AudioCodes Ltd (AUDC) 2012 Q1 法說會逐字稿

Greetings and welcome to the AudioCodes first-quarter 2012 earnings conference call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow both formal presentations.

(Operator Instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Erik Knettel.

Thank you, Mr.

Knettel, you may begin.

Thank you, Rob.

I would like to welcome everyone to the AudioCodes first-quarter 2012 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 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 the 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, during the call, AudioCodes will refer to non-GAAP net income and net income per share.

AudioCodes has provided a reconciliation of non-GAAP net income and net income per share to its net income and net income per share according to GAAP in its press release and on its website.

Joining us today from AudioCodes, we have 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 Mr.

Shabtai Adlersberg.

Mr.

Adlersberg, please go ahead.

Thank you, Erik.

Good morning and good afternoon, everybody.

I would like to welcome all to our first-quarter 2012 conference call.

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

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

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

We will then turn it to 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 first quarter non-GAAP pro forma results reflect adjustments for the following two non-cash items -- stock-based compensation expenses, which totaled $439,000; and amortization expenses related to the acquisitions of Nuera, Netrake, and CTI, which totaled $282,000.

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

Getting to the numbers -- our first-quarter results are in line with our updated guidance we issued on March 26.

First-quarter revenues were $32.3 million, which represent a 13.2% decrease from the sequential fourth quarter of 2011.

As a percentage of revenues, sales in America accounted for 54%; Europe, Middle East and Africa, 33%; and Asia-Pacific, 13%.

GAAP net loss for the first quarter was $1.6 million, or $0.04 per share, a decrease of $4.6 million versus the year-ago quarter, and a decrease of $2.2 million sequentially.

Non-GAAP net loss for the first quarter was $827,000, or $0.02 per share, a decrease of $[5] million versus the year-ago quarter, and a decrease of $2.3 million sequentially.

The decline in revenue primarily reflected weakness in sales in North America, including the decline in the OEM technology group business and lower-than-anticipated government sales.

Aside from these headwinds we experienced during this quarter, we did see solid demand for our [full electric and] equipment group business, which represents over 80% of our overall revenue.

Revenues associated with the new management and technical services business line grew to approximately 17% of total revenue, or $5.4 million in the first quarter of 2012.

Managed services provide a recurring revenue driver which help further [buy an article of] high-value relationship with its customers.

Service revenues are also beneficial, in that there are typically characterized with high gross margins and our based on the extensive experience and know-how accumulated in the Company.

Our top 15 customers accounted for [12.6%] of our revenue, compared to 62% in the revenue in the previous quarter.

In the first quarter, we had a single distributor in North America that accounted for 14% of revenues compared to 13% in the previous quarter.

In terms of revenue by business group, in the first quarter our networking business group that accounted for 81% of revenue; and our technology business group accounted for 19% of revenue, compared to 80% in our networking business group and 20% in our technology business group in the fourth quarter of 2011.

In the first quarter of 2012, on a GAAP basis, gross margin was 58.4%; non-GAAP gross margin was 59.1%.

GAAP operating expenses were $20.6 million compared to $21.2 million in the fourth quarter of 2011.

Our total non-GAAP operating expenses were $20.1 million compared to $20.6 million in the fourth quarter of 2011.

Headcount decreased this quarter by 13 employees, ending the quarter with 621 employees.

Short-term and long-term cash balances were $70.3 million compared to $75.6 million last quarter.

The decrease in cash balances was attributed mainly to financial activities, including loan repayments and purchase of Treasury stocks.

Net cash provided from operating activities was $623,000 this quarter compared to net cash provided of $4.1 million last quarter, and net cash used of $371,000 in the first quarter of 2011.

DSOs came in at 75 days compared to 76 days last quarter.

Our guidance for 2012 is as follows -- on annual basis, we forecast revenue for 2012 to be in the range of $140 million to $150 million, and non-GAAP earnings per share are expected to be in the range of $0.06 to $0.12.

As for our share repurchase program, originally announced on October 3, 2011, we would like to inform you that as of March 31, 2012, the Company repurchased approximately 1.9 million shares of common stock at an aggregate cost of $6.5 million.

