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Operator
Greetings, and welcome to the AudioCodes second-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 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.
Erik Knettel - IR
Thank you, Diego.
I would like to welcome everyone to the AudioCodes second 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 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 its 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 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, President & CEO
Thank you, Erik.
Good morning and good afternoon, everybody.
I would like to welcome all to our second quarter 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.
And then we will discuss the developments in our business and in the industry.
We will then turn into the Q-and-A session.
Guy?
Guy Avidan - VP, Finance and 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 proforma numbers.
Our second-quarter proforma results reflect adjustment for the following non-cash items, stock-based compensation expenses which totaled $581,000 and amortization expenses relating to the acquisitions of Nuera, Netrake and CTI, which totaled $376,000.
A full reconciliation of the non-GAAP proforma 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 second quarter, revenues were $41.5 million, which represents a increase of 14% versus the year-ago quarter, an increase of 1.1% sequentially.
GAAP net income for the second quarter was $4 million or $0.09 per share, an increase of 90% versus the year-ago quarter, an increase of 32% sequentially.
Proforma net income for the second quarter was $4.9 million or $0.12 per share, an increase of 74% versus the year-ago quarter, an increase of 19% sequentially.
As a percentage of revenue, sales in Americas accounted for 56%, Europe, Middle East and Africa 33% and Asia-Pacific accounted for 11%.
Our top 15 customers accounted for 51% of our revenue compared to 57% in the first quarter, reflecting an improved diversification of our customer-base.
In the second quarter, we had a single distributor that accounted for 13% of revenue, in line with the first quarter of 2011.
In terms of revenue by business group, in the second quarter, our networking business Group accounted for 79% of revenue and our technology business Group accounted for 21% of revenue compared to 72% of our networking business Group and 28% of our technology business Group in the first quarter.
In the second quarter of 2011, on a GAAP basis, gross margin rose [59%], proforma gross margin rose [59.8%].
The improvement in gross margin this quarter was predominantly driven by favorable product mix, bolstered by higher sales of software products and services.
GAAP operating expenses were $20.9 million in line with the first quarter.
Our total proforma operating expenses were $20.2 million compared to $20.1 million in the first quarter of 2011.
Headcount increased this quarter by 9 employees which brings us to a total of 633 employees.
Increase in headcount was predominantly driven by the expansion of our global sales and marketing team.
Short-term and long-term cash balances totaled $56.5 million compared to $62 million in the first quarter.
The decrease in cash balances is primarily attributable to an increase in account receivable.
DSO came in at 73 days compared to 62 days in the first quarter.
The shift in sales weighting towards the back-half of the quarter reflects the increased contribution of sales from value-added resellers versus -- or regional equipment manufacturers which historically had been the larger part of sales.
To put things in perspective, voice represented just 62% of sales in the second quarter of 2010 versus 76% of sales in the second quarter of 2011.
Second quarter revenue was more back-ended than usual which contributed to the sequential growth in account receivables as well as in DSO.
Due to the shift towards relying on voice and software-based products and less technology and OEM business, we believe the indicator of backlog is no longer a good indicator of our future business.
Therefore, we will cease reporting this indicator as of next quarter.
We're entering the quarter with 30% backlog after planning terms of revenues.
As for our guidance, we wish to update our annual guidance for 2011.
On an annual basis we reiterate our revenue forecast for 2011 to be in the range of $167 million to $174 million.
And we update the non-GAAP earnings per share to be in the range of $0.44 to $0.48.
I will now transfer the call to Shabtai.
Shabtai Adlersberg - Chairman, President & CEO
Thank you, Guy.
We're very pleased to report another growth quarter on both revenues and earnings.
This represents nine consecutive quarters of growth.
As Guy has mentioned we grew in revenues 14% year-over-year and 1% quarter-over-quarter.
But this result, the surface side of revenues.
Closer analysis of the key trends in the revenues this quarter provides a substantially greener picture.
On the growth side, we have better than expected growth in networking.
Networking has been growing 30% year-over-year and 9% quarter-over-quarter.
At the same time we faced decline in the second quarter in technology sales.
Chip sales fell short of expectations, about 15% below compared to the first quarter of 2011.
This decline was better than expected and we still need to watch and understand where it's coming from.
However, now one can understand that well, we grew very nicely on networking which is our key business, 9% over previous quarter and 30% over last year because of our --we fell short in the chip sales we came on top only 1.1% in revenue.
On the earnings side, completely different picture, great progress.
Earnings grew close to 20% quarter-over-quarter and about 75% year-over-year.
