AudioCodes Ltd (AUDC) 2011 Q4 法說會逐字稿

Greetings and welcome to the AudioCodes Fourth Quarter and Full Year 2011 Earnings 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)

It is now my pleasure to introduce your host, Mr.

Erik Knettel.

Thank you, Mr.

Knettel.

You may begin.

Thank you, Jackie.

I would like to welcome everyone to the AudioCodes fourth quarter and full year 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 market 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 into 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, 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 Shabtai Adlersberg, Chairman, President, and Chief Executive Office, 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.

Thank you, Erik.

Good morning and good afternoon, everybody.

I would like to welcome all to our fourth quarter 2011 conference call.

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

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

I will then review the business highlights and summary for the quarter and describe developments in our business and industry.

We will then take you through 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 non-GAAP pro forma results reflect adjustments from the following two non-cash items - stock-based compensation expenses, which total $492,000, amortization expenses relating to the acquisitions of Nuera, Netrake, and CTI, which totaled $306,000.

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

Getting to our results.

Our fourth quarter results are in line with our updated guidance issued on October 3.

Fourth quarter revenue was $37.2 million, which represents a 3.3% increase from the sequential third quarter of 2011.

As a percentage of revenue, accounts in Americas accounted for 56% , Europe, Middle East, and Africa, 31%, and Asia Pacific, 13%.

GAAP net income for the fourth quarter was $670,000 or $0.02 per share, an increase of $4.7 million versus the year-ago quarter and an increase of $1.2 million sequentially.

Non-GAAP pro forma net income for the fourth quarter was $1.2 million or $0.04 per share, an increase of $3 million versus the year-ago quarter and an increase of $1.6 million sequentially.

AudioCodes established a new financial reporting business line effective for the Company's fourth quarter 2011 results called managed and technical services.

Revenues associated with this new managed and technical services business line grew to exceed 15% of total revenue or $5.5 million in the fourth quarter of 2011.

Managed services provide another revenue driver, which helps further bind AudioCodes high valued relationships with its customers.

Service revenues are also beneficial in that they are typically characterized by high gross margin and are often recurring in nature.

Our top 15 customers accounted for 52% of our revenue compared to 51% in the previous quarter.

In the fourth quarter, we had (inaudible) distributed in North America that accounted for 13% of revenue compared to 16% in previous quarter.

In terms of revenues by business group, in the fourth quarter, our networking business group accounted for 80% of revenues, and our technology business group accounted for 20% of revenues compared to 82% in our networking business group and 18% in our technology business group in the third quarter of 2011.

In the fourth quarter of 2011, on a GAAP basis, gross margin was 59.1%.

Pro forma gross margin was 59.8%.

GAAP operating expenses were $21.2 million compared to $21.5 million in the third quarter.

Our total pro forma operating expenses were $20.6 million compared to $20.9 million in the third quarter of 2011.

Headcount decreased this quarter by 13 employees, which brings us to a total of 634 employees.

Short-term and long-term cash balances were $75.6 million compared to $72.8 million last quarter.

Increase in cash balances is attributed mainly to a loan on the amount of $5 million we took this quarter.

During 2011, the Company had met proceeds from bank loans of $17.2 million.

DSO came in at 76 days compared to 80 days last quarter.

Our guidance for 2012 is as follows.

On an annual basis, we forecast revenue for 2012 to be in the range of $164 million to $170 million and non-GAAP earnings per share are expected to be in the range of $0.32 to $0.38.

As for the share repurchase program announced on October 3, we would like to inform you that, through December 31, the Company repurchased approximately 1.2 million shares of common stock at an aggregate cost of $4 million.

I will now transfer the call

Thank you, Guy.

Announcing our fourth quarter financial results, [referring] to results return to sequential growth in all key financial[promises, including revenues, earnings, and cash flow from operations.

As indicated in our financial results press release, the growth is driven by consistency, including demands to converged (inaudible) data made in products and services in several key networking and telecom segments.

Those include connectivity for business services, communications, IP access and tracking and mobility.

And we see these trends of growth continuing for the next five to ten years.

Just to remind us all, this market segment is fairly large and growing and we plan to grow in [forth] in these areas through cooperation with market leaders.

We give you some sense of the opportunity communication collaboration and enterprise telephony market represents a direct opportunity for us to about $1.5 billion in 2012.

The [market] represents another $500 million for our products and services.

Tracking and enterprises between markets plan to grow to $500 million for the full year and other work market growing fast which [method] by there to the enterprise and the service providers markets.

