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Operator
Greetings, and welcome to the AudioCodes first-quarter 2011 earnings conference call.
At this time all participants are in a listen-only mode.
A question and answer session will follow the formal presentations.
(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.
Erik Knettel - IR
Thank you, Diego.
I would like to welcome everyone to the AudioCodes first-quarter 2011 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 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 from AudioCodes today we have Shabtai Adlersberg, Chairman, President and Chief Executive Officer and Guy Avidan, 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 of the Board, President & CEO
Thank you, Erik.
Good morning and good afternoon, everybody.
I would like to welcome all to our first-quarter 2011 conference call.
With me this morning is Guy Avidan, 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 first quarter, and discuss developments in our business and in the industry.
We will then turn it into the Q&A session.
Guy?
Guy Avidan - 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 as well as non-GAAP pro forma numbers.
Our first-quarter pro forma results reflect adjustment for the following non-cash items, stock-based compensation expenses which totaled $730,000; amortization expenses related to the acquisitions of Nuera, Netrake and CTI, which totaled $385,000; and for the fourth quarter of 2010 a non-cash deferred tax benefit.
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 first quarter, revenues were $41m which represents a $1.4m increase from the last quarter.
As a percentage of revenues, sales in Americas accounted for 51%, Europe, Middle East and Africa 32% and Asia Pacific accounted for 17%.
Our top fifteen customers accounted for 57% of our revenues compared to 49% in the previous quarter.
In the first quarter we had a single distributor in North America that accounted for 13% of revenues compared to 11% in the previous quarter.
In terms of revenue by business group, in the first quarter, our technology business group accounted for 28% of revenues, and our networking business group accounted for 72% of revenues same as previous quarter.
In the first quarter of 2011, on a GAAP basis, gross margin was 58.5%, pro forma gross margin was 59.2%.
The improvement in gross margin this quarter was predominantly driven by favorable product mix.
GAAP operating expenses were $20.9m compared to $20m in the fourth quarter of 2010.
Our total pro forma operating expenses were $20.1m compared to $18.8m in the fourth quarter of 2010.
The increase in first-quarter operating expenses was driven by one-time sales pick-up that contributed $0.5m and an increase in our global sales force.
Headcount increased this quarter by 12 employees, which bring us to a total of 624 employees.
The increase in headcount was predominantly contributed by new sales employees.
GAAP net income for the first quarter was $3m or $0.07 per share.
Pro forma net income for the first quarter was $4.1m or $0.10 per share.
Short-term and long-term cash balances were $62m compared to $64m last quarter.
The decrease in cash balances is attributed mainly to the increase in accounts receivables and missed prepayment for 2011.
DSO's came in at 62 days compared to 58 days last quarter.
As for our guidance we wish to update our annual guidance for 2011.
On an annual basis we forecast revenues for 2011 to be in the range of $167m to $174m, and non-GAAP earnings per share of $0.43 to $0.47.
Lastly, as for the second quarter of 2011 we are entering the quarter with more than 40% backlog of the plan in terms of revenues.
I will now transfer the call back to Shabtai.
Shabtai Adlersberg - Chairman of the Board, President & CEO
Thank you, Guy.
We are very pleased to report another solid sequential quarter of growing revenues and expansion of our business for the first quarter of 2011.
As indicated in our financial results press release this morning, the growth is driven primarily by consistent and increasing demand for converged voice and data products in all segments of the telecommunication and networking industry.
The trend looks solid, and [bodes to] continue in the next five to 10 years.
Supporting this trend of growth in coming years is the expansion in markets we participate in with partners, growing segments such as the enterprise communications collaboration market, the call center market, mobile voice and the transition to LTE, and focus on enterprise telephony connectivity and security, SIP trunking markets, and enhanced productivity for mobile workforce through mobile VoIP.
To remind us all these market segments are fully [big] and [would serve] further through collaboration with the market leaders.