Based on the repurchase of up 4 million shares made out of the program to date, AudioCodes has approximately 2.1 million shares left on the current authorization.

With that, I will turn the call back over to Shabtai.

Thank you, Guy.

Earlier today, we've announced our financial results for the first quarter of 2012.

As indicated in our financial results press release, revenues came short of expectations and (inaudible) earning early in the year.

It reflects a faster-than-anticipated decline in our legacy business, a trend that we believe will become much less significant as we approach the end of 2012.

As we have indicated already, up to (inaudible) 2011, year 2011 is (inaudible) corrected 2012 for about transition in (inaudible) business, hence the mixed results in our operations.

While we continue to grow and extend our networking business, now (inaudible) operations and planning on month to year continued growth of about 20%, we face continued decline in our technology and legacy business, a process which we believe is static.

And while we anticipate further decline throughout the next quarter, we believe that will be much less visible in our overall combined revenues and earnings going forward, from the end of 2012 and going into 2013.

The decline in Q1 network 2012 is attributed mainly to lower sales and technology, in the [ship] business line, and in the recording and logging business line.

Declining sales in our legacy OEM business (inaudible) this relates to our old (inaudible) business line which was acquired from the sale back in 2003 and very minimal sales to the government segment.

But make no mistake, the networking business keeps expanding.

And we are accordingly adding more industry and more general products.

And we brought products into the portfolio we should emerge in 2013 much stronger.

The market [participants] will face a big (inaudible) and our collaboration with market leaders such as Microsoft and [Biogenesis] (inaudible) and others will further contribute to future growth.

Just to name some of the market factors we all understand the biggest (inaudible) we see in front of ourselves.

According to input from [Informatics], IDC, and other industry sources the (inaudible)communications and calibration equipment market represents an opportunity that is above $10 billion.

Just to name some segments of it, because of some misperception in the marketplace to how media gateway is being rolled out.

In this unified communication market, the throughput for integrated media gateways is in $1.3 billion in 2012, and growing -- and we're getting growing, not declining to $1.45 billion in 2015.

I have heard many investors, by mistake, thinking the gateway market is going away.

That is not true.

We recommend to (technical difficulty) look in to some of the industry standards [as studied].

Also, the market for Enterprise SBC is $200 million this year, growing nicely with about $500 million in [2015].

Another market we are approaching is the contact center market.

This is a $5 billion market.

And we are collaborating with some of the leaders in that market, among them, Avaya and Genesis.

The SIP trunking market is another big market in the business communications services market.

This market, by itself, is growing from $1.4 billion in 2011 to $5.9 billion in 2015.

And on top of that, we are very active in the mobile voice market.

That market is showing very substantial growth this year.

We see substantial pickup in activity with many Tier 1 service providers looking to solutions that provide over-the-top solutions as the market moves on to [LCD].

Key to our success are two key elements -- one is our channel strategy of honoring the [results] of the industry players, results that [are rich] in all regions; and we leverage their large-scale on a global basis.

Second key is the fact that the industry goes into a very substantial consolidation process.

Not too many [carriers] are.

We are among the ones that should enjoy that trend.

And we do see an increasing number of [honors] coming up to us and say, exit [in our]; stop investing in the gateway market and need to have integrated SBC and gateway capabilities.

We are that partner of choice that many of the industries there are coming to.

As to our strategy going forward on technology and applications, we have been known to be a leader in the connectivity market, namely the gateway market.

We just now started this past year and a half, entering the [sessions] of the control market.

We are now adding more pillars to our ability.

We do offer mobility solutions; we just announced a communication quality product.

We will be increasing [go on] services.

All in all, our activity in triple products and services is growing.

And we are channeling all of those activities together with [others now] such as Microsoft, Genesis, Avaya, and more.

More positive news this quarter; we have been continuing the trend of growing our services, now comprising 17% of total revenue.

Increasingly, we are growing more value to customers and partners through the combination of products and services.

Some of this includes planning, implementation, cooperation and support.

Just to remind everybody on the call, we did $17 million in 2010.

We did $22 million in 2011.

And we are planning for a 30% increase in 2012.

We enjoyed good product results this quarter.

That has contributed to strong gross margins performance.

