AudioCodes Ltd (AUDC) 2010 Q4 法說會逐字稿

Greetings and welcome to the AudioCodes fourth-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.

Thank you, sir, you may begin.

Thank you, Diego.

I'd like to welcome everyone to the AudioCodes fourth-quarter and full-year 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 or 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 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 Guy Avidan, Vice President in 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 and year-end 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 and summary for the fourth-quarter and the full-year 2010, and discuss developments in our business and the industry.

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 as well as non-GAAP pro-forma numbers.

Our fourth-quarter pro-forma results reflect adjustments for the following three non-cash items.

Stock-based compensation expenses, which total $1m, amortization expenses related to the acquisition of Nuera, Netrake and CTI, which total $387,000, and non-cash tax benefit of $2.3m due to deferred taxes.

A full reconciliation of the non-GAAP pro-forma results discussed on this call to GAAP results is currently available for review on our website and in the press release issued earlier today.

Getting to our quarterly results, in the fourth quarter revenues were $40.5m, which represent a 6% increase from the last quarter.

As a percentage of revenue sales in Americas accounted for 63%, Europe, Middle East and Africa 34%, and Asia Pacific 13%.

Our top-15 customers accounted for 49% of our revenue, compared to 53% in the previous quarter.

In the fourth quarter we had one single customer that accounted for 11% of revenues, compared to 10.9% in the previous quarter.

In terms of revenue by business group, in the fourth quarter our Networking Business Group accounted for 72% of revenue and our Technology Business Group accounted for 28% of revenue; same as previous quarter.

In the fourth quarter of 2010 on a GAAP basis gross margin was 57.4% and pro-forma gross margin was 58.2%.

GAAP operating expenses were $20m compared to $18.2m in the third quarter of 2010.

Our total pro-forma operating expenses were $18.8m, compared to $17.8m in the third quarter of 2010.

Headcount increased this quarter by four employees, which brings us to a total of 612 employees.

GAAP net income for the fourth quarter was $5.4m, or $0.13 per share.

Pro-forma net income for the fourth quarter was $4.5m, or $0.11 per share.

Short-term and long-term cash balances were $64m, compared to $59m last quarter.

The increase in cash balances is attributed mainly to the increase in net income this quarter.

DSO came in at 58 days, compared to 60 days last quarter.

Our guidance for 2011 is as follows.

On an annual basis we currently forecast revenue for 2011 to be in the range of $165m to $172m; GAAP earnings per share to be in the range of $0.32 to $0.37.

Non-GAAP earnings per share are expected to be in the range of $0.41 to $0.46.

Lastly, we enter the first quarter well above 40% of backlog of the plant in terms of revenues.

I will now transfer the call to Shabtai.

Thank you, Guy.

We are very pleased to report the seventh consecutive quarter of growing revenues and profit for the fourth quarter of 2010; an excellent year-end result for the full year.

2010 has been a great year for AudioCodes, mainly in the sense that, side by side with a riveting strong financial performance, we've been able to further position AudioCodes as a central Voice access player in the Voice over IP industry.

VoIP now, on one end, keeps growing and becoming a mainstream Telecom and Internet application.

Yet, at the same time the VoIP industry is undergoing meaningful consolidation processes and, thus, the reward to the remaining strong players will be substantial in coming years and AudioCodes is right there.

In fact, most recent Telecom industry analyst reports identify clear trends for a new three-year investment cycle that would start in 2011.

This is supported mainly by an historical high free cash flow for the service providers that we believe will drive investments in new Wireline and Wireless Broadband projects in coming years.

As such, we believe that we will see AudioCodes enjoying a long two/three years' trend of growth and expansion at an average rate of 20% plus a year going forward.

Let's look on the industry and what AudioCodes went through in 2010.

All in all, 2010 signified recovery from the financial crisis, led by nice growth in developing countries and the BRIC countries.

We've seen in our industry, the Voice over IP industry, we've seen a strong consolidation trend.

I'll mention a few; Nortel's Carrier VoIP operation was acquired by a private company called Genband; Avaya acquired Nortel Enterprise; Operation Dialogic and Veraz merged.