The unified communication market is about $9.6b and growing, call center market is $5b market, mobile VoIP market is growing fast with solution offered by over-the-top players, and the SIP tracking market, which will take up from just $100m in 2010 to close to $500m in four years from today.
Key to our success are two fundamental elements, one is -- the first is our go to market and general strategy of relying on partnering with global industry players for a global reach in all regions, coupled with increasing sales coverage all over the globe.
Second is the consolidation process in the Voice-over-IP industry and the VoIP network infrastructure, which is bound to reward the strong remaining players such as AudioCodes with growing sales through partnerships and channels and larger market share.
And that has been consistent in the past few several quarters.
On the global solution partners front we made very nice progress this quarter.
Further through our current partnerships with Microsoft, and Avaya, and Alcatel Lucent and BroadSoft and others, we announced this quarter three new partnerships.
There is another one that we have for a specific product that we are not naming at this time.
Announcements made this quarter, we announced collaboration with Alcatel Lucent Enterprise on enterprise session border controls for the mid-sized enterprises.
We believe that will become a major revenue stream 2012 and beyond.
This morning we announced a partnership, and integrated into the RIM solution, allowing to connect BlackBerry mobile phones with enterprise leading PBXs and IP-PBXs.
In the press release we have named integration into Nortel and Avaya PBXs, and more work is underway.
Third announcement was the [debut] for our mobility class products which enable integration of mobile phone clients with enterprise or PBX.
And as we have announced early March the first release of port connection of client devices to the Microsoft Lync unified communication solutions.
We met good demand in the market with less competition than before due to consolidation.
And with written telecom industry analysts' reports identifying clear trends for new investment cycle service providers, supported by historically high free cash flow for service provider, we believe that, that will drive investment in new wireline and wireless broadband projects for coming years.
And as such, any let's say last-minute [selling] in the voice industry, we believe and we firmly now believe that plans for continuing growth will prevail, and we will be able to show business expansion of around 15% to 20% growth in next two to three years.
As we gradually become a partner of choice for voice expertise and with a growing number of partners each quarter on an ongoing basis, when it comes down to expertise in both legacy voice, TDM voice, VoIP getting mainstream in the carrier, mobile and enterprise networks and emerging high definition VoIP, HD VoIP and more we will see more hot telecom trends coming more and more including in our markets.
Specifically, we focus on SIP connectivity, which will add SIP trunking and STC in the enterprise space, quality of service and we plan an announcement further this quarter, mobility and security all relating to Voice-over-IP communications.
This is where the investment in technology and product development goes these days, and where we expect our business to grow beyond the already captured market share in our traditional Media Gateway market.
Now to highlights of our financial performance in the first quarter of 2011.
First quarter is traditionally the weakest quarter in the year.
We are very pleased to report sequential growth over Q4 2010.
Revenue grew 1.4% quarter over quarter, 18% year over year.
Operating income grew nicely 53% over first quarter of 2010 while the net income grew 68% year over year.
Gross margin increased nicely to 59.2%, a very nice achievement.
That compares with 58.2% in the fourth quarter of 2010 and 56.2% year over year.
This is the second quarter of rising gross margin.
Key to our ability to continue lowering --- was lowering cost in production and better mix of product with lower gross margin, and also continued increased contribution from our services revenues.
As we go further in the year revenues from services will increase and we believe that will contribute, going forward, to our gross margin.
OpEx grew 6.7% from previous quarter as Guy has mentioned.
Part of the increase relates to several one-time expenses relating to our sales activity in the year, kick-off events and increase in hiring.
On the operating margin side we ended at 10.4% which was 5.
-- 7.5% year over year.
We had good cash flow management, kept a good control of expense.
We kept hiring, increased headcount by another 12 employees mostly in sales and marketing positions, ending the quarter with 624.
Guy mentioned backlog is in good shape at 40%.
Now to some business highlights, networking sales were on track, rising modestly over Q4 2010.
Growth came more from sales of SIP devices to enterprises and services providers versus residential.
Of specific strength we should note sales of mid and low-density media gateways, strong sales of higher density-needs range gateways to service provider in our Class 4, Class 5 programs.
