position in the marketplace and became one of the leaders and more established players in that market.

Our focus continues to be on the Networking Businesss, which we continued to grow in 2008 by above 15% over 2007.

And this is the sixth year in a row for us to grow in that specific market segment.

Competitively, we believe we continue to emerge as the long-term Voice over IP industry leader, with a very strong product and technology edge in the mid and low-density marketing segments.

We also believe that the trends of larger player exiting the market, going into more software and application opportunities, and with the companies not being able to sustain those hard times economically will make us even a better success in the future.

Operationally, we kept improving on the cost reduction front.

Operating expenses in the fourth quarter of 2008 decreased by 6% compared to the third quarter of 2008 and reached a level of $20.3m.

In addition, on January 15 we announced a plan for wage reduction across the Company.

And we took more cost-reduction steps, all in all targeting to further reduce our operational cost.

And therefore, as a result, we estimate that our quarterly operating expenses cost will be decreased by another 8% to 10% starting from the first quarter of 2009.

On the headcount we went down by 16 employees, which represents a decrease of 2.6%.

At the same time, we continue to evaluate the various business activities and the business plans at AudioCodes.

We try to focus our efforts and expenses on activities where we forecast long-term growth that would be helping us beyond the current crisis.

All in all, if we try to assess our position in the market, based on market reports, we are one of the top players in the market.

Based on a market report issued by Synergy Research, in the low-density and mid-density market we are ranked number two.

First place is Cisco with 21.5%, AudioCodes is 15.6%, Huawei is 13.7% and Nokia Siemens is 13%.

So, all in all, second place, very solid position.

We do believe that in those low and mid-density segment -- market segments we will become even more focused.

And in anticipation of some of the larger player reducing some of their investment in that market space, we believe we will gain market share.

All in all, while sales level has not reached the expected performance we look for in fourth quarter of 2008, we witnessed a quite intense activity with partners and customers, both in the enterprise and the carrier space.

In the enterprise space we enjoyed continued momentum as strength in our CPE business with business partners, most notably working on projects deploying the Microsoft solution, working with Avaya as a partner and a few more leading OEMs.

At the same time we invested substantially in increasing our partnerships with global system integrators and expanding our distribution channels.

We intend, in 2009, to continue to build our VAR community so that will sales -- increase sales to the SMB/SME market.

We're trying to target organization with between 10 and 20 to 500 users.

And most notably are the names that we have defined before.

On top of the products that we are usually selling to the market we are introducing, early in 2009, IP phones.

We are adding third-party PBX applications.

We are adding value-added services applications.

And we are approaching slowly a position where we could provide a complete SMB full solution.

We're working with partners in the VAR space and enterprise space and keeping advancing the equipment we believe, again, we will become a strong and willing player in that market.

In 2008 we announced two initiatives.

The first one is the MSBG, the Multi-Service Business Gateway.

Here, we look to basically penetrate a complete new market for us to converge Voice and Data market.

We are already with beta products in the field, getting a very good response to the performance of our products.

We do believe that through the next few months in 2009 we will start shipping those MSBG products.

We also announced the High-Def VoIP initiative.

I'll get to that in a moment.

All in all, as I have mentioned, while we have reduced costs and we have lower wages, we basically have not changed at all or reduced our R&D force.

That allows us to keep the investment going on.

We believe that when the market will emerge out of that crisis, just like it did seven years ago, AudioCodes will become a winner.

The way it was a winner emerging from the 2001/2003 crisis, we will do the same exiting from this crisis.

So we're working on coming out with new products, targeting the Microsoft environment, targeting combined Voice and Data applications, leading the transcoding market which is very active, trying to connect between IP-to-IP networks.

We are a leader in that market due to our expertise and leadership in voice codecs.

And, all in all, I think with keeping the same amount of investment while other parties and competitors reduce investments, we do believe that we will be able to respond to most of the new customer requests, features and applications and, therefore, emerge winners.

In 2009 we do intend to come up with new products.

Already in this quarter we'll sell to the market our new High-Def IP phones.

We will come out shortly with a few more product deals that target also the residential environment.

On the carrier side of the business 2008 has been flat with 2007 but, while we went down in media server and some old cable media gateways, we went up substantially on our key product line, which is the Mediant media gateway family.