As I indicated, positive cash flow from operations; we have been able to strengthen our balance sheet, and that allows us to continue to execute on our active share repurchase program.

We have seen good momentum in growing our enterprise [sessions on] control of scale.

Actually, last year we have introduced, at the end of the year, our software enterprise E-SBC.

The software SBC addresses the growing trend of datacenter consolidation, virtualization, and cloud computing.

We already won an OEM deal in 2011.

And we just won another OEM deal at the end of Q1 2012.

I'd like to indicate, also, that about a month ago, in phonetics industry, a research company issued a new report on the Enterprise SBC market.

That report shows the [radical track] amongst the top three levels of top providers, that market capturing 5%.

We believe that, with our continued investment in that area, we will grow market share going forward.

We've been investing a lot in the Microsoft area, (inaudible) activity in the unified communication market with their Lync 85 communications solutions.

We believe we are on-target to (inaudible) in 2012.

Our revenues from 2011, we see [part time] developing quite nicely with some big projects, each representing once a year $20 million in facilities.

More announcements made this quarter; we have announced our Session Experience Manager as well as Quality Solutions.

This is a new separate solution, [able to] monitor, analyze, report, and control the quality of incoming and outgoing enterprise calls over the Internet in real time.

Until today, Voice over IP is about the best efforts of practice.

We intend to bring and increase that level to best quality practice.

This is the investment.

According to a recent study by Frost & Sullivan, the world's monitoring and management solution market is about $1.5 billion gross, about $1.5 billion in 2010; continuing to grow in double digits compounded annual growth rate, and is bound to reach $3.4 billion in [2017].

The Session Experience Manager provides enterprises with the confidence that their Voice over IP network and services are attractively utilized, function well, and deliver the expected (inaudible).

This product signifies, among others, for shifts into more and more circuit solutions and bandwidth solutions, a process that is bound to have even larger and growing market share and gross margins.

Now to some recent changes in our operation; in order to become much more effective, we have done some rework in our technical-facing activities.

We've made changes to global sales, denominated in US global sales, increased activity in [billable] development with [honor] and (inaudible) switches already very improved.

We have substantially invested in increasing our sales team globally.

We do see fruits from our investment in emerging economies such as Brazil, Russia, India and a few more.

We just [concluded] an internal sales pick-up meetings running in North America earlier this month and one in Hong Kong for our Asian-Pacific operations.

All in all, we are substantially increasing new activities in the sales operations, improving monetary and strategic decisions and we will believe that all that investment will pay off in the coming quarters.

Last, to our activity on the share buyback, as Guy indicated -- we have, at the Company, we have the confidence in our ability to continue to grow and expand our business, and that is [the truth] for our investment in repurchasing our shares.

As Guy had mentioned, the plans that we have announced early October 2011, by the end of March 2012 the Company has repurchased about 1.9 million shares at a cost of $3.5 million, and we will continue to do that.

We do believe that that is the best investment for the Company.

All in all, to summarize my presentation, for the quarter we target big markets; all in all, overall marketability exceed $16 billion.

We enjoy a strong position in an industry that [lets] out with not too many players.

It's a consolidating industry, and we are among the top players there.

We are successful in growing (inaudible) connectivity in the past and present; and in the future, also mobility, voice quality and services.

And we believe in our ability to grow at least 20% [ROE] going forward.

That pretty much summarizes my production for the day.

I'll now turn it to the operator for Q&A.

(Operator Instructions).

Jay Srivatsa, Chardan Capital.

Thanks for taking my questions.

Shabtai, when you had lowered guidance in March, you talked about government sales being weak.

What is the status there?

And are you seeing some rebound in that space?

Or it still continues to be weak?

No, at this stage we do not see any return on that front.

The key reason for almost no government sales is -- we do believe and we've seen that with other companies -- that some budget in that space were eliminated lately.

And we have no visibility from our partners.

So right now, it will see some come back, that will probably happen the second half of this year, but not in the short-term.

All right.

And then in terms of enterprise spending itself, what's your sense in terms of macro conditions improving?

Are you expecting, as you get into the second half of this year, that some of that will start to contribute incrementally to some of the Voice over IP installations?

You know, in the macro perspective, we really do not see much influence from the general market economy.