[To fundamental element] versus our go-to-market and general strategy, but relying substantially on partnering with [government] through [global reach regions].

Secondly, is the consolidation process in the bulk industry and the bulk network infrastructure market, which is about to [reward] those who remain the strong ones.

On a global [products] front, we made very nice progress in the first quarter of 2011, due to our current ownership with Microsoft, [process], and others, we made products with [stream].

Now getting to our financial highlights.

On a quarterly basis, revenue growth [tripled] 3% quarter over quarter and it declined 8% year over year.

However, on annual level, while we grew only 3.8% over 2010, this amount includes really does not tell the whole story.

We have made [progress] in our business from technology and OEM basis, with a company that's [networking], we expect a big shift in revenue mix this year.

Technology revenue declined from about $29 million in 2010, [$35 million] in 2011.

This is close to a 30% decline in business where we do not invest at all.

Our core networking was a focus and is now about 80% of our business.

That business grew from about $90 million in 2010 to about $115 million in 2011.

That's an increase of about 20%.

20% growth in our core networking is a profit that goes on for several years now and we believe we continue if we expand our ownerships, channels, and activity in the market.

In fourth quarter, we took strict measures to better control our costs.

OpEx came down about 1.5% compared to third quarter 2011, after several quarters of growing OpEx.

We do expect more OpEx reduction in the first quarter of 2012.

Operating income came back this quarter to [4.4%], again 4.4%, ending 2011 at 7.1% versus 9.4% in 2010.

Gross margin improved nicely in the fourth quarter with 69.8%], ending all of 2011 at about 59%.

[Continuing] lowering manufacturing costs [with products] with higher margins, introduce [conditions], and continue to increase in contributions to our [revenues].

We generated positive cash flow from operations, about $3 million in the quarter.

That count went down about [3%] and [full year] in the first quarter of [2.4%].

Now we start the review.

In 2011, we grew from $150 million to $156 million year over year.

In some of the [regions] in a very challenging macroeconomic environment.

We grew mainly in developing countries.

That growth was achieved in South America, where year over year improved more that 50%.

That includes growth in Brazil, in Mexico, Columbia, Argentina, and other countries.

Growth also was very nice in Eastern Europe where we've grown very nice in Russia.

In Western Europe, it was a mix.

[Growth] in Germany, in the UK, France was flat and we went down in Italy.

In Asia Pacific, all in all, we were almost flat, while we grew in certain areas like in Australia and [we went down] in Korea and in other places.

Significant growth has been viewed and presented around Microsoft link project, our engagement with [integrators] and [specialists] benefited us and we now see more and more [2011] with more and more product sales, professional [sales].

We see Microsoft itself down in 2011, growing more than twice than 2010.

So that is major cost [savings] to us.

We also saw some very good performance in [growing] services and managed professional services.

We moved above 20% in the year.

And as I mentioned, we ended at 15% of revenues and services.

We have seen more significant growth through distribution in North America.

And on the product front we had a few winning products.

We did suffer from decline in two non-core areas.

One is residential line, the other one was the [chips] business unit.

In terms of planning ahead, we do see several growth changes for 2012.

Marked growth will come from business services, both IP and TDM for enterprises and business services.

We then see the unified communication markets, our collaboration with Microsoft and a few new players, both on connectivity and mobility, providing a lot of [ground].

We will grow in contact center.

We will grow in a few more areas indefinitely and mobile voice will become the growth engine for us.

We do see special attention being made to enhancing our collaboration with market leaders, among them global system integrators, OEMs working on a global basis, enhancing our presence in the [countries] - in Russia, Brazil, India, China, South Africa - and building upon [likely] channels.

I've mentioned already that connectivity and mobility will be a growing market for [us].

We are gradually becoming a point of choice for many of the world leaders.

In the growing number of clients each quarter and on an ongoing basis, this is what we [plan] going forward.

When it comes to [strategies] in [voice legacy, voice-voice, IP connection voice], mobile voice, enterprise network, we believe we are one of the very, very few [plans].

We believe that we have done in 2011 much work to become stronger than some of our completion.

We see going forward several [parts] back on trend, becoming more and more [present] in our markets.

We talk specifically about connectivity, quality of service, mobility, and VoIP security.

And this is where our investment in technology and product development goes and this is where we expect our business to grow beyond what we have done so far.

Now to our 2012 target and guidance.

Generally, we intend to grow as follows.

We intend to grow above 10% on top lines.

