AudioCodes Ltd (AUDC) 2009 Q4 法說會逐字稿

Greetings and welcome to the AudioCodes Q4 2009 earnings conference call.

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

A question-and-answer session will follow the formal presentation.

(Operator Instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Erik Knettel, Investor Relations for AudioCodes.

Thank you, you may begin.

Thank you, Diego.

I would like to welcome everyone to the AudioCodes fourth quarter and full year 2009 earnings conference call.

Let me begin the call today with a brief Safe Harbor statement concerning AudioCodes business outlook, 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, uncertainties and factors include, but are not limited to, the effect of current global economic conditions and conditions in AudioCodes' industry and target markets; the bankruptcy of AudioCodes' largest customer; our ability to raise additional financing; shifts in supply and demand; market acceptance of new products and continuing product demand; the impact of competitive mix 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 Mr.

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, Eric.

Good morning and good afternoon, everybody.

I would like to welcome all to our fourth quarter 2009 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 [fourth] quarter and for our overall 2009; also provide some outlook into 2010.

We will then turn 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 $500,000; amortization expenses relating to the acquisitions of Nuera, Metric and CPE, which totaled $400,000; and non-cash interest expenses relating to [FSB280 B14] of $300,000.

A 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 today.

Getting to our quarterly results, in the fourth quarter, revenues were $34.1 million, which represent a 6% increase from the last quarter.

As a percentage of [our] revenues, sales in America accounted for 54%; Europe, 21%; Asia-Pacific, 16%; and Israel, 9%.

We had one customer (technical difficulty) [above 10%].

Our top 15 customers accounted for 51% of our revenues compared to 50% in the previous quarter.

In terms of revenue by business groups, in the fourth quarter, our technology business group accounted for 27% of revenues and our networking business group accounted for 73% of revenues.

In the fourth quarter of 2009, pro forma gross margin was 56.3%.

On a GAAP basis, gross margin was 55%.

Our total pro forma operating expenses were $16.6 million compared to $16.5 million in the third quarter of 2009.

Headcount increased this quarter by six employees, which brings us to a total of 578 employees.

Pro forma net income for the fourth quarter was $2.5 million or $0.06 per share.

Short-term and long-term cash balances were $53 million compared to [$116 million] last quarter.

The decrease in cash balances is attributed mainly to the replay of our conference, which were offset by a positive cash flow from operating activities of $11 million.

DSO came in at 49 days compared to 63 days last quarter.

Our guidance for 2010 is as follows -- on an annual basis, we forecast revenues for 2010 to be in the range of $138 million to $143 million, and non-GAAP earnings per share of $0.18 to $0.22.

We also estimate our GAAP earnings per share to be in the range of $0.10 to $0.14.

As for the first quarter of 2010, we are entering the quarter with 50% backlog of the plant in terms of revenues.

I will now transfer the call to Shabtai.

Thank you, Nachum.

Fourth quarter 2009 has been a great quarter, a nice ending to a globally rough 2009 and generating good momentum entering 2010.

This was the third quarter in a row of growing revenues, earnings and stronger positions in the market.

[In] third quarter of growth, it is clear evidence now that our markets have mostly recovered from the credit crisis and we're back to growth modes in 2010 and beyond.

As we continue our investments in 2009, in spite of the credit crisis, and almost did not cut back majorly on any of our key activities in R&D, marketing and sales, we do expect initially at this time that revenue growth for 2010 will be about 10%, and we also believe that we will more than triple our earnings in 2010.

Based on initial activities and feedback from the market in January, there's a reason to believe that we will provide updates to those guidelines as 2010 develops.

On the bigger picture, we do see a very comfortable market environment in 2010 -- strong telco markets; [most of that] is now mainstream.

Broadband access and market growing substantially and related voice-over-broadband; new opportunities rising in mobile voice with the huge mega growth of mobile data and video use.

That means more VoIP calls, more need for various solutions such as [clients who have plans] for our mobile VoIP into the [nation India] (inaudible) and residential equipment.

Enterprise spending is back, and I believe that there's a reason to believe that enterprise spending in the area of telephony will have to catch up with the rest of the growing application (inaudible), meaning more need for more advanced equipment than before in history.

Also we see growing partnerships and more also seeing the [gratuities] with some of the [world] larger within radios.