We have good traction in our Microsoft activity.
We are on track to achieve our annual target.
[SPS] and MobilityPLUS which were announced lately met good demand in the market, and again we believe there is much growth in that front too.
We experienced similar activity in our call center activity, with our leading partners, among them Avaya, Interactive Intelligence, Genesys and a few more.
Our Class 4, Class 5 programs, which target sales of media gateways to service providers worldwide in business applications and in trunking applications was quite successful quarter over quarter and year over year.
We saw increased activity in the business connectivity and SIP trunking market, and with partners, some of which we mentioned there and named before.
We've seen good activity in the mobile VoIP market with one very important design win with a service provider in Asia Pacific.
On the sales side the key performing regions were North America and Latin America.
In North America the sales to the OEM segment were notably very strong.
Major focus in our sales similar to previous quarters was placed on increasing hiring in three key markets, Russia, India and Brazil.
And we are in process to continue to invest in that.
And that in a nutshell is my summary of the developments this quarter.
And I'll turn now the call to Q&A.
Operator?
Operator
Thank you.
(Operator Instructions).
Our first question comes from Jay Srivatsa with Chardan Capital Markets.
Please state your question.
Jay Srivatsa - Analyst
Yes, thanks for taking my questions, congratulations on a good quarter and congratulations on raising guidance for the full year as well.
As you look ahead to the next few quarters, I know you haven't given guidance for the quarters, but are you expecting sequential growth in the coming quarters or do you expect any seasonality impact?
Shabtai Adlersberg - Chairman of the Board, President & CEO
Basically, except for the first quarter, we usually plan on sequential growth in [quarters] towards the end of the year.
Roughly we plan on a 3% to 5% to 10% sequential growth.
Then depending on the quarter we'll see where it ends up.
But we definitely build on growing quarters.
Jay Srivatsa - Analyst
All right.
And then in terms of gross margins it looks like it's jumped nicely is that -- is this something that you can sustain over the next few quarters or are you expecting any change in your margin profile?
Shabtai Adlersberg - Chairman of the Board, President & CEO
So, I believe the trend is on our side.
We are -- we've done good work on controlling our costs in terms of manufacturing.
But I think there are other things that come into play.
I think the key strategy, which is adding more and more partners, really comes to our benefit meaning that majority of our sales now go through channel with business connectivity products, gateways, SBCs and [MSBGs] which are sourcing at enterprise.
So there's less price pressure through those programs.
Also, there's increased better mix of product between enterprise and residential, which definitely improves gross margin.
I've mentioned our services program which is a good growth of high margin.
And lastly some of the products are starting to become more software products.
I've mentioned [XBS] for Microsoft that's a software product.
There's another product of similar [activity].
So, more -- and we will see going forward more software product.
All in all, I think we should be able to sustain good margin.
Jay Srivatsa - Analyst
All right.
Last question on the mobility Voice-over-IP product suite that you have, are you expecting small and medium businesses to adopt this or are you seeing good traction from the larger business as well?
Shabtai Adlersberg - Chairman of the Board, President & CEO
Okay, so right now most of the activity is conducted with the service provider.
We usually do that for consumer use.
We do have an effort that should be readily available to the market very shortly in this second quarter where through a partner we will offer connectivity to small, medium businesses.
So that is just starting, the whole Microsoft activity really just starting.
We announced it [lately].
We've got a very large and increasing number of requests to provide connectivity to the Lync solution.
We believe that as time goes on it will be captured both by mid-sized and small businesses and hopefully will pick up also in the enterprise, large enterprises markets.
Jay Srivatsa - Analyst
Very good, thank you.
Shabtai Adlersberg - Chairman of the Board, President & CEO
Sure.
Operator
Thank you.
(Operator Instructions).
Our next question comes from Rich Valera with Needham & Co.
Please say your question.
Richard Valera - Analyst
Okay, good morning, gentlemen.