We see a mix of networking continuing growing 20%, being now 80% of the business.

Technology, which is now about 20% of the business, we believe we will continue to decline, but we believe that decline will be limited to no more than 10%, 15%.

All in all, we do plan to grow in the first quarter 2012 over the fourth quarter 2011.

OpEx [in 2012], will not grow more than 3% or 4%.

We believe earnings will grow about 30% compared to 2011.

We believe we will see continued [cash] flow in each of the coming quarters.

And we do believe in our future, in our fundamentals, and therefore we will continue with our buyback program, which we have been very consistent this far.

With that, we remain very confident in our ability to [carry] in our long-term commitments growing our business in the coming year.

That is the end of my introduction.

And we will take you now to the Q&A session.

Operator?

(Operator Instructions) Thank you.

Our first question is coming from Jay Srivatsa of Chardan Capital Markets.

Yes, thank you for taking my questions.

Shabtai, it appears enterprise spending is still relatively weak from what we can gather.

But yet, from your comments you believe your Q1, you expect to be growing from Q1 2011, which is a quite a big jump from your Q4 numbers.

What gives you the confidence that you'll be able to grow your business, given the macro conditions that are existing today?

Hi, Jay.

Shabtai here.

I think you misunderstood my comments.

I said that we tend to grow Q1 2012 over Q4 2011, not over Q1 2011.

That's right.

Second, is as I [also] mentioned that ended the quarter with high top line.

We add about [$1 million] to the first revenue.

So that may give you some more flavor for what we achieve in Q4.

We do see increase in business and we do believe that, with each quarter, that [our business] gets more mature and we have more ownership and products - [35] and better than some of our [plants].

So for us, we do believe that we will continue to grow in Q1.

Fair enough.

Thanks for clarifying that.

On the mobile voiceover IP segment, it appears there is a lot of interest there.

How do you see the landscape playing out and when do you think you will start to see some material contribution from that segment?

Okay.

So let me give you some color on the mobile voice market.

So far, we've been investing only in the service provider market.

In 2011, we did better.

Actually, we grew more than 100% versus 2010.

The first quarter has been very successful.

We have recorded a few wins, two with large service providers in South America.

No names, big names, [smaller] names.

We did one, a Tier 1 service provider in Europe.

We also - we announced, by the partnership with [Brock].

We had another nice win with a cable company in Europe.

And a few more - actually, if I look at the pipeline at the beginning of 2012 compared to what we had in 2011, I can see already a jump of 100% in our pipeline.

So in the service provider, we've got a lot of momentum and we do not see substantial complications.

Getting to the enterprise space, we are introducing this quarter our solutions for the link environment for mobile enterprise solutions for Smartphones.

We do believe again, that with added functionality and taking care of our voice quality, which is - can become really fragile in overall our Wi-Fi links in the enterprise, we will be very successful.

So all in all, we are very encouraged.

Indeed, we are only at the first stage of revenues, about $2 million in 2011.

But we do believe that going forward, we will continue.

And let's remember that that is a - mostly a [solution-less services], so throughout the margins and contributions to the bottom line will be very substantial.

All right.

Switching to the unified communications part, clearly, you've partnered with Microsoft here.

What are some of the initiatives that Microsoft has for this year to continue to penetrate that market?

Do you expect them to be able to achieve meaningful traction better than what they were in last year or do you expect market conditions to kind of dampen that?

Well, it's obvious that penetrating the market is the hardest effort, and then once you are more - when you win more accounts and you become more established, then your ability to show references and to bring potential customers to existing installation and deployment improves your options to sell more.

We know that a number of places are growing.

We've been brought into some very large fields that we have never seen before.

In the second half of 2011, some of those [are between] $0.5 million and $1 million.

We do see a need of large enterprises that spread globally.

They need to provide a unified communications solution over, literally, tens of different [PBXs] from the old - the enterprise telephony [stake like] Cisco, Panasonic, like [Midas], like a few more - ten different names if you - any large enterprise is going through acquisitions.

When they acquire other company, you get onto your communication network a variety of different PBXs and the ability to add all of them into one coherent unified communication network simply by using what we call [converge data].

It's data to [branch out].

We are probably one of the best in that area and it's growing.

It's growing and the need for mobility, for present information, instant messaging, collaboration, all of that is growing and that - we believe with more working [business] we will continue to grow above the $10 million level that we reached in 2011.

We should grow at least 100% in 2012.

All right.

Last question for Guy.