All of those signs really point to the fact that the industry as a whole becoming smaller and smaller, while the market is big, and AudioCodes being at the center of it will enjoy good growth prospects going forward.

At the same time the Telecom and VoIP industry continues reshaping going forward.

We have seen the new focus on SIP Trunking, on mobility, on security, which is becoming very important for the VoIP industry.

We've seen the rise of Cloud services, advertising SIP connectivity and security at the Enterprise and in the office.

And we have seen the Unified Communication market growing and really coming up from nice-to-have functionality to something that's needed.

Everybody needs instant messaging presence and many of the other features, video and stuff, and therefore there is a big drive in the Unified Communication market and AudioCodes is right again at the center of it, cooperating and partnering with some of the leading players in that market.

Lastly, we have seen a huge surge in data consumption in mobile devices.

Definitely smartphones and tablets and other mobile devices will contribute to the growth of data that will basically pave the way for Mobile Voice to grow going forward.

Trying to position AudioCodes for the future, we believe that AudioCodes increasingly will become the ultimate Voice expert in the industry.

Basically, our ability to play the Access market, the Trunking market, the Business Services market, Residential, Mobile VoIP, all that puts us in the center of that industry.

In our strategy of teaming up with market leaders, among them we have named a few, Microsoft, Genesys, Avaya, Alcatel-Lucent, Skype and a few more, really positions us in a very good position for the future.

We will continue that trend and try to get involved with more new names, market players that will help us expand ourselves.

The competitive landscape is becoming fragile.

I've mentioned a few of the companies merging.

We've seen some other companies having to focus their resources on relatively small spaces, some of them more in the Access area, some of them in the SBC and Routing area, others going to Video.

Some are about going just for a Security focus play.

And one of our competitors really got to be the partner.

So, all in all I think, strategically looking forward, I think we are standing right now with one of the most interesting points in the Company's history, allowing us basically to enjoy long-term trends of growth and expansion going forward.

In 2010 we have done great steps towards that future.

We have gained market share in a consolidating Media Gateway market.

Just take the service provider Media Gateway market; that was about $900m.

We have systematically increased our market share.

We have grown to about 42% in the combined low-end and mid-end Media Gateway market.

And we now capture almost 10% of the overall market.

With the process of [Logical Air] investing less in that area and smaller companies breaking up, we believe we have a chance to substantially grow market share in that big market.

We became a partner of choice to some of the leaders in the Unified Communication and Collaboration market.

That's about $10b market, out of which the accessible market for AudioCodes is somewhere between $2b and $3b.

We play with some of the big players in that field.

We have strong partnership with Microsoft.

Just launched the end of 2010 is Lync solution for that market.

And we believe that that market will take up going forward, mainly to support mobility, security and other functionalities.

We are well positioned to fight the battle in the fast-growing SIP Trunking and enterprise SBC market.

We do intend to introduce more capability in that area.

That is a new line for us.

We just started it mid 2010 and we believe we do have the ingredients and capabilities to fair well in that market.

We've also introduced some superior solutions for the emerging Mobile VoIP space.

Right now those offerings are targeting service providers.

We do intend to address enterprise solutions later in the year.

All in all, in the next three years we will see several very hot Telecom trends becoming more and more important in our markets.

Specifically, I am talking about SIP connectivity, quality of service, Voice and Video, Mobility, Security.

We have invested substantially in the past two or three years toward those areas and in 2011 we intend to continue that investment.

We intend to announce around mid year two new initiatives in this area, meant to further solidify our leading position in the Voice over IP space.

We believe that we will see at AudioCodes a long two/three years' trend of growth and expansion, as I've mentioned before, and we believe we will grow at an average rate of 20% a year going forward.

Now let me go quickly and review some of the financial highlights.

I think we have been able to achieve this quarter some very meaningful targets that we planned for a long time.

Revenue grew 6% quarter over the quarter and 19% year over year.

Operating income grew 26% over the third quarter of 2010, to $4.5m, and, more substantially, 80% year over year, comparing $4.5m versus the $2.5m we did about a year ago.

Gross margin was exceptionally good and rose to 58.2% versus 56.2% in the previous quarter.

That represents mainly our ability to lower our costs, while at the same time maintaining good pricing level in the market.