On that front we grew about 27%.

We feel very strong in the market.

We are carving out new partnerships.

We do feel that, again, with the continued investment in new features, new incentives, inter-ops, servicing customers, fixing customers' problems, we are an organization that's very established, very capable financially and, therefore, have an edge over weaker competition.

Also, we gained a lot of success in the [medium] density media gateway market where the product, this was just introduced to the market in 2007, basically tripled in revenues in 2008.

We are strengthening our play in the service provider market by partnering with leading softswitch vendors.

In the second half of 2008 we came to very close partnership with a very strong class IV leading softswitch provider.

We are already supplying products to one leading carrier in EMEA.

And we have plans together with that partner to go to other places.

All in all, we do also intend to expand our efforts into the North American MSO market.

While in the past we sold products to the residential side, we do intend to go into the business communications side and sell products there.

Already we see some success there.

All in all, we are going to invest more in trying to penetrate large enterprises and expand our federal and/or government play.

In terms of our product focus, while in the past we've been engaged primarily with [PSD] and media gateways, we now see new opportunities for us for IP to IP for transcoding applications, High-Def Voice applications, Microsoft environment applications, going from maintaining the current network and introducing new IP equipment through a technology called reverse V5.2, so a lot of activity on customer interaction these days.

On the sales front, surprisingly enough, Americas was growing for us in the fourth quarter of 2008.

Put aside Nortel, where we wrote down $1.7m, sales in The Americas actually increased in the fourth quarter of 2008.

The two other regions were weaker in the fourth quarter.

One is APAC.

The second one is EMEA.

So, all in all, we came to a level of sales of about $40m.

Again, we wrote down $1.7m due to Nortel announcement.

In Latin America we have very good activity with service provider in this space.

And we see a few more opportunities coming up.

On the outlook for the first quarter of 2009, the carrier segment seems healthy.

The carrier segment continues to generate cash.

And in the last few days we received some nice new orders.

We are basically -- we feel that Voice over IP is a technology that allows customers to reduce operating expenses.

And, as such, there is ongoing (inaudible) in the market and we do not see that we will see a further decrease beyond this quarter.

On the OEM side we do believe that we will see some lower visibility with some of our customers, all of them suffering on various stages, various levels from the current crisis in the market.

And we believe that our OEM business will decline going forward.

On the enterprise side we hold -- seem to hold back, generally.

And, again, we believe that by providing OpEx reduction solution we should be able to fare well in the market.

In terms of regional analysis, in North America we believe that we start to see some good funnel on the service provider side in North America.

We're not referring to Tier 1 but to lower tiers of carriers.

At the same time, we are rebuilding our enterprise sales team and we hope to see good progress in there.

In EMEA we see strong pipeline, mainly in Eastern Europe or more Russia.

We have partnerships with a few service providers.

We will have some replacement opportunities with equipment at some of the large players into enterprise and not continue to support.

And we believe that that will open for us a few more opportunities with new service providers that we have not seen before.

We just won lately a very important design win with a service provider in Western Europe.

APAC was on the downside in the quarter.

But, at the same time, we believe that we will -- since APAC going forward will become a larger and more vital region going forward, we are investing in penetrating these countries and territories in coming years.

And we will start operations in Australia, the Philippines and a few more countries at this time.

In Latin America, again, we seem to have good activity, mainly with service providers.

To touch on Nortel, Nortel were an above 10% customer in 2008.

As we all know, in January 2009 they have announced seeking credit protection.

We have been in touch with them on a routine basis since then, just to make sure that business continuity is being achieved and preserved.

Since then we have seen purchasing activity being resumed.

And right now business is as usual.

We do believe that we will see -- our working assumption is that we will see some decline in revenues 2009.

Still early to estimate the level of that decline, but we definitely see going on -- business going on with Nortel as before.

Let's not forget that Nortel is still a -- is a leading Voice over IP carrier solution provider.

And we believe that partnership with them at this time is still substantial and helpful.

And since solutions are pretty complex and designing a product into a solution provider is pretty difficult, then we believe it's our position with their solution is pretty much secure.

Last, I will touch my -- our initiative on the High-Def VoIP initiative.

We've seen some very good feedback and response from market players.

We got that type of feedback from many different players in the market, service providers, softswitch providers, semiconductor players, clients, mobile and PC client solution providers.

