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Operator
Greetings and welcome to the AudioCodes third-quarter 2011 conference call.
At this time, all participants are in a listen only mode.
A brief 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, Eric Knettel, Investor Relations for AudioCodes.
Thank you, sir.
You may begin.
Erik Knettel - IR
Thank you, Dan.
I would like to welcome everyone to the AudioCodes third-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; shifts in supply and demand; market acceptance of new products and the demand for existing products; 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 market conditions as needed; possible disruptions from acquisitions; the ability of AudioCodes to successfully integrate the products and operations of acquired companies in AudioCodes business; and other factors detailed in AudioCodes filings with the US 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 GAAP net income and net income per share 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 and CEO
Thank you, Eric.
Good morning and good afternoon, everybody.
I would like to welcome all to our third-quarter conference call.
On the call with me this morning is Guy Avidan, our Chief Financial Officer and Vice President of finance.
Guy is taking the call from New York City.
I'm in Tel Aviv.
Guy will start off by presenting a financial overview of the quarter.
I will then review the business highlights for the third quarter, and we will discuss developments in our business.
We will then turn it into the Q&A session.
Guy?
Guy Avidan - VP of Finance and CFO
Thank you 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 third-quarter pro forma results reflect adjustments for the following non-cash items.
Stock-based compensation expenses which totaled $519,000, and amortization expenses relating to the acquisition of Nuera, Netrake, and CTI, which totaled $282,000.
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 results, our third-quarter performance is in line with our updated guidance issued October 3.
Third-quarter revenues were $36 million, which represented a decrease of 6% versus the year-ago quarter and a decrease of 13.2% sequentially.
Sales were impacted by softness in the technology business group, government market, and our residential business line, as well as weaker macroeconomic conditions in North America and Western Europe.
GAAP net losses for the third quarter was $527,000 or $0.01 per share, a decrease of $4.5 million versus the year-ago quarter and a decrease of $3.4 million sequentially.
Pro forma net income for the third quarter was $274,000 or $0.01 per share, an increase of $3.3 million versus the year-ago quarter and a decrease of $4.7 million sequentially.
As a percentage of revenue, sales in the America accounted for 57%; Europe, Middle East and Africa 30%; and Asia Pacific accounted for 13%.
Our top 15 customers accounted for 51% of our revenue, same as in the second quarter.
In the third quarter, we had a single distributor that accounted for 16% of revenue compared to 13% in the second quarter of 2011.
In terms of revenue by business group, in the third quarter, our networking business group accounted for 82% of revenue and our technology business group accounted for 18% of revenues compared to 79% in our networking business group and 21% in our technology business group in the second quarter.
In the third quarter of 2011, on a GAAP basis, gross margin was 58.7%.
Pro forma gross margin was 59.3%.
The slight decrease in gross margin this quarter was caused by the sequential $5.5 million decrease in revenue.
GAAP operating expenses were $21.5 million compared to $20.9 million in the second quarter of 2011.
Our total pro forma operating expenses were $20.9 million compared to $20.2 million in the second quarter of 2011.
Headcount increased this quarter by 14 employees, which brings us to a total of 647 employees.
The increase in headcount was predominately driven by an increase of Voice over IP application development personnel and a continued expansion of our global sales and marketing team.
Short-term and long-term cash balances totaled $72.8 million compared to $56.5 million in the second quarter.
The increase in cash balances is primarily attributed to two bank loans in the amount of $18.75 million.
We believe this additional capital provided AudioCodes ample liquidity for all our near-term business activities.
DSO came in at 80 days compared to 73 days in the second quarter.
The shift in sales weighted towards the back half of the quarter reflects the increased contribution of sales from value-added resellers versus original equipment manufacturers, which historically had been the largest part of sales and increased rate of revenue from our networking business group.
Third-quarter revenue was more back-end loaded than usual, which contributed to sequential growth in accounts receivable as well as in the DSO.
As for our guidance, in an annual basis, we reiterate our revenue forecast for 2011, in line with the 2011 outlook issued on October 3.
This included revenue estimated to be in the range of $155 million to map $162 million.
With regard to full-year non-GAAP earnings per share, we are now currently forecasting to be in the range of $0.24 to $0.30.
As for the share repurchase program announced on October 3, we would like to inform you that the company started to repurchase shares.