Then we have been able to achieve an objective that we set for ourselves at the beginning of the year; operating margin now at 11.7% versus 9.7% in the previous quarter, crossing the 10% target we put for ourselves earlier in the year.

We have been able to show positive cash flow; cash grew to $64m.

We generated $5.7m from operating activities.

We kept hiring; headcount grew.

We grew by four employees, ending with 608 employees, with more hiring to come into effect in Q1 2011.

All in all, we believe that towards the end of this year we'll grow our headcount to between 640 to 650 employees.

As Guy has mentioned before backlog is a good level, at about 40%.

In terms of our sales performance in the fourth quarter, we have seen both a good level of sales in North America and in the EMEA regions; both have performed above target.

Other regions such as Central America and Asia Pacific did well, but less than the other regions.

And in the CHIPS market we came, again, down to the normal level of the beginning of 2010.

Identifying two new -- emerging new sources of revenues which allow us to try us for greater solidity and stability, the two key trends in revenue's evolution that I'd like to mention.

One is growth of our revenues coming from resellers and distribution channels.

In 2010 we have been able to almost double our revenue in that space and, basically, the revenues from distribution surpassed the 10% of revenues.

Another source for very great stability is growing revenues from Services.

Again, in that arena we have grown nicely and we did more than 20% over 2009.

We do predict that revenues from Services will keep growing in 2011, again, at a rate of about 20% a year.

And that, basically, concludes my summary for the business highlights of the quarter and we will now hand over the session to the Q&A.

Operator?

Thank you.

We will now conduct the question and answer session.

(Operator Instructions).

Our first question comes from Ittai Kidron, with Oppenheimer.

Please state your question.

Thanks.

Shabtai, I got a little bit confused by some of your comments.

Maybe you can reconcile to me your guidance.

The mid-point of your guidance for '11 implies about a 12%, 13% year-over-year growth, yet you are talking about a 20% CAGR for the year.

So what's the disconnect here between your industry comments plus the comment that you expect to share -- to see share gains, versus your guidance for '11, which is well below that?

Right.

Basically, I think we are talking about an average trend of 30% a year for the next 20 -- I'm sorry, for the next two or three years.

We have done similar in 2010.

If you remember, when we started out 2010 our guidance for -- was for a 10% to 12% revenue increase.

We ended up close to about 20%.

We ended up at 19%.

Coming into 2011 we feel very good, still, in terms of our guidance.

For the first year we really do not want to push the limit too much.

But we feel confident that with all the investments we have done, and the fact that we are at the center of partnership with some of the leaders, we'll be able to maintain an average growth rate of 20% going forward for the next few years.

Are there pieces in your business that will see a decline in 2011, that can make for that blended 12% growth?

Yes.

Actually, if you take the $150m we did in 2010, split it up to Technology, which was about a third, and then Networking, which is two-thirds; roughly $50m Technology, $100m Networking.

We do anticipate that -- we do anticipate lower revenues in Technology.

We believe decline will be around 5%.

On the other hand, in the Networking side we expect growth in all market segments.

Take Media Gateways, which is our central activity.

Out of the $100m, about $78m or plus relate to Gateway business.

We believe that that will grow more than 10%.

Enterprise SBC, the new activity for us, will grow.

Mobile Voice will grow.

We've a few more initiatives in the Residential business.

So, all in all, we do believe that Networking will grow above 20%.

Okay, so --

That's pretty much our breakdown.

And with regards to your margin it seems like, again, as you mentioned, you got to your 10% plus margin target on the operating side.

How do I think about that potential going forward?

Are we leveling off?

It sounds like you're clearly going to hire more, so you're going to increase your headcount by about 5% this year and, so, that will clearly go into the OpEx.

But what's your plan for operating margins, keeping them flat here or there's room for upside?

How do I think about that?

We actually would like to continue to grow on the operating margin side.

We would like to be able to maintain between 12% and 13% in 2011, but the long-term goal is really to get to around 15%.

Okay.

And, lastly from me, what can you tell us about the initial feedback from customers or from the channel about your E-SBC solution?

How do we think about traction for that solution through the year?

Actually, it's been received pretty well.

There are certain areas in which we really outperform competition in that space.