Wanted to clarify a comment you made on your partnership with Alcatel Lucent for your enterprise SBC product.
Do you expect that to generate meaningful revenue this year or was that referring to next year?
Shabtai Adlersberg - Chairman of the Board, President & CEO
I referred mainly to next year.
The partnership is just in the first steps first stage of engagement, but it's a good, good partnership.
So we expect it will become meaningful more 2012 and beyond.
Richard Valera - Analyst
What is the sort of, I guess, trajectory of that partnership?
What is it that you need to do this year to set the stage for growth next year?
Shabtai Adlersberg - Chairman of the Board, President & CEO
I cannot go into the specific of the partnership; all I'll say is this is a stage of introducing our products into the channel.
That takes time.
And then we do intend to announce more products later this year, and the integration of those products into the channel again will take another few months.
So all in all, I think 2011 with Alcatel Lucent enterprise operation is primarily about integration and readying the channel.
And we'll probably see sales kick off more to the end of the year and then later.
Richard Valera - Analyst
That's helpful.
And then it sounds like you got a new win with your mobile VoIP client.
I think you mentioned an Asian service provider.
Can you give us an update on that business, and if you can any sense of the magnitude of that business and how much it might be growing this year or next?
Shabtai Adlersberg - Chairman of the Board, President & CEO
Okay.
So evidently there is a large amount of interest, and we are engaged in trials in product and service evaluation in many places.
I would probably assume beyond 10 or so.
The thing is that it takes time it takes -- for a service provider to experiment and evaluate the functionality and quality of service and the value of that product.
They are very serious about it but they still take time to evaluate it, fine tune it and sometimes ask for customization.
So I'll tell you that the potential is very big, but it will not take off very fast.
Our goal this year was to more than triple revenues compared to last year.
We will probably be able to do that.
The agreement that we signed is -- it is a large PO.
And it will basically go into build up and execution in the coming months.
And we believe that it will start to kick up mid-year.
But we do have a few more trials in some very large operators.
It takes time.
It's evaluated.
But the trend is very clear it's a product that operators would like to use both for residential and for businesses.
Richard Valera - Analyst
Great, that's helpful.
And one final one from me, just with respect to your overall Media Gateway business I think there are conflicting views out there about the longer-term growth prospects, or even medium term growth prospects.
But you seem to have pretty strong demand levels for that business, and be pretty confident of growing that for the next couple years.
Can you talk about what the key drivers are for that media gateway business over the next say two- to three-year period?
Shabtai Adlersberg - Chairman of the Board, President & CEO
Yes.
Well, Media Gateway's market is not a small market.
In 2010 it's been about $900m in the service provider space and between $300m and $400m in the enterprise space.
Now, it's true that it's not growing and in some areas, like in the service provider area, we may see some decline of 5% annually.
However, there is almost no new product design.
The majority of the larger players really want to get out, exit that market.
Most of our partners, large partners would like to focus on services network solution applications and really look to outsource those types of products, simply because they do not intend to invest in the new generation product in that space.
Now since we work on a horizontal level with --- we're proactively gaining traction with many partners and we just announced this morning a win for that.
It means that gradually we will grab more and more business and market share from the existing players.
Meaning that although the market is not growing we will keep growing in that market simply because we will have more partners and more opportunities.
And I think we will enjoy the position of the last man standing in the VoIP market.
And that will be a good solid support for all of our new activities in new markets and new applications.
Richard Valera - Analyst
Okay that's helpful, thank you, gentlemen.
Shabtai Adlersberg - Chairman of the Board, President & CEO
Sure.
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.
Shabtai Adlersberg - Chairman of the Board, President & CEO
Okay, thank you, operator.
In summary of our call we look forward to continue to grow our business in 2011 and follow on the momentum and success we enjoyed in the first quarter.
I would like to thank everybody that's attended our conference call today.
And we will look forward to have you on our next conference call.
Thank you very much.
Have a good day.
Operator
Thank you.
This concludes today's conference.
All parties may disconnect now.
Thank you all for your participation.