We do see a market quite active.

We see no decline in demand.

The unified communication market is growing fast.

Microsoft indicated, on their last conference call, that their sales of Lync solution are growing 35% over last year.

The contact center business is active, as I've indicated.

Just to give you an idea about mobile VoIP, we have announced about a year ago our win with Vonage in the US.

We do have another big project now in Asia Pacific that is now multimillion dollars.

And we have a number of subscribers crossing the one million inquiring [stats].

We just signed another nice win in Europe with a large cable broadband company whose number of subscribers exceeding 5 million.

And we are -- we see practically two or three new RFPs coming out each month.

So, much activity.

We do believe that our proprietary technology will allow us to offer a much better solution, in terms of quality and stability and connection to [Ponner's] unified communication systems.

So, all in all, we do not see any weakness on a macro basis.

All right.

In terms of the legacy business, this is something you've been de-emphasizing for a while now.

So what happened for that to become -- for that to see a sharper drop in the current quarter?

What took place to take it down that much?

Okay, so when we did modify our guidance for the year, we basically took into account that this year our government -- our sales to the government space will not reach the level of last year.

That doesn't say much about the future.

Actually, they were -- that segment is nothing that we will write off.

The other big business that went down in Q1 was the media (inaudible).

That business is going away.

That business used to be, about six or seven years ago, on a run rate of about $10 million a year.

And we just came down to less than $1 million in the first quarter.

So all in all, we took that into account when we basically lowered the guidance for the year.

Another continuing trend is the decline in technology.

In 2010, technology represented about $50 million of sales.

In 2011, combined technology sales were about $34 million.

The running rate for this core technology was about $25 million a year.

So those are the three key processes for the decline in Q1.

And we do believe that we may see further declines in the technology space.

We do not expect them to be as harsh as we have seen so far.

And in any event, we do not believe that, going beyond 2012, who will -- that will [affect].

We believe that as we enter 2013, we will see a much cleaner, pure Company once we focus on the networking business and on the key market segments that were just now mentioned.

Okay.

Guy, what do you expect to be the share count exiting Q2, given some of the buybacks you are doing?

As Shabtai mentioned before, we are continuing the buyback program.

And we still have 2.1 million shares to buy under the current authorization.

And it could take us a while, based on the current volumes, to exhaust that quality.

Okay, thank you.

Robert Katz, Senvest Capital.

I wonder if you could reiterate your guidance.

I missed that.

It's $140 million to $150 million in revenue for the year, and $0.06 to $0.12 per share, non-GAAP.

And how to use see that progressing through the year to reach that level of guidance, the $32 million in Q1?

Say it again -- we usually don't break the guidance by revenues, but we see sequential growth in topline.

And even if we keep the OpEx as-is, as it is today, that should bring us to the numbers mentioned before.

Sure.

That would suggest, to reach the high end of your guidance, a pretty significant ramp in the latter half of the year.

And where do you see that coming from?

Yes, I think it is basically, what we see -- the two areas in which we have focused that could help drive business -- first is the unified communication market.

We are increasingly seeing more opportunities.

As we have mentioned before, and we have built a large sales team in many countries to spread the word [up] the continent.

We just have a new sales team, but in a few countries we have not been active in; like in Japan, and in India, and other places.

We also introduced to be a much more active with our services in our [acti-phone] products.

We do believe that that broad based growth in the Microsoft activity together with the variety of services and quality offerings, side-by-side with our activity in the contact center market, which is also very active, could contribute to increased sales in the second half of 2012.

And do you anticipate that Q2 will be a profitable quarter?

Or it is still unclear about Q2?

Right now, we do not believe that we will see further decline from Q1.

We do plan to go beyond that.

But that is still the beginning of the quarter, and it's still a little bit too -- call the quarter yet.

Thank you, and good luck.

Sure, thanks.

Thank you.

At this time, I would like to turn the call back over to management for closing remarks.

Okay, thank you, Operator.

In summary, of course we look forward to significant growth (inaudible) the coming year can follow on the momentum and the opportunities that the market has offered for us.

I like to thank everybody for attending our conference call today.

And we look forward to having you on our next conference call.

Thank you very much.

Bye-bye.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.