I will now transfer the call to Shabtai.
Shabtai Adlersberg - Chairman, President and CEO
Thank you, Guy.
Yesterday we reported our third-quarter financial results.
As reported, our revenues and earnings came short of our initial plans.
While we continue to make progress in our core net operating business and experience a good level of activity with our partners and customers, we experienced weaker than previously anticipated macroeconomic conditions in the US and in Europe.
[Adding] more details into the sequential decline in our revenues, most of this is attributed to non-core business lines.
About $2.5 million of decline in the technology sales, about $1 million of sales in the residential business lines, and [IT phones], and close to $1 million of sales in the government segment.
Putting aside all those items which are non-core and nonstrategic to the company's success, the core networking business kept growing.
We believe that as we follow on in the fourth quarter, core networking business will accelerate in 2011 versus 2010 by more than 20% growth year over year, while we witnessed small declines quarter over quarter.
Technology declined this quarter 27% from the second quarter, which accounts practically to about 45% of the decline in the revenues.
To give you a better perspective, on an annual level, technology revenues are down this year to a level -- will be probably to a range of $32 million to $34 million in 2011 compared to $49 million in 2010, which is an annual decline of 33%.
To remind everybody, this is legacy.
This is a non-core activity.
We do not put resources in these product lines.
And we will basically see that line continuing to decline, although not really at the same pace that we have witnessed so far in the past two quarters.
So, also the decline is attributed to legacy business, which we are not making any investment in.
Just as mentioned, in our networking business, we differentiate between core business and non-core.
At this stage, residential business gateways and governments are really non-core.
So, the decline in networking -- core networking was really very low this quarter.
Looking forward, we believe that while low revenues from technology sales will continue, we have risen to believe that that pace will be slowing in 2012.
In the networking business, we believe that that decline -- quarter-over-quarter decline is a one-time phenomenon and it will start to make a comeback in the fourth quarter of 2011 and further into 2012.
We thus remain confident in our ability to execute on our longer-term commitment to growing our business in coming years.
We are making huge investments these days preparing ourselves for what's coming forward.
As you know, we have committed to operating three growing fields -- unified communications which is a [tablet] market and growing nicely; contact centers which is about $5 billion and growing; and of course in the legacy business, which is carrier VoIP.
Now we believe that we will keep growing in 2012 with at least 20%, 25%.
The key to our strategy -- and you can see that in our financial results, is a huge investment in partner strategy and similar parallel investments in growing and establishing our global sales coverage throughout the world.
That investment is done and is still not producing any fruit.
We do believe that coming into 2012, we will start to see the benefits from that investment.
Now, to some of our key markets, in the unified communication market, we put most of our focus in the markets of product, the Lync, a solution for our enterprises and clouds.
We have been slowly on track with our plans in the first quarter of 2011, and we believe that we will end up this year as we have planned before, doubling -- more than doubling our revenues from 2010.
With good sales progress with that organization, mainly in North America, we are establishing a fully extended portfolio with many different products.
Basically, we do plan to come to market with more products in the Microsoft space.
We do intend to make more announcements.
And just to mention that early in July, we have been awarded by Microsoft with the award of US Lync Voice Gateway Partner of the Year.
So all in all, the Microsoft forum is on pace as we planned and we believe that we will see further growth in coming quarters.
Second [product] that is very essential to our success is the contact center business.
Our key partner in that market is Genesis, but we are making inroads with a few more partners.
We have been clearly successful in North America.
We see improved cooperation in international markets.
So we've got new projects in Europe, Asia-Pacific, and in South America.
We also started to see our SBC technology and products being 35 and put into partner solutions in coming quarters.
And we have done quite a progress this quarter.
We do believe that we will strengthen our relationship with Genesis going forward.
And we should be able, due to our strong portfolio of products, to be successful with a few more players.
On the SIP Trunking business, we have seen (inaudible).
We continue to put a lot of effort and investment in certification efforts with many service providers worldwide, both in North America and in other markets.
In the first quarter of 2011, we have introduced a new design of the Mediant 800 and MSBG multi-services gateway.
We have secured three design wins with alternative carriers during that quarter.
And we will start to see shipments and products of new products already in this quarter.
So we do believe that that product, the new product, M 800 MSBG will contribute to -- growth of revenues in coming quarters.