What do you expect the share count to be in Q1 following the buyback?

Okay, please repeat it.

I'm sorry.

The question was what do you expect the share count to be following the buyback as you exit Q1?

We're really going to be the range of $40 million to $41 million.

Okay.

Thank you much.

Thanks, Jay.

Thank you.

(Operator Instructions).

Our next question is coming from Nick Mauro of Sidoti.

Mr.

Mauro, you may proceed with your question.

Hey, guys.

How are you doing?

Hi.

With the revenues now being - it was split 80-20 as opposed to 82-18 last quarter, do you see that trend continuing and how do you think that affects the margins?

We believe that the - close to the 80-20 ratio will stay and I think we discussed this - before technology and networking, more or less gross margin.

So it will not affect gross margin, forward looking.

Okay.

And I may have missed it, but you mentioned before.

But going into 2012, do you expect to try and cut down expenses a little bit?

No.

Going back to the guidance, we expect to grow close to 10% in the top line in average OpEx and grow much more in net profit.

And that - there's no change in OpEx.

Okay.

And then, just lastly, for 2012, where do you see the relationship with Microsoft going?

We do expect it to continue to grow as the number of the [clients] grow.

And as we are introducing more and more solutions to the link system, we have just 35 - we're recording that intention with Microsoft end of Q4.

End of Q4 we do have mobility products that will provide voice connections to link from other devices.

So we believe that all those [forums] will help to build ownership with Microsoft.

Okay.

Great.

All right.

Thanks.

Sure.

Thank you.

Our next question is coming from Rich Valera of Needham.

Thank you.

Good morning.

Shabtai, I was hoping you could clarify what the $10 million piece of your business that you were hoping to double this year is comprised of.

We are talking about sales in the Microsoft link ecosystem.

Sales are usually comprised of a majority of types of products.

They range from standalone gateways to integrated gateways, [NSBC], [delicate solution], IP forum, management systems, professional services.

That is the mix of the products.

Great.

And I was wondering if you can just comment on the competitive landscape in that specific environment, the enterprise you see environment with respect to, I guess, sort of gateways and SBCs and, as well, the kind of software applications that you have been developing on top of those to try to add value to potential customers there.

So if you could just talk about sort of your strategy there and how you see the competitive landscape.

Right.

So right now connectivity is the biggest application into which we sell in that environment.

And that's a market we compete with companies such as [Biologic, Nedopcom], and sometimes we heard from Cisco or others.

But all in all, we see ourselves at the top of that group.

Coming to mobility, we believe we are competing with two or three smaller companies.

One is [Altigen].

The other one is - actually, we were at a bunch of small products.

Right now some of them escape my memory.

And what else?

We less compete on IP phones.

Basically, we do not [see] major strength there.

In the recording application, we are not worried yet of any competition, but we do understand that we will see that coming somewhere in the future.

All in all, because we do bring several different fields and capabilities in that arena, we believe that our ability to provide the larger projects becomes very [include].

After that, the fact that we are one of the few companies - although we have - I have mentioned names here, I think we are by far the largest and strongest companies [readily].

And when you talk about link deployments that span many countries for large enterprises, we probably stand third in our [big facility] with large companies going into projects and being deployed in all of the regions in the world - North America, Europe, South America, Asia Pacific, et cetera.

So our presence in our [professional space], we have a big advantage in this.

Great.

That was helpful.

And I think in 2011, your home gateway business was quite a bit below your expectations.

I don't think you consider that core, but could you give us a sense of what your expectations are for that business in 2012?

Yes.

Actually, we define that as a non-core business.

We've declined.

We do expect some mild increase in 2012.

We believe we will see more than 50%, but still that's lower than $10 million.

There's almost no focus in terms of our core competence in management to that line.

We will probably try to seek some collaboration with other parties, but there's focus on that.

And right now, we do not expect that activity to affect our performance in any meaningful manner.

Okay.

Just to be clear, you said there was about $10 million of revenue in 2011 and you expected that to be up, perhaps, 50%?

No.

I said that up to 50% including 2012, we still do not expect that line to provide [$10 million].

We expect it to be between $5 million and $10 million.

Okay.

Very good.

Okay.

Thank you.

Sure.

Thanks, Rich.

Thank you.

We have a question coming from [Jay Berlingo] of Schwab.

Thank you.

A couple of questions relating to bank loan for about $23 million.

I think it may have been taken, possibly in the fourth quarter.

Is that correct?