I will mention later on investments made in 2008 and 2009 moved from a pure play voiceover IP to a much more comprehensive play, where we converged voice, data needs and also enabled applications.

We believe that will allow us to address potentially larger markets.

We believe those will be about five to 10 times bigger than the market that we have addressed before.

We definitely believe that with the patent of new products (inaudible) and the larger market size of [us], we should do better.

And as I've mentioned in our previous calls, we believe that as an organization, we've got the build, we're a more streamlined organization, and we have much better expense structure.

Now for some key financial indicators.

Our revenue in the core grew 6% quarter-over-quarter.

Our net income grew this quarter 60% over third quarter of 2009 and we've been able to maintain and sustain gross margins at about [56%].

OpEx grew only 1.2% from previous quarter, and so the results we have seen operating margins growing to 7.5% from 5% in previous quarter, which is a big jump and we're getting closer to our long-term financial model, where we seek 10% operating margins.

On an annual basis, we've done a great job by reducing OpEx roughly $19 million versus 2008, which is about 22% decrease.

Very important, we have a very, very strong positive cash flow this quarter.

I'm not sure we will repeat that in the future.

We have generated $11.8 million from operations.

Overall cash position these days is about $50 million and most notably, we have generated more than [$20 million] in 2009, which is almost doubling the position we had entering 2009.

On the income side, good news.

We are back to higher earnings.

We increased [Nempar] already in Q4.

We have more positions for Q1 hiring.

We believe that throughout 2010, we should grow by at least 5% to 6% on the account.

Backlog, as Nachum mentioned, this is the second quarter in a row where we started the quarter with more than a 50% backlog.

Now to the key challenges we see for 2010.

One of the most important one is to be able to execute on our new product introductions.

Let me a name a few such new products that will come into the market in 2010.

As you know, we believe that, as I've mentioned before, transitioning from [analogs] to VoIP flat data, flat [detection] enablement will substantially grow our addressable market.

Let's take one by one.

Let's take the enterprise market.

So just a gateway business itself, we stand alone on gateways.

We have roughly addressed the market that was about $200 million to $250 million.

Now with the MSBG, which is a converged multi-servers business gateway, that by itself is substantially larger market, $1.5 billion -- meaning that we would more than triple our addressable market jobs on the gateway on converged solutions.

Entering the phones, IP phones market, that's about $2 billion a year market.

Even if only 20% of that market are available, the rest, 80%, belongs to the big five.

We still have a new market [$400 million added up] just for the IP phones.

The same for core server markets where we can enrich our solution and offerings by embedding IPPBX solutions from other vendors and from [other] sources to that.

So all in all, we have essentially larger offering.

That by itself is key, simply because our go-to-market usually is being helped by Pine Gap and partnering with various other resellers.

When we have got a substantially larger portfolio of products, which address those markets, we are now capable of partnering with essentially stronger and larger partners.

And we have seen that already happening in Q4, where some of the largest (inaudible), which we had no access to previously, are now open to our solutions.

So just mentioning a few of the products.

We've got the IP phone already sending in Q4.

We [now have] the MSBG Plus, which provides enablement for applications on top of a converged product and a few more.

[Paying] the residential market until late 2009, we were the only one type of solution in ATA, which basically was a very small part of the market, roughly 10% to 15%.

We're entering with a new product in IAT.

It's a [credit access] device that on the face of [DR], it's being evaluated these days by fellow service providers or [the demo to them] we will have [better] customers already in Q1.

That's a Q1 market, [few] billion, that's a complete reverse of the picture we had in the residential business.

We will be coming out with a product on the logging side of the business a few more upgrades.

All in all, a very exciting proposition entering 2010.

All in all, I believe that we -- being able to execute on our plans to transition from the gateway focus on the to what we call intelligent hardware, that is unified communication and collaboration, will give us a lot of new opportunities.

Roughly, if I look in terms of revenues in 2010, we believe that the new products will contribute close to 10% of our revenues already this year.

And in 2011, that should ramp up to 15% to 20% of our revenues.

Now, the focus we have is on building and we are substantially changing our go-to-market strategy.

Initially, we had a salesforce that was attacking or approaching both service providers and enterprise through the same channels.

With the maturing of new offerings for the enterprise market, we decided to basically separate between the two go-to-market strategies.