So, all in all, we've seen good feedback to our initiative.

At the same time also good feedback to our High-Def IP phones initiative.

And we expect to introduce this quarter phones and High-Def transcoding equipment.

Just to remind everybody, High-Def Voice brings significantly better user experience and voice quality.

And we believe that that will provide us a leading edge over our competition as the market develops.

And, with that, I've completed my review of the business strengths in our market.

And we'll get to the Q&A session.

Thank you.

We will now be conducting the question-and-answer session.

(Operator Instructions).

Our first question comes from Vivek Arya with Merrill Lynch.

Please state your question.

Thank you.

Hello, Shabtai.

Hello, Nachum.

A couple of questions.

Shabtai, how would you characterize the nature of orders as the year has started?

Is it more upgrades of previous projects or do you see new projects or deals being assigned for Voice over IP compared to, say, the last quarter or the year ago?

Well, on the service provider side -- actually, it's new projects everywhere.

On the service provider side, usually because we became entrenched in that market segment and because our brand is known, more and more we are being asked to bid on new projects.

Mainly in the last quarter we've seen those mainly in Latin America.

And we've seen some activity also in EMEA.

On the enterprise space, we definitely see new projects since the whole Microsoft initiative is new to the market.

So those are our new deployments.

With Avaya the relationship is quite late so, again, new projects.

All in all, I think we see a lot of new business.

If you talk about transcoding, we've seen quite a few number of RFPs issued out.

People need to connect different IP network and the stable transcoding comes into play.

So it's new design wins mostly.

And, secondly, Shabtai, your partnership with Nortel.

I'm trying to gauge whether Nortel's going into bankruptcy.

Is that a net negative or a net positive for you in 2009?

And what I mean by that is, on the one hand, they are your largest customers.

Obviously, disruption there is a bad thing.

But at the same time it probably gives you opportunities to go and sign new partnerships or maybe go directly to customers.

So, firstly, can you give us some color on what the impact could be from the Nortel relationship in 2009?

Okay.

So I'll try to divide my answer into few parts.

A, my estimate is that we will see decline in Nortel business.

We are just looking to other cases in history when a company went bankrupt, you do see that a long time you see some of the business activity being reduced.

Is it going to reduce by 20% or 30% or any other number?

It's very difficult to estimate at this stage.

Secondly, is that I really do not expect substantial damage, simply because Nortel is a very good partner for us for many years.

But for the last [24] months or so we've not seen much new design win activity with Nortel.

So on that front we really do not see that we are going to start losing business that we enjoyed in the last two years.

What happens is that our products are being designed into current Nortel projects or products and those are being purchased by service providers worldwide.

Now each time Nortel wins a deployment and/or a network is being expanded our products simply need to be used.

It's not really up to a decision of anybody whether they will purchase the product because they simply need it.

So on that front I think you can pretty much relate the reduction in our business with Nortel to the overall Nortel business reduction in the VoIP carrier space.

Still they're a strong player and, therefore, I'm not sure that the damage will be that much.

Lastly, I do agree with your comment that in this -- and this is part of what I indicated in the beginning, that the exit of some of the large players from the markets really opens opportunities for us.

And since we are known to be very focused, very committed, successful, working on the leading edge, good partner, supporting customers, I think that, all in all, while other companies resort more and more into softswitch solutions and/or complete networking progression solutions, we can become a very successful product supplier.

And therefore, with our brand -- that is, I've mentioned the class 4, winning class 4 softswitch partner that is teaming with us for the last six months.

That is exactly the trend and the phenomenon I'm talking about.

It's the recognition of AudioCodes being capable of fulfilling voids and spaces where other players have exited the market.

Got it.

And just one or two quick ones for Nachum.

Nachum, the gross margins have been under pressure for the last few quarters.

Is that volume related?

Is that mix related?

And how should we think about gross margins in 2009?

Do you think they will be above 55% or there's a chance they could go below that level?

Yes.

Obviously, Vivek, you are right, it's a little bit -- it's going down quarter by -- a little bit recently.

But you have to take into account that, if you look at the numbers in this quarter and you add what we took off for Nortel, we took it only from the revenue line and we didn't change anything on the cost of goods sold.

