AudioCodes Ltd (AUDC) 2010 Q2 法說會逐字稿

Greetings, and welcome to the AudioCodes second-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.

Please go ahead.

Thank you, Diego.

I would like to welcome everyone to AudioCodes' second-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 with the 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 general, and in AudioCodes' industry and target markets in particular; AudioCodes' ability to raise additional financing; 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, 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 Mr.

Shabtai Adlersberg, Chairman, President and Chief Executive Officer; and Mr.

Guy Avidan, Vice President Finance and Chief Financial Officer.

It is my pleasure to now 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 second-quarter 2010 conference call.

With me this morning is Guy Avidan, our Chief Financial Officer and Vice President of Finance.

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

I will then review the business highlights for the second quarter, and then discuss some of the developments in our markets and business.

We will then turn it into the Q&A session.

Guy?

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 second-quarter pro forma results reflect adjustment for the following two non-cash items - stock-based compensation expenses, which totaled $370,000, and amortization expenses relating to the acquisition of Nuera, Netrake and CTI, which totaled $385,000.

Full reconciliation of the pro forma results discussed in 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 second quarter revenues were $36.5m, which represents 5% increase from the last quarter.

As a percentage of our revenue, sales in America accounted for 46%, Europe 22%, Asia Pacific 21% and Israel 11%.

Our top 15 customers accounted for 55% of revenue, compared to 44% in the previous quarter.

In terms of revenue by business group, in the second quarter our Technology business group accounted for 34% of revenues, and our Networking business group accounted for 66% of revenues.

In the second quarter of 2010, pro forma gross margin was 56.3%.

On a GAAP basis, gross margin was 55.4%.

Our total pro forma operating expenses were $17.5m, compared to $17m in the first quarter of 2010.

Headcount increased this quarter by 11 employees, which bring us to a total of 596 employees.

Pro forma net income for the second quarter was $2.8m, or $0.07 per share.

Short-term and long-term cash balances were $55m, compared to $55m last quarter.

DSO came in at 62 days, compared to 56 days last quarter.

As for our guidance, we wish to update our annual guidance for 2010.

On an annual basis, we forecast revenue for 2010 to be in a range of $142m to $147m, and non-GAAP earnings per share of $0.24 to $0.28.

As for our third quarter of 2010, we're entering the quarter with more than 50% backlog of the plant in terms of revenues.

I will now transfer the call to Shabtai.

Thank you, Guy.

Good morning, everybody.

We're very glad to report another sequential quarter growth in the second quarter of 2010.

Relying on a very nice execution of our Company in the first half of 2010, and with the current momentum and outlook for the third quarter, we feel we are in a good track to achieve the top line and earnings targets we set for ourselves in the beginning of 2010.

This is the fifth quarter in a row of growing revenues and profits.

And as we continue to invest in our business and returning to healthy hiring, and we are building a much stronger position in the market, and foundations for continued growth in 2010 and beyond improve substantially.

As a result, this is the second quarter in a row where we raise our guidance for 2010 revenues and earnings.

As Guy mentioned, on the revenues side, we now target growth above 15% -- about 15% higher than 2009.

And on the earnings side, we plan to do between $0.24 and $0.28, versus $0.09 in 2009.

All in all, industry activity across our service provider and enterprise accounts in the second quarter was very good, and looks quite solid for the rest of 2010.

What's important is that we kept executing on our plan to transition from a pure play VOIP media gateway focus to become a mainstream smart TPE market player, a player that supports emerging unified communication and collaboration applications for the SMB and the SME market segments.

The focus in our plans is growing our presence and ability to sell in emerging markets, next to the developed countries.

And so, during second quarter of 2010, we kept investing in growing our global sales and customer-facing teams and coverage, and adding value-added resellers and expanding our distribution channels worldwide.

Before we get to the business highlights and recent developments in our market and the industry, let me review quickly some of the financial highlights for the quarter.

Revenue grew 5% quarter over quarter, 20% year over year.

Operating income grew nicely, 16% quarter over quarter.

Net income grew 15% over first quarter of 2010 and more substantially year over year, reached $2.8m versus $600,000 about a year ago.

Gross margin was sustained at about 56%.

OpEx grew only 3.2% from previous quarter.

This is primarily attributed to returning some of the reductions made in connection with the wage cut made in 2009.

This is the last step we have done in that area.

Operating grew nicely, to 8.3%.

This is very close to our declared target of achieving 10% this year.

We had positive cash flow.

Cash was steady.

Cash reserves were steady at $55m.

We have generated about $1.6m from operations.

On the headcount front, we grew by 11 employees, ending with 596 employees.

And again, we feel very strong coming into the third quarter, having a backlog that's about 50% at the time of the call.

More insight into the quarter.

We had very good activity on the Technology segment.

We enjoyed 14% growth, compared to the first quarter of 2010.

This is again attributed mainly to the growing sales from chips, in the -- our new markets, in the fiber deployment market in China.