We're going to invest substantially, as I've mentioned before, on the enterprise side.

We're going to build an enterprise sales force.

We have one already established in North America.

We already see fruits from that key investment already in 2009.

And we look to repeat that type of build-up and performance in other important countries.

And we are already in an effort to identify more partners in selected countries all over the world in order to increase our sales force.

To touch on some of the details of Q4, in terms of sales -- roughly almost all of our regions are North America, EMEA, and Asia-Pacific, performed well.

The only region that did not perform well was Latin America.

In North America, if I split into three major segments, service provider segment improved significantly over third quarter.

We saw repeated orders; multiple products into accounts; brands is growing in North America.

All in all, we believe that we would grow nicely in North America on the service provider segment.

The same on the enterprise side.

As I've mentioned, we have built a new sales force there, improved our numbers and we seek further growth and penetration in 2010.

The third segment, which is the OEM segment, has been flat.

We do believe that indeed going forward, we would see those providers (inaudible) sales growing in OEM remaining more flattish.

In EMEA, we saw nice growth -- more than 10%.

Asia-Pacific also very strong on service provider side, mainly in Southeast Asia.

In Latin America, we are not satisfied with the performance.

A few key projects got delayed.

And we believe that some of the countries, key countries there have slowed down a bit.

So we would definitely invest in (inaudible) -- between that situation.

All in all, on the sales side in 2010, we intend to expand in key countries.

We will focus on a few big countries in this region.

We believe we would see a North American growth of more than 20% year-over-year.

Asia-Pacific would be another region where we would seek more than 30% gross [in petra].

As I mentioned before, the focus is on executing a world plan go-to-market strategy and being able to sign up with larger value-added resellers, Tier 1 resellers.

Now on some parts from the business plans.

All in all, in the quarter, we have mentioned before, networking grew 7.5%.

Technology grew only mildly, about 3%.

On the chip business, we do see a very nice pickup already in orders in 2010, mostly related to growth in China.

On the CPE side, we saw Q4 very successful.

We have increased sales.

We sell for resellers and already basically growing in those areas.

In terms of our product focus, I believe I've mentioned most of -- I think I mentioned before so I'll move on.

On the carrier side of the business, the carrier business was rather flattish in Q4.

No big change in revenues.

We have done -- we have had progress on some military projects.

We have new opportunity with a large cable company.

We also see a lot of investment being done these days on providing solutions for networking between IP networks -- IP to IT, developing IT to IP stability.

We focus substantially on transcoding and on (inaudible) [quotes] for larger enterprises.

I should also mention high definition VoIP.

We believe that we introduced that concept early 2009.

[We saw] some industry activity, mainly in terms of summits and meetings between our vendors and a few end users.

We believe HD voice will pick up substantially in 2010 as we know that some of the larger player in the model world announced already plans to deploy it.

We know Orange is going to deploy HD in the UK and in a few more countries.

We know private service providers on that.

We see definitely increased activity in -- believe that good quality and recurring revenues and product replacements (inaudible) will [definitely] results of using more HD.

So a summary of my presentation.

2010 should be a good year.

We do plan to grow revenues at this time by 10% to 15%.

OpEx will grow substantially lower, less than 5%.

We intend to achieve operating income of 10% by mid-year.

I believe we will keep maintaining a strong cash flow and good cash position, and we look forward to a good 2010.

And with that, I've basically completed my part of the presentation and we'll take questions now.

(Operator Instructions).

Vivek Arya, Bank of America Corporation.

This is actually [Kira] on Vivek's behalf.

Can you please speak about the importance of Avaya to your business?

Avaya is a partner of AudioCodes in the enterprise space.

We do have OEM relationship with Avaya.

It is still not a major part of our partnerships and we view Avaya as just one of a few such partners and working companies in the field.

Ted Jackson, Cantor Fitzgerald.

Okay.

I didn't think you guys were getting my requests for question.

I wasn't getting a confirmation tone.

Shabtai and Nachum, congratulations on the quarter and on the guidance.

I have a couple of questions for you.

One is, is I was curious if you could provide a breakdown in your business between enterprise and service provider?

So roughly, Ted, I would say it's still 60/40.

But that's rough numbers, I don't -- I mean, we usually do not provide the exact number and let's say between the two, but it's 60/40.

And that would be enterprise to service provider?

Yes.