So, basically, without the adjustment we did for Nortel, this quarter the gross margin was at 57% rather than 55.9%.

So, again, taking the 57% for this quarter, compare it to 57.2% in the last quarter, all in all, we are in the range of 56% to 57% probably in the next couple of quarters.

But, as you said, it's all about the mix.

And just one last one.

Nachum, what was the interest income and the interest expense in the December quarter?

And how should we model it for 2009?

Thanks.

It should be around zero.

Both of them should cancel on each other.

So interest income net should be zero.

Okay.

Thanks a lot and good luck.

Thank you.

Thank you.

Our next question comes from Ted Jackson with Cantor Fitzgerald.

Please state your question.

Hi, Shabtai.

Hi, Nachum.

Hi.

Hi.

You made a comment in your presentation, Shabtai, about -- you didn't say SBCs but you basically said pure packet transferring.

And in the past I've gotten the sense that you all walked away from the standalone SBC market and were really looking at it more as an integrated product within the Mediant 1000.

Has there been a shift there and are you seeing more traction in standalone SBCs?

Okay.

So I think I made that comment in the past.

In our strategy we try to focus more on Integrated Media Gateway and SBC applications and try to avoid because we are less competitive on the standalone SBC market.

And this is what we decided a few months ago and we keep working as such.

So our focus really is on integrating SBC functionalities into our media gateways and, therefore, coming out with more cost-effective solutions.

And then, could you give us somewhat of an update on CTI Squared and what's going on with that particular business unit of yours and where you're going with it?

Okay.

So we basically took a shift with the focus of that group.

We have lately basically asked them to integrate their solution on top of our Mediant gateways.

In our leading Enterprise Media Gateway solution, the Mediant 1000 and the MSBG Mediant 1000, we have a Pentium module that would allow the integration of third-party applications.

Now we are -- based on customer requests we are integrating different PBX solutions, such as Asterisk and others.

And, at the same time, we are also adding the value-added service application of CTI Squared.

So we are going to come up very quickly with a solution that, on top of the Voice and Data applications, provides some application on top of this.

We have reduced the size of the group to feed that type of activity.

And, based on the success of that activity in 2009, we'll decide how we go forward.

We do not continue to invest in the original area where CTI Squared was focused, which is selling, again, standalone value-added services solutions to the service providers.

And do you have any concern on that front, that you might be running into competition with your customer base and that this could mess up some of your [panel] strategy?

And then I'll step out of line.

Well, not really, because our partners in the enterprise market really comprise of larger companies who sell to the large enterprises.

The solution we are talking about basically are more accustomed towards third-parties' requests.

That is not [based] as a product.

We simply -- whenever needed, we do add those applications.

And those application really target more the lower end of the market in terms of very small number of users.

So, in essence, we do not see any competitive trend developing here.

All right, thanks very much.

Our next question comes from Joe Park with Oppenheimer.

Please state your question.

Hi, thanks for taking my call.

I had a couple of questions here.

First, on your OpEx plans, you've taken some pretty significant cost-cutting measures.

I just wanted to see, in addition to the wage reductions that you announced last month, what else do you have in the pipeline there?

And also, regarding FX, what type of impact does that have on OpEx?

And I'll have a follow-up after that.

Hi, Joe.

So, basically, as you saw in the last quarter OpEx went down 5% quarter versus quarter.

Taking into account the full impact of the wages reduction that we did and employee went down by 16 in the last quarter.

So, basically, I believe that the OpEx will be down in the next quarter, probably below 20 for the quarter and that should be the run rate for the year.

Exchange rate, shekel versus dollar, also have influence on our OpEx, so it's very hard to focus it right now.

But I believe that the run rate for '09 will be lower than the fourth quarter level.

Okay, great that's very helpful.

And then, just for modeling purposes, looking at your non-GAAP effective tax rate, what would be a reasonable expectation there?

5% to 10%.

Joe Park.

Okay.

Perfect, thanks.

Sure.

(Operator Instructions).

Our next question comes from Robert Katz with Senvest.

Please state your question.

Hi, Shabtai and Nachum.

I have a question about your cash; you've built it up nicely this quarter.

Can you continue to build that up and can you run your operating working capital more efficiently going forward?

And how do you view that over the upcoming quarters?

Yes, Robert, so we did $9m in the last quarter from operating activities.

