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Operator
Greetings and welcome to the AudioCodes first quarter 2010 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, of Grayling for AudioCodes.
Thank you, you may begin.
Erik Knettel - IR
Thank you, Diego.
I would like to welcome everyone to AudioCodes first quarter 2010 earnings conference call.
Let me begin the call today with a brief Safe Harbor statement.
Statements 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, 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; our ability to raise additional financing; shifts in supply and demand, market acceptance of new products; 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, AudioCodes will refer to non-GAAP net income and net income per share.
AudioCodes has provided a reconciliation of non-GAAP net income and net income per share to its net income and net income per share according to GAAP in its press release and on its website.
Joining us today from AudioCodes we have 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.
Shabtai Adlersberg - Chairman, President, CEO
Thank you, Erik.
Good morning and good afternoon, everybody.
I would like to welcome all to our first quarter 2010 conference call.
With me this morning, last time, 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, and then discuss some of the developments in our business.
We will then turn it into the Q&A session.
Nachum?
Nachum Falek - VP, Finance, CFO
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 first quarter pro forma results reflect adjustments for the following two non-cash items, stock-based compensation expenses, which totaled $400,000 and amortization expenses relating to the acquisition of Nuera, Netrake and CTI, which totaled $400,000 as well.
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 first quarter revenues were $34.8m, which represents 2% increase from the last quarter.
As a percentage of our revenue, sales in America accounted for 47%, Europe 22%, Asia Pacific 19% and Israel 12%.
Our top 15 customers accounted for 44% of revenues compared to 51% in the previous quarter.
In terms of revenue by business group, in the first quarter our Technology business group accounted for 31% of revenues, and our Networking business group accounted for 69% of revenues.
In the first quarter of 2010 pro forma gross margin was 56.2%.
On a GAAP basis gross margin was 55%.
Our total pro forma operating expenses was $17m compared to $16.6m in the fourth quarter of 2009.
Headcount increased this quarter by seven employees, which brings us to a total of 585 employees.
Pro forma net income for the first quarter was $2.5m or $0.06 per share.
Short-term and long-term cash balances were $55m compared to $53m last quarter.
The increase in cash balances is attributable mainly to a positive cash flow from operating activities which was offset by a repayment of a loan bank.
DSO came in at 56 days compared to 49 days last quarter.
As for our guidance we wish to update our annual guidance for 2010.
On an annual basis we forecast revenues for 2010 to be in the range of $140m to $145m, and non-GAAP earnings per share of $0.22 to $0.26.
As for our second quarter of 2010 we are entering the quarter with 50% backlog of the plan in terms of revenue.
I will now transfer the call to Shabtai.
Shabtai Adlersberg - Chairman, President, CEO
Thank you, Nachum.
A good quarter.
Nice continuation to our success in the second half of 2009 and good momentum entering into 2010.
This is the fourth quarter in a row of growing revenues, keeping a good level of profitability while we continue to invest in our future and build a stronger position in the market.
While 2009 has been primarily about recovering from the global crisis, the key theme in 2010 is focus on growth and expansion.
This is reflected in the updated guidance that Nachum just gave.
We now plan for higher revenue and higher earnings.
And we do not exclude the possibility to up -- provide an update later in the year.
Service providers and enterprise VoIP business outlook for 2010 looks good, looks solid at this stage, and provides for continuous growth.
There is much space for growth both in national Voice-over-IP telephony, broadband access.
We believe that those applications will fuel the growth, so we've got many good prospects of growth going forward.
We kept execution, and that is most important we kept execution on our grand plan to make a big transition, transiting from being a pure play Voice-over-IP gateway focus to a company that now will become a mainstream [smart TT] market player, and a company that focuses on converged voice and data network devices.
We believe that those are very cost effective, support the upcoming trends of unified communication and collaboration.
And all in all we believe that we've got some of the most cost effective and high performance devices in the SME and SMB markets.
This strict focus of our strategy allows us to address markets which are now more than 10 times bigger than the market segments that we have addressed before.
And, therefore, we believe that that will support our continued long-term growth story.
And just like in 2009 we continue investing in our organization to become better built, streamlined, more streamlined with regard to expense structure.
And at the same time we do invest a lot in expanding our global reach.
We invest a lot in building a large global network of value-added resellers and distribution channels.
Now to some key financial indicators.
Revenue grew in the quarter 2% quarter-over-quarter and 19% year-over-year.
That is a very good achievement for Q1 which is traditionally weaker than other quarters of the year.
Most of the budget slashing occurs in Q4.
Usually we do expect actually lower revenues in Q1.
The fact that we have been able to grow 2% in the first quarter is a good sign of good momentum, and good market prospects.
Net income was substantially improved year-over-year.
We reversed the trend from a loss of $2.5m a year ago -- sorry from a loss of $1.6m a year ago.
We earned $2.5m.