And then on the new products that the -- what is it, the MG (technical difficulty) (inaudible) -- when will that product be GA'd?

Okay, so (inaudible) basically is we bring -- the product has already been introduced to the US market.

And we already got close to five different customers evaluating and already in the process of maybe acquiring that product.

A similar such product with a different interface (inaudible) interface will be introduced into national markets in a few months.

So all in all, we believe that sales will start first in the year this quarter and then continuing [RW] in second quarter.

So, in the first quarter is when you expect to see an initial revenue contribution from the products?

Yes.

And then regarding the first quarter, I know you provided an annual guidance, could you give a little color in terms of how you see the first quarter starting out?

I mean, typically, it's been a seasonably down period.

And would you expect that to be the same in terms of sales and then a ramp as we move through the year?

Right.

So, in our plans, usually Q1 in the telecom space is the weakest quarter in the year.

We therefore, as I've mentioned initially, at the beginning of my presentation, we do not place a large growth figure for Q1.

So our plan at this time are roughly to do similarly to what we did in Q4.

According to backlog on hand, that is achievable and we can end up even better than that.

So, we do not expect a decline and if there will be a decline, it should be very minor.

And then my last question is just relative to operating expenses.

As the environment became tough, you all did an excellent job in terms of controlling the expense structure of AudioCodes.

And I'm curious as we move through recovery phase, do you feel that -- I mean, or is there a need, if you would, to bring up some compensation and maybe play a little catch-up, more bonuses -- would we perchance see a larger ramp in some of your compensation practices than we have in the past, as we look out into 2010 and beyond?

So, Ted, obviously, I mean, we are committed to the top line and to the bottom line.

But it's true that taking into account the top line will grow 13% to 15% or so, we will probably increase OpEx as well.

I would say 5% or 6% on an annual basis.

But then again, without getting into the details of quarters by quarter or exact OpEx, that's roughly the range.

And again, as I said, obviously, we are committed to the top line and to stay profitable and generating cash.

That's it for me.

Thanks very much.

(Operator Instructions).

Jonathan Kreizman, Oscar Gruss.

Thank you for taking my question.

This is actually [Dsnas] speaking for Jonathon.

I would like to ask about the opportunities that you mentioned in your last call.

You talked about the (inaudible), the HD phones and unified communications with Microsoft.

You talked a little before about the HD phones.

I was wondering if you can elaborate about the unified communication with Microsoft and a little bit more about the MSBG opportunity?

Right.

So we are definitely active in partnering and working with Microsoft in its deployment of its unified communications solutions.

We definitely see growth year by year.

We do not [have], however, the exact forecast in front of me, but I do know that we expect to grow nicely.

We are one of the few partners with Microsoft, and the feedback we're getting from the field and from the channels is that we are, in many cases, the preferred vendor in a Microsoft solution -- deployed solution.

With the phones, we've been working hard to add features that will make them deployed over -- outside in an IP-centrics type of solution deployed by service providers.

Most of that work has been accomplished towards the end of 2009.

So again, we think 2010 will be the first year of substantial sales we believe of IP phones; already had a few sales.

We have an OEM basically already buying thousands of those phones and we have more opportunities opening up for us currently.

Okay.

That's answered my second question as well, so thank you and good luck.

Robert Katz, Senvest.

Hi, Shabtai and Nachum.

Very nice quarter and nice guidance.

I have a question about your long-term operating model.

You mentioned that 10% was your model and you were going to achieve that mid-way through the year.

What is your longer-term model in terms of percent operating margin?

Do you know if you look back, we've been in 15% and 16%.

As you said, we target to get to 10% and hopefully do it in the near-term.

I believe that longer term, we will be able to get to 12% and maybe a little bit better than that.

Okay, thank you very much.

Good luck.

Thank you.

Ladies and gentlemen, there are no further questions at this time.

I will now turn the conference back over to Shabtai Adlersberg for closing comments.

Thank you.

Thank you, sir.

Thank you.

Well, as I've said, we look forward for a very successful, very busy 2010.

We look forward to expand our business in many new areas.

I would like to thank everybody that attended our conference call today, and we look forward to have you on our next conference call.

Thank you very much.

Bye bye.

Thank you.

Ladies and gentlemen, this concludes today's teleconference.

You may disconnect your lines at this time.

Thank you all for your participation.