Initially, if you -- every time we think about deployment of Enterprise SBC you -- most of the time, especially when you are talking about a large corporation, you need a combination of Gateways and SBC.

And definitely bringing our legacy unique advantage over anybody else in the legacy PDA market, our ability to present good solutions for that combined capability and what's called survivable branch application is best.

Second, we believe that -- and we have not really discussed on all of the developments, but we do believe that high definition VoIP will become more and more important in the coming years, or that performance on the SP capabilities, being able to trans-code different high definition voice codex from one to another, that's another advantage.

Third, the VAR network we have been building in the US, we've been investing for the past 18 months in a large network of VAR, and that starts to show signs that it pays off again.

Our ability to reach many projects really helps us competing against other people in that space.

We do intend to bring, mid of this year, substantial improvement in our ability in various functionalities and also in capacity.

And, again, we believe that that will help us gain more share in the relatively new activity of Enterprise SBC for us.

Got you.

And lastly, for Guy, Guy, how do I think about the March quarter seasonality?

Would it be fair to assume revenues need to be somewhat -- maybe single-digit -- low single-digit down sequentially?

How do we think about that?

And also OpEx, quarter over quarter, is it going to decline or stay flattish?

As mentioned, we enter the quarter with a backlog that exceeds 40%, which is pretty much typical for a Q1.

So we expect Q1 over Q4 to be flat, both in the top line and in the bottom line.

Okay, very good.

All right, good luck, guys.

Thank you, Ittai.

Thank you.

Our next question comes from Jay Srivatsa, with Chardan Capital Markets.

Please state your question.

Yes, thanks for taking my question.

Congratulations on a good quarter, Shabtai and Guy.

I wanted to ask a few questions on your partnership with Microsoft.

Could you give us some updates on where things are?

Is Microsoft pushing their platform pretty aggressively?

Are you expecting -- are you seeing good traction in terms of customers adopting your solution along with the Microsoft platform?

Can you give us an update on that?

Sure.

Yes, based on -- we do hold monthly reviews in that area, which is pretty important for us.

Based on reports from the field we do believe that, indeed, Microsoft is pushing their Unified Communication solution substantially in the market.

We see increased activity with their field resources.

We also can notice increase in pipeline of deals, substantially larger deals than we have seen backwards five or six months ago.

Still, each such project takes time for implementation; it's a process.

So we are confident we'll see increase in our revenues from that activity in 2011.

Probably we will see the majority more in second half of 2011, but still a lot of design activity, a lot of push in the market.

All right.

As you look at the Mobile workspace are there components in that space that you believe you have, or you don't have, that you could potentially look at acquiring over time, given that you have $50m cash?

Are there opportunities for you that you've identified that would give you a better chance to be successful in that space?

Basically, on one hand we do have an aggressive go-to-market activity.

We are working in practically all regions and trying to engage new service provider customers.

At the same time we do need to add more components to the solution.

Any Mobile Voice solution needs better security, needs better handing-over capability.

We will need, probably, to add more video functionality into it, instant messaging, presence functionality, so we may be looking into some very small technological, either licensing-in or acquisition, but those would be relatively very small compared to where we are today.

All right.

Last question.

In terms of competitive landscape you mention you have recognized several other players having different components of the solution, but not the entire suite.

Do you foresee any of the other competitors consolidating to become a greater threat for you in terms of your solutions the later part of this year?

Or do you see that as more of a fragmented market that will continue to exist?

I do believe that we will see more consolidation in the process.

Definitely smaller companies will have to find a new home so, depending on their ability to excel in the market, they'll find such.

But all in all we cannot identify too many players out there.

So all in all the consolidation process is -- already has a big momentum and -- we will see continuation of it, but not in a major way in 2011.

Thank you very much.

Good quarter.

Sure.

Thank you, Jay.

Ladies and gentlemen, I will now turn the floor back to Shabtai Adlersberg.

Thank you.

Okay, thank you, operator.

In summary of our call, we would like to thank you all for participating in it.

We look forward to continual growth and business expansion in the New Year and follow on the momentum and success we enjoyed in 2010.

And we believe that that will extend well into the future, in the next two or three years.

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

Thank you very much.

Bye bye.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you all for your participation.