No, the majority of the loan we took in Q3 - $18.7 million in Q3 and an additional $5 million in Q4.

Okay.

I'm sorry.

Could you say that again?

I didn't hear you.

Most of the loans were taken in Q3 -- $18.7 million.

And the rest, $5 million in Q4.

Okay.

What was the reason for that and what are we using that money for?

The main reason was to strength the balance sheet.

And forward-looking, we're in the changing market and the company is growing and we believe that we are in a very strong balance sheet, especially compared to our competition in the market today.

And that's going to give us great advantage in the future.

Okay.

So you borrowed the money just to have available for general corporate purposes, if needed?

Yes.

There wasn't any specific reason why it was borrowed for any type of purchase or acquisition, anything along those lines?

No specific reason, currently.

Okay.

When do you plan on paying it back?

Sorry?

When do you plan on maturing that loan?

Oh, we're paying back the loan every quarter.

The run rate - this quarter we paid back more than $2 million.

Okay.

So the $75 million that you showed in - that you have available in cash, about $23 million of it is actually borrowed money.

Is that correct?

A little more.

One second.

I'll give you the exact number.

$23 million is long term and there is about $10 million short term.

Okay.

And your buyback that you announced - the four million shares.

You've already, in the last quarter or so, picked up those at about $1 million that I saw in the release?

$1.2 million.

Yes.

Okay.

And has the company decided if there's going to be any type of timeframe when that repurchase will be completed?

Are we talking about - that's going to be going on for the next year?

Do you plan to get it done in the next six months?

You have another three million shares to go.

Yes, no-we never announce any time related to the plan.

Okay.

So this is just an ongoing - whenever you feel that there is opportunity to buy it and you'll step in.

But this four million share buyback can just continue on for years?

Well, it is ongoing.

We never announced a time limit related to the plan, but it is also based on the amount of cash we have in the company.

It's also based on forward-looking cash needs in the company.

So it's - there is no time limit for the plan.

Okay.

The only limit is four million shares.

Okay.

And then, who is this I'm speaking with?

It's Guy.

Hey, Guy.

We spoke before and I have a question for you about one of your major shareholders.

At least it was a major shareholder and I just can't seem to find any information.

It was a hedge fund out of the city - out of New York, out my way here.

I think the name of the firm was [Reema], but don't hold me to that.

And they had a large position in AudioCodes and they had actually increased it.

But for the life of me, I can't find any information on them in terms of where they are in that position.

Can somebody update me?

They were holding like 8% or 10%.

Try under the name [Sandback].

I'm sorry?

Try the name Sandback.

I don't understand you, Guy.

What did you say?

I'm saying don't look under the name Reema.

Look under the name Sandback.

Okay.

The name of the hedge fund was Reema?

I'm saying try under the name Sandback.

And I'll - maybe the line is not that good.

I'll call you offline to give you the exact name.

But they're still a major shareholder in the company.

They are.

Do you know if they've increased their holdings at all since the last time you and I spoke, which is about six months ago?

This is Shabtai.

We have no access to immediate information.

We draw all our information from submission of filings and those are basically stabilized on the 15th of the second month of each quarter.

So other than the information we have from November 15, 2011, the next time we'll know better would be February 15, 2012.

Okay.

You normally wouldn't put out any type of news release relating to their holdings, correct?

That's not something you would do.

No.

I understand.

Okay.

And just one more quick question on 2012 forecast.

I believe you mentioned that you were looking to grow the top line for the full 2012 year with - did you say by over 10%?

No, we guided - the upper end of our guidance is around 10% - a little less.

Let me clarify that.

This is Shabtai.

Our guidance was for, on the top line, was $154 million to $170 million.

I'll tell you that my internal plan is to grow the top line above 10%.

But that's our target and plan internally.

That's not a guidance.

I see.

And did you also mention - I'm sorry, I was a little late on the call here.

Did you also mention what you had planned on growing the bottom line in terms of percentages?

Yes.

We said that we intend to grow earnings by 30%, at least.

Three, zero - correct?

Correct.

Okay.

Excellent.

Okay.

I appreciate your time today, guys.

Take care.

Thank you.

You, too.

Thank you.

At this time, I'd like to hand the floor back over to Mr.

Adlersberg for any closing remarks.

Thank you, Operator.

In summary of our call, we look forward to continue to grow our business in the coming year and follow on the momentum and growing opportunities in our markets and industry.

I'd like to thank everybody that [depended] on our call today and we look forward to have you on our next conference 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.