Gross margin has been very strong, sustained at the level of about 56%.
OpEx grew mildly about 1.8% from previous quarter.
That is primarily attributed to returning some of the reduction made through the wage cut measures we'd done in 2009, and some very small selective hiring.
We had positive cash flow.
We generated close to $2.5m from operations in the quarter.
We believe that trend will continue going forward strengthening our financial position.
Overall, cash grew close to about $55m.
As I have mentioned on the headcount we have done selective hiring, grew by seven people, all in all on growth of [1.0].
And as Nachum mentioned already backlog at beginning of the quarter is fairly strong, around 50%.
Some other specific highlights in the quarter.
On the technology segment we enjoyed a very good quarter, about 17% growth compared to Q4.
That is mainly attributed to growing chip sales for the ONU market in China.
We expect that trend to continue throughout 2010.
Actually we witnessed some chip supply shortage.
Otherwise we would have been -- we could grow higher in that specific segment.
Blade sales were rather flat, so no big change here.
In Networking revenue declined 3.8%.
However, all of it and more than that is related to a major decline in one specific traditional 10% customer which was very low in this quarter.
When we exclude that customer decline, Networking as the whole from all of the other customers grew by more than 5%.
We consider this to be a very good trend for Networking.
At this stage we do not have any more 10% customers.
Now to the key -- to the grand plan and key objectives of 2010.
Again, we are focusing on transiting from a pure play Voice-over-IP gateway to an SME/SMB mainstream smart TT player for unified communication and collaboration.
For us that represents a move from a market niche that basically provides about $400m of opportunity to a market segment that presents more than $5b in size mainly referring to enterprise telephony.
We've built a very broad product portfolio, and now start to offer a solution on top of that.
We do intend to announce shortly in the coming weeks a few more new products that will allow us to strengthen that position.
We are investing substantially in growing our global coverage.
We are now targeting countries with large populations and basically investing a lot by building a strong infrastructure of local value-added resource.
We believe that that will help our -- will come into effect more and more in 2011, and substantially allowing us to grow more than 20% next year.
We already see good signs for that type of activity in our North American enterprise VAR coverage.
We have saw increased rate of signing first rate VARs and we believe that that is a good indication and feedback from the market to the quality and the breadth of our product portfolio.
In terms of sales, North American and EMEA were roughly on plan.
North America close to 100%, EMEA above 110%.
Latin America and Asia Pacific were weaker.
We attribute that to seasonal change in business, and do expect that this region will pick up later in the year.
We place a lot of importance to investing in our partners ecosystems.
We do rely on larger players, mainly stuff which partner in large applications sort of partners.
We do rely on their selling power, on their ability to drive their applications spread on a global basis.
We've been investing, you have seen some announcements in the quarter in the [source] of VoiceCon tradeshow in Orlando this year.
We have announced our collaboration and interactive activity with two large players, Microsoft and Skype.
And we are investing at the same time with other partners.
At this stage we have close to 10 partners with which we are investing.
And each time their global sales force sells a solution, our products are embedded into those solutions.
And for us that's a big driver for growing sales of our products.
So all in all we are investing in products both on one hand in improving our coverage on the ground with VARs, luckily in various countries.
And at the same time we are collaborating with global leaders in software and soft switching to make our sales grow.
And that is basically -- those are the key highlights for the quarter.
And we will now turn the session to the operator for Q&A.
Operator
(Operator Instructions).
Our first question comes from Ittai Kidron with Oppenheimer.
Please state your question.
Ittai Kidron - Analyst
Thanks.
Hi, guys.
Shabtai, can you talk about Nortel now that Avaya and Ericsson own the Nortel assets what sort of the level of interaction you have with those companies?
How do you expect your business there and the level of partnership with those two new companies to kind of shape up over the near future?
Shabtai Adlersberg - Chairman, President, CEO
Right.
So we have not yet an opportunity to get in more direct discussion with the management of these companies, or the companies that have acquired those parts of Nortel business.
I can tell you that on the enterprise space we do see pick up in our sales through that channel and since the investments made continue to bear fruit.
And we -- the decline I've mentioned relate essentially more to the carrier side of the business where we have seen a large decline this quarter.
We still don't know basically to reflect on whether it's a one-time whether it's a trend.
We simply are very early into that.
And at this stage until some of the merger and acquisition procedure are not final I'm not sure we can get good answers to some of our question.
So we'd like to go through another quarter at least before we'll know what's happening on that side of the business.
Ittai Kidron - Analyst
But how much of that is baked into your annual guidance then?
Shabtai Adlersberg - Chairman, President, CEO
As I've mentioned before we do not have that customer at the 10% level anymore.
And it's becoming just another one-off spend [in such] account, has no anymore effect on the growth or the [kind of our] business.
And we do have good momentum with Avaya, so we will -- I don't expect to see any major effects either way this coming quarters.
So we have steady growth at least on the enterprise side.