If you look at the entire year, we generate $16m for '08.

As revenues are now going down, obviously in terms of working capital it might help us.

On the other hand, you have to remember that sometimes it will be harder to collect.

At the same time not sure about the linearity within the quarters of the revenues.

Obviously, we will do our best effort to continue and generate cash into '09.

It will be -- I think it will be a difficult target to do $9m in the first quarter which, usually, as you know, it's more back-ended, etc.

But to continue and generate money through '09, obviously, that's the target.

Do you think you'd generate money in every quarter in '09?

It's very hard to say.

It's very hard to forecast.

As I said, quarters are not the same; they don't have the same linearity.

Talking about the first quarter, usually it's a little bit more back-ended.

So at this point it's very hard to say.

Do you guys feel that the first quarter will be the trough for the year or do you -- what type of sense do you get from your end markets?

Well, Bob, this is the one million dollar question I'm asking myself for this time.

Pretty much difficult to say anything about that.

We are surprised by the decline that we faced this quarter.

We have basically guided for a range between 30 to 35.

That's a big drop from -- basically, we did $40m in the fourth quarter.

Right.

So I would be -- again, hard to say, but we do seem to see and I'm a little bit encouraged, although that I'm not sure that that will affect Q1 but I am encouraged by the level of activity with service providers, since those that are in good shape continue to -- technology allows them to attract new customers and deploy into new subscribers.

So I'm fully encouraged by the levels of activity I'm seeing from the service providers.

At the same time I'm optimistic simply because we have invested a lot in 2008; a lot of it has not come yet into the market.

We will slowly get them end of this quarter and the second quarter.

I think we should be able to hold the line there.

But again, it's only a feeling, my belief, and I have no data to count on.

That's where we are.

Okay.

Which -- your NBU seems to be having a more severe drop-off in revenues than your TBU.

What are your expectations going forward on those two different product areas?

I'm sorry --?

Your NBU seems to have a more -- your Network Business Unit had a bigger drop-off in revenues than your Technology Business Unit, which held up pretty well.

Looking into Q1 how do you think that fares?

Again, very, very tough to predict.

The decline that is basically a result of the general economic pressure, I believe the decline would be more in the networking.

But that would be also the type of comeback that we will see because this is what we focus, this is where we bring a lot of value, this is where other people invest less.

So it's simply a reflection.

I think that the Networking Business is a reflection of the current crisis.

And so, if the crisis is worsening in the first quarter, that is how Networking will be affected.

But if there's emergence out of it in the second half, we will see Networking coming back.

That's my take.

Right.

And is there margin difference between the TBU and the NBU?

Yes, in general it depends on which product within each business line.

It depends if it's Media Server versus Media Gateway in the Networking or whether it's chip or board on technology.

The average is almost the same, meaning if Networking will grow faster than Technology, not sure that it will have a meaningful impact on gross margin.

Right.

And, in terms of further cutbacks, you're making a -- you've made some more in Q1, just to clarify that.

And you expect OpEx to go down 10% in Q1 and that will be your base level, just below $28m?

It will be down below $20m.

I couldn't hear your question, but I didn't say it will be 10% down.

8%.

Eight -- okay.

Okay.

And how much -- if things don't rebound, how much further are you willing to take your breakeven down?

Bob, we live the day.

And we see the trends.

Right now, based on the current levels that we plan for Q1, we already took steps and are planning more steps.

We'll need to see simply how Q2 and the rest of the year shapes up.

But we have not applied yet any severe -- too severe measures in reducing costs.

I think we also enjoy the fact that the conversion rate between the US dollar and the Israeli shekel is improving.

Right.

We have different dimensions to play with.

And by monitoring and tracking on an online basis, we will be basically guiding and working to achieve breakeven or very close to that [number].

I just want to -- I guess confirmation, and I think I've heard this from you before that the last time we had a major recession I think AudioCodes spent a lot of money on rebuilding the Company.

And this time around are you more committed to breakeven and maybe slowing down the R&D efforts or is there a need to go back into a 2001/2002 type of business model?

No.

Just to help other people on the call which maybe do not have the same information you have, in 2001 to 2003 crisis we capped the level of investments and took losses, large losses.

We took losses on the amount of about $10m a year.

This time we have different plans.