Other highlights of the quarter, we had a record non-GAAP gross margin of 59.8%.
This is a trend that's being sustained over the last three or four quarters growing from traditional 56% we had a year ago to 60%.
We do believe that going forward we should be able to even grow that gross margin.
It -- thanks to the fact that we are selling much more application ends of the product, we've announced such in the quarter, and we have increased revenue coming from services.
We are developing very fast professional services facility here and we do believe that overall average selling price and profit will grow substantially more as we delve more and more into sales of software products and services.
We also made a record on the operating margin.
We reached 11.1% and this is fairly aligned with our goals as a goal of trying to achieve 15% operating margin within the next two years.
First and foremost, this quarter represents a record milestone for the Company.
Our networking business is now accelerating and now becoming 79% of the overall activity.
I believe that this is the key business people need to refer to when assessing our performance and ability to grow.
All in all our networking sales this quarter stood at $30 million; if you take an annual view that translates we believe in 2011 to reaching more than $130 million in 2011 just on the networking side.
This is compared to $100 million in previous year, so that's 30% growth.
So just to get a better look at the Company we have a networking business that's worth $130 million of sales this year growing annually 30%.
We believe this is a sustainable pace and we should be able to grow it going forward at the same pace.
Why we are so confident in that?
I think we've worked hard to develop a very broad and sound product strategy and our go-to-market which relies on partnering with global industry players such as Microsoft, Avaya, Genesys, ALU, NSN and others pay for itself.
At the same time we have invested substantially in building global sales force, discovering many countries in the world and coupling the product strategy with the broad global sales coverage.
We believe we will attain similar growth in networking as we exhibited this quarter.
So all in all we're very pleased.
Just to give you an idea, gateway business has been growing very fast.
To give you a point of data, when we compared sales of Media Gateways and Integrated Media Gateways and SBC half of 2011 to first half of 2010, we grew more than 35%.
We are in a very strong consolidating position.
We are probably becoming second to Cisco only, and we see more and more opportunities.
Our gateways are now being evaluated by potentially new partners, global large scale companies who may contribute to increased sales of integrated gateways and SBC furthermore.
Another way to look into the evolution and ability to grow the Company is by looking into some of the new growth engines that we have developed in the past two years.
Among those new growth engines we count our offering for the unified communication and most notably our offering for the Lync product for Microsoft, offering for contact centers, SIP tracking and enterprise with the mobile VoIP government sector and services.
When you track down the combination of -- contribution of all of those growth engines, the analysis shows that six quarters ago, in the first part of 2010, those new applications contributed about 11.6%.
We did the same analysis end of second quarter, now it represents 22.3%.
That is all in all close to doubling the contribution of the new engines in the second quarter.
This is where most of the investment goes, R&D, marketing, operation, sales, services and we believe that contribution of new application will continue to drive our business going forward.
Just to capture for everybody on the call the opportunities we faced, we're right now targeting three very large markets.
We target the unified communications market, which is about $10 billion today, poised to grow to $14 billion in 3, 4 years, the contact center market about $5 billion, the carrier voice market and enterprise connectivity that's close to $2.5 billion together.
We're looking into mobility.
All in all I think we're targeting a double market segment of $18 billion out of which I would estimate our available target market to be between 20% and 30%.
So we've got lot to do.
All those markets are in growth mode.
We do not see any flatness there, and not too many players.
And getting to play in those markets the bar is pretty high and would be quite difficult to enter and penetrate and compete in that business.
If we look even beyond that into 2012 and beyond we look for high definition voice to capture growth.
We look for voice-over-IP to become major ingredients, cloud services to contain voice services.
So all in all I think with the portfolio and customer base and opportunities we've developed so far we do believe we are looking forward to more successful operations.
I'd like to touch two key programs that we'll maintain in the Company just to give the flavor into the potential we have.
The first one is our activity in the Microsoft space.
As you know Microsoft launched end of last year Lync as their unified communication product which is basically achieving growth and keeping pace in the market.
We are a player in that market.
We do provide for that environment in area of product that span connectivity, mobility, SIP programs, and lately we've announced also recording.
We believe that this is a once-in-a-lifetime opportunity.
Microsoft is predicted to become in few years the leader in that market.
We plan and act to become their leading partner on the network infrastructure side.
It's an open system meaning we can play in that environment unlike the past where one couldn't play into the telephony environment of Alcatel and Nortel and Siemens and Cisco et cetera.
And we believe that that opens for us huge amount of opportunity to add more sales and more applications.
What we achieved so far?