And we expect this trend to continue.

On the Networking side, revenue increased just a bit.

Just like in the first quarter, it was mainly affected by the fact that the largest customer we had in the past to -- was at a level of 15% has decreased in the second quarter of 2010 to only 5%.

On top of that, we've witnessed growth in our digital media gateway versus decline in our analog media gateways.

But the thing that's more prominent in our Networking business is the fact that we enjoyed increased sales that are related to products which are embedded and certified in some of our solution partners -- global solution partner sales worldwide.

And this is why we enjoy their large global infrastructure.

And we believe that that trend will continue in coming quarter, for the next 12/24 months.

Now to some new and important events and phenomena in AudioCodes.

We have new growth engines that we are starting to see ramping and identify as such.

I'll talk today about two.

I'll talk about mobile VOIP and I will be talking about enterprise that we see that's connected pretty much with the evolving SIP trunking application.

Mobile VOIP is becoming a very important area for us and a very hot area in the world.

According to recent research reports, we expect about 100m of mobile VOIP users by 2012.

In terms of dual-mode handsets that support both 3G and wifi Voice over IP, it is expected that there will be more than 400m of units shipped in 2013.

As VOIP is becoming just another application, the trend of providing VOIP services through the use of smartphone application software clients by service providers gains momentum in the industry.

As a result, the number of leads and interest regarding our offering in this space is growing, and we enjoyed much increased activity with partners.

We do expect more wins in the second half of 2010.

Just to give you a measure, while we entered 2010, we had less than 10 leads of -- actual leads of service providers.

We ended the first half of 2010 with close to 180 leads from partners that are looking into using mobile VOIP.

Mobile VOIP basically will reside on every smartphone, and as smartphone becomes a larger part of handsets, and will reach a level of hundreds of millions and then cross the line of billions of units, we expect mobile VOIP clients to become a major market.

We are a leader in this market, simply because we have invested in it for the last 18 months.

We also are in a very unique position, as we are the one company that can present software clients for practically any handset in the market, be it an Android-based phone, be it a Symbian-based phone, BlackBerry and a few more.

So that is one area where we do expect much growth to come.

Another area that seems to be very important for us, and where we announced two days ago entry and increased activity is the area of enterprise session border controller.

According to an Infonetics report, the enterprise SBC market grew 56% in 2009, and reached 60m.

It is poised for accelerated growth in coming years, reaching circa 700m in four years.

Enterprise SBC is driven largely by the quick penetration of SIP trunking services in service providers, mainly in the US.

SIP trunking is gaining momentum, simply because it offers reduced operating expenses for telephone services.

It promises to eliminate the cost of expensive and dedicated TDM lines that connect businesses to the PSTN, and dramatically reduce the cost of local and long-distance charges.

AudioCodes is positioned to hold a significant share of this market, thanks to our already incumbent operation in that space.

We have integrated our Enterprise SBC capabilities into our MSBGs and gateway product lines, and those are sold today to service providers and connecting business customers of SIP trunks practically in any market.

The one announcement we made relates to AudioCodes' Mediant 3000 series.

This is an ideal platform for large enterprises seeking SIP trunking application connectivity, and it provides a price-effective, high-availability platform covering practically any security threat that's native to SIP trunking.

Now to some partners' activity in the second quarter.

One partner with which we have many activities together is Microsoft.

In that area, we offer a complete -- very large number of solutions, spanning gateways that help to connect the Microsoft OCS to the IP network.

We offer survivable branch appliances.

We offer SIP telephony servers that allow to connect from any software client to the OCS Enterprise SBC services for SIP trunking.

All in all, we've got a lot of offering for that market.

Last week, we participated in a large event held by Microsoft in the US, met a lot of partners.

Activity's growing, revenues are growing.

We do understand that Microsoft is adding more emphasis to that activity, and has added or is in the process of adding more sales people to that activity.

More partners with which we have built a development activity.

We are working with a few partners which we cannot name right now, but each of them pretty big in its space, looking to add voice expertise next to its data and application software.

And I would like to mention at that point that practically (technical difficulty) consolidation in this space, and with some of the mergers announced lately there are fewer and fewer players in that market.

And Audiocodes, with a broad portfolio and a lot of different products on its portfolio, ranging from clients to phones to gateways to multi-service business gateways to SBC solutions, we are becoming a one-stop shop for many of our partners seeking to partner with a voice expert that's capable of complementing their offering in converged voice and data applications.

I'll mention also two more applications where we're active.

One is in the large call center area, where we partner with a world leader and have a few offerings, again ranging from gateways to phones to SBCs.

And then, also we have a close collaboration with a world-leading hub that's a cloud business services and enterprise provider that's embedded in terms of operators around the world.

In terms of our products, I'll mention that we have a few more new products that are at a beta stage and entering the market.