In Mobile VoIP, we've seen a lot of activity.
Mobile VoIP comes a very important application going forward for the smartphones, the tablets, and the PC market.
We are still in the trial and certification stage, we are not seeing yet meaningful revenues.
However, we do believe that per quarter, we see more and more project opportunities we are engaged in.
We announced in the quarter relationship with BroadSoft on Mobile VoIP applications.
We do believe that due to our technology edge and ability to add more technological features into the product, we will be able to be a very strong player in the Mobile VoIP market, which is due to come in 2012 and beyond.
In the residential business, we had a setback.
Basically we have an ongoing delay in total project this year, leading to a potential decline in our revenues in 2011.
And we will have to wait until those projects get more mature.
To summarize our positions, we are servicing markets which exceed more than $15 billion, and our direct addressable market exceeds $5 billion.
We enjoy strong positions in a consolidating industry.
The sales force we have built worldwide will contribute to that partnership -- strategy will add to that.
We are successful in growing market applications, such as connectivity, unified communication and mobility.
Our core networking revenues are expected to continue to grow more than 20% annually.
And we are confident in our ability to become a 10% market share [folder] in the long term in our addressable market of $5 billion.
As we reported, we have been able to maintain high gross margin and continue to do that in coming quarters due to the fact that we are introducing more and more software products and provide more professional services.
With that, I will conclude my initial presentation and I'll turn the call to the Q&A session.
Operator?
Operator
(Operator Instructions).
Jay Srivatsa, Chardan Capital Markets.
Jay Srivatsa - Analyst
Thanks for taking my question.
As you look beyond Q4, what's your sense?
Do you believe some of these end markets and specifically related to macro conditions will see some rebound?
Or are you concerned about how the macro conditions are playing out as you look at the first half of next year?
Shabtai Adlersberg - Chairman, President and CEO
Okay.
Hard to answer.
You know APAC and Central and Latin America were good markets.
Same applies to East European countries.
We have felt weakness more in Europe and some of it in North America.
Now, obviously I'm not the person to answer how that will develop, but again, I think we will simply follow the industry.
I don't -- we have not seen major weakness.
If you look into our numbers on the networking -- the core networking decline was clearly mild, 3%, less than 5%.
But it's too early to say more about 2012.
Jay Srivatsa - Analyst
Okay.
On the residential side, you said there were some delays.
Can you expand on what happened and what do you expect?
When do you expect that to come back if you believe that's going to happen over the near term.
Shabtai Adlersberg - Chairman, President and CEO
Right.
I think we would somewhat reach a bottom level in the residential gateway business.
What's really happening is that we're dealing with very advanced products.
The cycle of introducing such an advanced product to the market is -- we basically acknowledged in the past few months will be longer than anticipated.
Initially with the product line, with the previous product, the MP 202 design cycles were about three to six months.
With the new product it's more like nine and 12 months.
So many of the projects that we felt will contribute to 2011 sales are really pushed off.
We do have very good response to the product.
The product seems to be quite successful.
But, the period it takes for such a product to get into meaningful deployment is longer than anticipated and that is the source.
So we do anticipate that in 2012, sales of that product line will get back to normal.
Jay Srivatsa - Analyst
Right.
Guy, in the past when you guys were operating at $36 million, $37 million, you were actually profitable on a GAAP basis, but given the increased cost structure, what do you expect will be the break-even revenue run rate going forward?
Guy Avidan - VP of Finance and CFO
As you can see in the report, on the non-GAAP basis, $36 million is our break-even points.
If you dig deeper to the numbers, you can see that we spoke about it before -- about 80% of our OpEx is built out of employees and personnel and expenses related.
So for the longer term, we won't be able to go back above $40 million.
We will have to adjust expenses as well to be profitable.
Jay Srivatsa - Analyst
Thank you very much.
Operator
(Operator Instructions).
It appears we have no questions at this time.
I would now like to turn the floor back to management for closing comments.
Shabtai Adlersberg - Chairman, President and CEO
Thank you, operator.
I would like to thank everybody that attended our conference call today.
In summary of our call, we look forward to competing for our business in coming quarters, and we look forward to have you on our next conference call.
Thank you very much for joining.
Bye-bye.
Operator
This concludes today's teleconference.
You may now disconnect your lines at this time and thank you for your participation.