Year-to-date our sales surpassed fiscal year 2010.
And we believe that this year our sales in that environment will more than double.
Right now we work with over 200 leading Microsoft integrators worldwide.
Our product portfolio is substantially more comprehensive than competition and we are continuing to invest in that area.
Projects, we've scaled from a few tens of thousands to 500,000 and more, sometimes in phases and developing very nice trend of run-rate of quality -- in the SME space.
We've been just awarded about two or three weeks ago from Microsoft with the award of US Lync Voice Gateway Partner of the Year.
So very promising flurry of activity for us.
And other areas have started to develop very nicely.
In fact, in the Company is SIP trunking and Enterprise SBC.
I'm glad to announce that by mid of this year our product has been selected by seven leading service providers in North America.
Our Enterprise SBC has been certified by top SIP trunking operator including the two most dominant providers.
We have about 200 of Enterprise SBC systems deployed in 2011.
And we have definitely an advantage when it goes to the (inaudible) in enterprise which comprise of a combination of TDM and SBC, and there are many of such.
A typical installation would require headquarter with several branch offices.
It always comes to the fact that in those branch offices one is a combined TDM and SBC environment, at least in the next three to five years.
So those are the two leading firms.
We are also making very nice progress on mobile VoIP and other spaces.
To wrap up my part of the call, our target markets exceed $18 billion.
They demonstrate growth and opening new horizon for market engagement while more directly related segments represent the $3 billion to $5 billion opportunity if I'm counting gateways, SBC -- integrated gateways and SBC, IP phones, clients and more.
We are confident in our ability to become a at least 10% market shareholder, showing the huge potential for the Company.
We believe that consolidation plays in our favor.
We enjoy a very strong position in consolidating industry, and enjoying wide global sales coverage.
Just to mention again that networking business this year should top $130 million, and should grow 30% a year.
And we believe this is a multi-year trend.
And with improved gross margins at 60% and above, and deploying more accessible products and services we do believe that the future is bright for us.
I will now turn the call to Q-and-A.
Operator?
Operator
Thank you.
We will now be conducting the question-and-answer session.
(Operator Instructions)
Jay Srivatsa, Chardan Capital Markets.
Jay Srivatsa - Analyst
I guess the first question would be on the EPS guidance.
You have raised guidance for the full year.
Could you share with us where you're seeing the improvement coming from, is it from the gross margin profile or in your operating expense strategy?
Guy Avidan - VP, Finance and CFO
Well, we are seeing, as Shabtai mentioned, due to more software-based products and more applications, so we will see better gross margin in the future.
You are following the Company, so you'll see that in the last year we invested a lot of efforts as well as money in terms of marketing.
We're sort of at the end of this investment, and we're expecting a return on this investment in the coming future.
This is what give us the confidence in the improved EPS.
Jay Srivatsa - Analyst
Okay.
You mentioned the shift from the OEM business to the [VoIP] business.
Could you expand on that, what precipitated that shift, and how you see the mix going forward?
Shabtai Adlersberg - Chairman, President & CEO
Well, Jay, this is our strategy.
I think we began about six, seven years ago.
We do traditionally an OEM company, and somewhere stuck in the food-chain, and our future was really controlled by the end-customer which we never got to.
So the decision taken about six, seven years ago was to work a way to grow more into a direct mode, build our sales force, and basically be more independent and in control of our future.
And that is the process that started.
And now, with a huge -- in the US we have more than 50 or 60 different VoIP.
We've got similar such consolation in other countries, big countries.
So we depend now more on distribution, large distributors, and large network of VoIP basically to sell our products in the market.
And we, as you can see, in our networking has been growing primarily to the fact that we engage so much (inaudible) to our partners.
Jay Srivatsa - Analyst
All right.
In terms of the drop in chip sales, you said it was expected.
Maybe you can expand on that, why do you foresee continued drop in chip sales as you look ahead?
Shabtai Adlersberg - Chairman, President & CEO
So I'll give you a color on that.
In 2009, our chip sales were about -- I don't recall the exact number, but were about $15 million to $16 million.
In 2010, we enjoyed, in our mind, a one-time opportunity when there was a huge deployment of product to the Army in China.
That has increased our sales in China, and overall 2010 to more than $22 million.
Now, we knew that that trend would end, and basically we predicted that this year, 2011, we will come back to the same level of $15 million to $16 million of sales.
And this is exactly what happened.
Basically if you compare -- I'll give you a number, if I remember correctly our sales of chips in the second quarter of 2010 was more than $7 million.
This quarter it was substantially less.