Among them, most notably a residential gateway that's based on feedback from the market we believe to be quite advanced and at the front, and is going to be deployed.

Already got the first deal for that product, tens of thousands of units for deployment in the second half of 2010.

We also have a lot of activity around SIP telephony server for the OCS environment.

All in all, a quite busy quarter.

Before I end up, just to cover the sales front, all in all we reached our targets for the second quarter.

In terms of regions and geographical sales, EMEA was quite strong.

With all the news about EMEA around, we haven't felt that we have strong activity in many big countries in Europe, so we don't feel any trouble in EMEA.

CNBU, the chip business unit, was very strong.

We also made nice progress on our North America enterprise sales, grew sales, added more value-added resellers, so we feel that we will be gaining momentum in coming quarters.

That's about our business highlights.

And I will turn the session into the Q&A.

Operator?

(Operator Instructions).

Our first question comes from Vivek Arya with Bank of America-Merrill Lynch.

Please state your question.

Good morning.

Thanks for taking my question.

Shabtai, just a couple of quick questions.

First is when can we start to see good sequential growth in your Networking segment, now that Nortel is just a small part of sales?

Well, my belief is that we will see it already in the third quarter, and that's where we plan it.

We believe that Nortel should come back.

I think that part was in some merge activity lately, in the last two quarters, so we believe that demand should come back.

Additionally, we believe that with the new additions of the Enterprise SBC and SIP trunking application and a new device that will be announced shortly, we will see Networking picking up fairly quickly.

Got it.

And secondly, the SBC capability that you have announced is quite interesting.

That industry is sort of dominated by one large vendor and I'm wondering what do you see as your differentiators?

How do you plan to take market shares?

Do you plan to go after certain customers, certain regions?

What's the overall strategy with that capability?

Sure.

Well, Vivek, while I agree with you on many fronts, I don't agree with you on the statement that you just made.

Indeed that player is dominant in the service provider market, but is making only first steps in the enterprise space.

And in the enterprise space, you'll find many competitors.

You'll find Cisco, you'll find ourselves, you'll find other players.

So that player has to make first steps into that market while we are entrenched there.

The ability to sell in that market segment relies substantially on the breadth of the VAR network that you have.

Right now we enjoy -- due to our gateway sales and other product sales, multi-service business and gateway sales, we enjoy a very large network of VARs that's spread not only in North America but also globally.

So we are definitely in a very good position to become a major player there.

And due to the fact that we integrate gateway capability, which always is needed, session border control usually, if you take large enterprise that comprises of a headquarters and then a few branch offices, you always need to provide in certain offices connection and connectivity to TDM and PSTN.

And any player that basically lacks those TDM capability, gateway capability, is inferior in its -- basically in its ability to compete.

So we feel quite strong in that market.

And we believe that by providing a large family, we announced two members, we're going to announce another one, we're definitely going to be one of the dominant ones.

I would think that -- there's no connection between service provider market and the enterprise market.

Got it.

And just one last one on expenses.

There was a big rise in operating expenses this quarter, and I'm wondering how do you see the expense trajectory for the remainder of the year.

Right.

So, as I've mentioned earlier in the discussion, much of it is related basically to returning some of the wage cut that we did in 2009.

We completed that process, so that will not change.

The only change we will see going forward will be related substantially to hiring.

We are planning to add more sales, not a large number of people, about between five and 10 people over the next two quarters.

So, all in all, we do not expect a substantial change in our OpEx going forward.

Basically, we did this quarter about $17.5m, and we believe that should there be any increase it should be substantially lower than our ability to grow revenue.

And just one last question, if I may.

Can you discuss where we will see the impact of mobile Voice over IP in your sales, whether it be more in Technology or more in Networking?

And when can we start to see the impact?

Thank you.

Actually, we already started to sell in the first half of 2010.

We have one major win that hopefully we will be able to announce in coming weeks that we expect to contribute substantial amounts already in 2010.

We have a few more opportunities that -- at least I'll tell you that we have a partner in that.

We have a daughter -- not really a daughter, but a company where we are the lead investor.

And that company will sell a few millions this year.

So -- and we do see substantial work in that.

So this year I would expect, all in all, net revenues to be around the $1m mark, but definitely we'll see two times, three times, four times in 2011.

So it's becoming quickly very important.

Just to let you know that about two weeks ago we had a roadshow tour with -- in Russia and a few more countries.

We have met all the large operators -- cellular operators among them.

Clearly, the notion that software clients and applications on smartphones are becoming a very important tool for any service provider that wants to compete with other online available call capability.

So we are getting a lot of interest, and actually have some few trials already going.

By the way, one operator that again I hope to be able to name, it already started a service in Asia Pacific about three weeks ago.

So it's a hot area, will translate into millions next year.

Thanks, and good luck.

Thank you.

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

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

Thank you.

Thank you, operator.

In summary of our call, we look forward to continue to grow our business in 2010, and follow on the success we enjoyed in the first half.

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