We will not go that path.

We do intend to adapt the business to our level of activity.

And should we be able to hold the line where we are, or we plan for Q1, then we will not have to incur too severe measures.

If the business goes down more, we will adapt.

So there is no plan to go into large losses this year.

Excellent.

Thank you very much, Shabtai, Nachum.

Sure.

Most welcome.

Thanks.

Thank you.

(Operator Instructions).

Our next question comes from Jonathan Kreizman with Oscar Gruss.

Please state your question.

Hi, Nachum and Shabtai.

Hi.

A follow-up question regarding the integrated SBC market.

So, while I think the market breakdown for the standalone SBC is pretty much clear, what is the competition in the in-between markets, the integrated market, which is a bit less obvious to me?

Could you elaborate on how this market is evolving and who the main players are, market share?

Okay.

So, basically, the integrated markets really -- the key players in that market would be those who own both Media Gateway technology and SBC technology.

There are not too many players.

So we are aware of companies such as Veraz and Sonus who have that technology but do not sell it usually on a standalone basis but more in form of a complete network solution.

We know of another private company in the US called [Genven] that has got those technologies.

So we assume Acme Packet would be a player in that market.

We do focus on the integrated solutions but we focus really much more on the enterprise solution rather than the service provider solutions.

So, all in all, we believe that due to our very rich and large capabilities in our enterprise-oriented solutions, competition will not be that strong at all.

Okay.

Now, I know the numbers in this market are quite limited as this market unfolds but do you have any number on what size this market is up to this point?

Not really.

I think the market is pretty small at this stage.

So I'm not aware of any market [group] that provides that type of information.

Okay, thanks, and good luck.

Thank you.

Thank you.

Our next question comes from Robert Katz.

Please state your question.

Mr.

Katz, your line is open please state your question.

Mr.

Katz?

Hello?

Hi.

You mentioned two new products you had come out with this year, the High-Def VoIP phone and the residential, I believe, it was a gateway.

Can you talk a little bit more about both products and your strategies for both products, and maybe some pricing?

Okay.

On the High-Def IP phone, as the name implies, we do intend, a, to add the IP phone and other products to our solutions so that it allows selling a fuller solution.

Many times we are being approached by service providers who need to deploy various types of equipment.

The fact that we're selling to them Media Gateways and the fact that we would be capable of providing also IP phones and residential gateways basically solidify and amplifies our position [as a viable] for large suppliers to that service provider.

So that's one area.

The other area would be SMB type application where selling more of a complete solution would be more competitive to selling standalone products.

Adding the IP phones next to our Media Gateways and some of the applications I've mentioned will allow us, basically, to sell more.

We're already seeing that type of response from some of our distributors.

Of course, we are going to focus on the High-Def functionality in those phones and, therefore, we believe that we will have an edge.

We do intend to have a various number of voice codecs embedded in those IP phones and that would give us an advantage.

We had already a few -- a discussion with a few operators in the last few weeks and the response is definitely favorable.

They are looking forward to test the phones and maybe to deploy them.

That's on that.

On the residential side, again, we are basically expanding the play from mere two-port Voice Media Gateway into a Voice and Data router solution.

We are going to add more functionalities common in that market.

WiFi capability, we're looking to use [wedding] DSL capabilities.

All in all, I think that taking advantage of the brands we have, the customer base and the relationship we have, we believe that by being able to funnel more products into those service providers will increase our sales to them.

What type of revenue do you anticipate getting for residence on the gateway side?

And is this a similar type margin product for you?

And what are the expected release dates for the residential gateway with WiFi and for the SMB VoIP phones?

Okay.

So, actually, with the Voice-only two-port Media Gateway 2008 has been very successful for us.

We went from a level of 2m or 3m in 2008 to about 8m in -- I'm sorry, 2m or 3m in 2007 went up to above 8m in 2008.

We believe that this year we should grow in numbers by adding those new functionalities.

We also expect that with the IP phones we will sell in 2009 already a small number of millions.

Okay.

Thank you.

Sure.

There are no further questions at this time.

I will turn the conference back over to Mr.

Adlersberg for any closing comments.

Thank you, operator.

I would like to thank everybody that took part in our conference call today.

We look forward to see you on our next conference call.

Thank you very much and bye bye.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you all for your participation.