So in fact that represents return to normal (inaudible).
We do not invest more than I would say probably 2% or 3% of the Company resources in the chip business, and therefore we're not gaining too many new design wins.
It's something that will -- we predicted it will slowly decline this year between I believe we discussed at 5% to 7%.
It so happened the second quarter showed us that.
But really this is just a side alley and not the key thing for us.
So that's what you can say about that.
Jay Srivatsa - Analyst
All right.
On mobile VoIP could you give us an update on where things are?
Looks like it appears there's a lot of interest in that space.
Are you seeing more activity in that space, and how do you expect that to shape up for you in the coming quarters?
Shabtai Adlersberg - Chairman, President & CEO
Yes, there's definitely a rise in inquiries, trial activities, evaluations.
Sales grew above what we sold in 2010.
We are involved right now with at least two large Tier 1 service providers testing the technology, hopefully deploying it shortly, could be even in third quarter of this year, this quarter.
We have intimate work with a partner that has got many connections to such large service providers.
So all in all, we see a lot of interest, and definitely we believe that coupling our very unique technological capability, good control of our codec technology, high-definition VoIP, combination of mobility with ESBC, all that will give us an advantage.
So I think this year we plan to more than double or triple our sales from 2010, and we do believe that that trend will continue going forwards.
Jay Srivatsa - Analyst
All right.
One last question, yesterday in an earnings call from a large networking company they expressed that the service provider market, the demand is dropping off a little bit as they look to the second-half.
As you look ahead, are you concerned about continued demand from the service provider markets or are you a little bit cautious as you look at the macro environment?
Shabtai Adlersberg - Chairman, President & CEO
Okay, so for us it's hard to say.
I'll split the answer into two.
I'll split our activity between activity in SIP trunking and everything else.
SIP trunking is very hard to displace.
We are involved in many certification processes with many service providers mainly in North America and also in Europe.
So on that front we don't see any drop it keeps growing.
The other space, those access projects are more sporadic currently and therefore it's hard for me to tell you whether -- I don't know that we have witnessed that, but I'll listen to others who are more I believe active in this field.
Jay Srivatsa - Analyst
Okay.
Thank you very much.
Shabtai Adlersberg - Chairman, President & CEO
Yes.
Operator
Rich Valera, Needham and Company.
Rich Valera - Analyst
Thanks.
Good morning gentlemen.
I was wondering if you could elaborate on what specifically you expect to drive the second-half ramp in network and obviously good performance year-to-date, but is it Microsoft Lync sort of gateways into the Lync environment that's the main driver of that or what other components of your business might actually be the key drivers of that second-half ramp in networking?
Shabtai Adlersberg - Chairman, President & CEO
Actually, it's an area of activities.
Just to touch a few of them I haven't mentioned contact centers.
We had great core in the contact centre market (inaudible).
We see this year growth north of 40%-50%.
We've got to partners in that state, Genesys, Avaya, Interactive Intelligence and another company.
And activity profile is very good, so that contributes.
We have seen growth also in axis projects, what we call the mid-density gateways.
Again if we compare first half of this year with 2010, we have seen increase in projects in Asia-Pacific, in Central and Latin America.
All-in-all again I think the only weak spot this quarter has been the chip business which I've mentioned already.
There was also some weakness or I wouldn't call that weakness, but more a delay in projects for our residential business line, but that's very minor portion of our revenue.
But all-in-all activity we will gain growth from many diverse areas, (inaudible) VoIP, SBC, Microsoft, Compaq center et cetera.
Rich Valera - Analyst
Great.
And I think you mentioned in your prepared remarks that your revenue associated with the Lync deployments had doubled year-over-year.
I just wanted to make sure what that comment was.
Is that what you'd said?
Shabtai Adlersberg - Chairman, President & CEO
I said that year-to-date, we already did what we did in overall 2010 and I also said that we believe that we will more than double growth this year in that environment.
Rich Valera - Analyst
Can you give us a rough sense of the absolute revenue dollars associated with the Lync deployments?
Shabtai Adlersberg - Chairman, President & CEO
Okay, yes, I think this year we should -- we plan on achieving about $10 million of sales in that environment.
We do believe that growth is accelerating.
I just looked into data published by Microsoft in their recent financial release.
They say that Lync is growing for them at double-digit quarter-over-quarter.
So -- and we also see activity in this field.
We see more projects, substantially more projects than 2010.
So we believe that in next 12 months we should see more than a 100% increase maybe close to 200% increase in activity.
Rich Valera - Analyst
Great.