Ittai Kidron - Analyst
Okay.
And if you can give your geographical split, I'm not sure if you gave it.
I might have missed it.
Nachum Falek - VP, Finance, CFO
Sure, Ittai.
As we mentioned sales in America accounted for 47%, Europe 22%, APAC 19% and Israel 12%.
Ittai Kidron - Analyst
Okay, very good.
And lastly, Shabtai, on the operating expenses side, how do you envision that growth?
What are your hiring plans for the year?
How do you expect that to grow through the year relative to your revenue growth assumptions?
Shabtai Adlersberg - Chairman, President, CEO
Okay, so initially earlier in the year, beginning of 2010, we had these targets of increasing OpEx or headcount by about 5%.
We still are around that plan.
However, if we see that we pick up faster on the revenue side we may increase it.
Right now most of the investment in hiring is going into the sales side of the business, much less for the R&D side.
So, again, all hirings are basically to support more sales.
So it's going to be a variable thing that will basically depend on the growth side of the business.
Ittai Kidron - Analyst
Very good, good luck, guys.
Shabtai Adlersberg - Chairman, President, CEO
Thank you, Ittai.
Nachum Falek - VP, Finance, CFO
Thank you.
Operator
(Operator Instructions).
Our next question comes from Vivek Arya with Bank of America Merrill Lynch.
Please state your question.
Vivek Arya - Analyst
Hi, Shabtai, Nachum.
Shabtai, you've announced several new partnerships in the last few months of Microsoft, Skype, etc.
What milestones are you watching for?
And what should we watch for to measure the progress on these partnerships?
Shabtai Adlersberg - Chairman, President, CEO
Okay.
I'm not -- well, hard for me to go into more details on that side.
All I will say is that with Microsoft the partnership is already a few years span.
And we are beyond the initial phase, actually we starting to see more growth and deployment.
So there will not be any major milestones except that we have witnessed growth, nice growth, in Q1 over what we saw in the past and we expect that continue.
With Skype it's a first step for us.
We still think that bringing our capabilities, partnering with them, them much more on the application side and we are simply complementing for cloud services on the enterprise side.
Think that presents a good combination.
And not able to provide milestones, I will say that we are working on making this a real revenue -- a source of revenue for us.
Vivek Arya - Analyst
Got it.
Secondly, I think in the past you had a separate relationship with the Government Solutions part of Nortel.
I think that's -- I believe it's separate from the parts that Avaya and Ericsson have taken over.
Is that government business also on track?
Is that still going to be a separate relationship going forward?
Shabtai Adlersberg - Chairman, President, CEO
Yes.
That part of the business went together with the enterprise business to Avaya.
And it's a -- it's a line of products that were specifically upgraded to support a very unique protocol and standards that are very specific to the government business.
Took like two years to develop.
So we are embedded, we passed the testing.
First rounds of purchases were made.
So we expect that that opportunity will continue and develop.
We do not expect at this stage any change to that.
Vivek Arya - Analyst
Got it.
And lastly, I think in your prepared comments you mentioned that there could be further revisions in the year from your new guidance.
I'm just curious what do you think could be the upside drivers, and also what could be the downside risk factors?
Thank you.
Shabtai Adlersberg - Chairman, President, CEO
Sure.
Well, I think mostly it depends on two key variables.
One is the pace that we will be successful in starting recruiting sales and establishing resale agreements with VARs in large countries.
That is a process that's already taking place.
We believe it will become much more effective in second half of 2010.
And second is our ability to start sell the new products which we've announced a few months ago.
A lot of work has been invested in our beta testing, and in working with first adopters of that.
And we do believe that that will be the driver.
So all in all, my assumption is that if we continue to grow on a generally basis of 5% in revenues quarter-over-quarter, we should be able to basically support those trends of growing further in revenue and earnings.
Vivek Arya - Analyst
Right, thanks and good luck, and good luck to Nachum also on his new role.
Thanks.
Nachum Falek - VP, Finance, CFO
Thanks, Vivek.
Shabtai Adlersberg - Chairman, President, CEO
Thanks.
Operator
Ladies and gentlemen, there are no further questions at this time, I'll turn the conference back over to Mr.
Adlersberg for closing remarks, thank you.
Shabtai Adlersberg - Chairman, President, CEO
Thank you, operator.
Summarizing our call we look forward to continue our success in 2010.
Before we conclude the call I would like to thank again Nachum.
This is his last analyst and investor's public call.
On behalf of myself, management team and Board of Directors we would like to thank him for his contribution to the development and growth of the Company in recent years, and for the strong financial foundation he has built here that will help carry us forward.
Finally, I would like to thank everybody attending our conference call today.
We posted some growth, and we look forward to have you on next conference call.
Thank you very much.
Operator
Thank you.
Ladies and gentlemen, this does conclude today's conference.
You may disconnect your line at this time.
Thank you all for your participation.