And just one final one; I don't think I heard you talk about your home gateway, your consumer home gateway.
Wonder if you could talk about how that's progressing.
I know you had some deployments you were excepting to ramp that were outside of Israel.
Any color on that would be helpful.
Shabtai Adlersberg - Chairman, President & CEO
Right, I just mentioned that indeed we had a delay in that line and revenues in the first half of 2011 were short of expectations, plus we already got indication that that line will pick up from growth again this quarter and the fourth quarter of 2010.
Rich Valera - Analyst
Okay.
Shabtai Adlersberg - Chairman, President & CEO
We will simply delay those projects in several countries.
Rich Valera - Analyst
Got you.
Okay, thanks very much, gentlemen.
Shabtai Adlersberg - Chairman, President & CEO
Yes.
Operator
Todd Koffman, Raymond James.
Todd Koffman - Analyst
Thank you very much.
Can I just get a clarification?
I think you said that you have more than 200 session border controller boxes deployed cumulative.
I just wanted to see if I picked up that number correct.
And then I thought I heard you say something about, in the same line, six North American carriers and was wondering if you'd just clarify what that commentary was in your prepared remarks.
Shabtai Adlersberg - Chairman, President & CEO
Right.
Actually you said is right.
A, we've been selected -- we've been tested and selected by seven service providers in North America to deploy with our enterprise session border controllers.
That's one data point.
The other one is that indeed we have deployed to date 200 systems in the field.
Todd Koffman - Analyst
And just as a follow-on, the six or seven North American carriers that have tested and selected you, you then went on to say you have two large tier 1 testing.
What geography are those two large tier 1 in?
Are they part of the North American group that you've called out or is that a different geography?
Shabtai Adlersberg - Chairman, President & CEO
No, that's in North America.
Todd Koffman - Analyst
One follow-up to this.
Has there been any change in the competitive landscape as it relates to some players maybe finally having a viable competitive product offering on the market in the last few months or has the competitive landscape basically been the same the last three or four or five months?
Thank you.
Shabtai Adlersberg - Chairman, President & CEO
Relative to a specific product?
Todd Koffman - Analyst
Yes, in the session border control product area, one or two -- it seems as though one or two competitive players in the last few months might have -- maybe gotten more competitive with the product that's more viable.
I was wondering whether you are seeing or hearing about that in any regard.
Shabtai Adlersberg - Chairman, President & CEO
Okay.
I assume you're talking more about large session border controllers which are being deployed with large enterprises.
A, we're not playing in that market yet.
Our offering right now relates more to the mid-market.
That's area number one.
The second area is were those facilities where you need to combine session border controller and gateway in the same box, I think you're referring to products who are being announced and who are starting to be deployed by companies such as (inaudible) and Alcatel-Lucent.
And I believe those products target more the larger range of prices and I think the competition there is really not result of war with another company.
Todd Koffman - Analyst
Thank you.
Very helpful.
Shabtai Adlersberg - Chairman, President & CEO
Okay.
Operator
Thank you.
(Operator Instructions).
Liron Rochman, Oscar Gruss & Son.
Liron Rochman - Analyst
Hi, guys.
Shabtai Adlersberg - Chairman, President & CEO
Hi.
Liron Rochman - Analyst
Just a quick one regarding the OpEx.
We saw an increase in the sales and marketing last two quarters.
And what should we expect for the rest of the year in that area?
Guy Avidan - VP, Finance and CFO
No major change.
As mentioned before, we have filled all the positions.
Most of the increases -- contributes due to personnel.
And we expect the second half of the year to be on the same level.
Liron Rochman - Analyst
Okay.
And then, Guy, you mentioned regarding the receivables you said there is some changes and we saw a big increase in this area in this quarter.
So can you give us some color on that side?
Guy Avidan - VP, Finance and CFO
Yes, as mentioned we've seen a lot of back-ended business this quarter.
We expect this nature of business to continue in the future, but in terms of account receivable and DSO it will return to the normal historical 62 or 63 days in DSO and obviously we will see cash from operations going back to the normal level.
Liron Rochman - Analyst
Okay.
Okay, thank you very much.
Good luck.
Guy Avidan - VP, Finance and CFO
Thanks.
Operator
Thank you, 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.
In summary of our call we look forward to continue our growth in second half of 2010, and in coming quarters.
I'd like to thank everybody who took part in our call and attending our conference call today.
And we look forward to have you on our call in the next quarter.
Thank you very much.
Bye-bye.
Operator
Thank you.
This concludes today's conference.
You may disconnect your lines at this time.
Thank you all for your participation.