AudioCodes Ltd (AUDC) 2012 Q2 法說會逐字稿

Greetings, and welcome to the AudioCodes second-quarter 2012 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) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Erik Knettel. Thank you, sir. You may begin.

Thank you, Dan. I would like to welcome everyone to the AudioCodes second-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 other 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 on 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 assume 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 Shabtai Adlersberg. Mr. Adlersberg, please go ahead.

Thank you, Erik. Good morning, and good afternoon, everybody. I would like to welcome all to our second-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 discuss our latest announcement of restructuring operations and focus more on redefining our strategy and go-to-market, and then refocus on change which we are taking the Company as an organization going forward. 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 second-quarter non-GAAP pro forma results reflect adjustments for the following two non-cash items -- stock price compensation expenses, which totaled $341,000, and amortization expenses relating to the acquisitions of Nuera, Netrake and CTI, which totaled $282,000. 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 the numbers, our second-quarter results are in line with our previous announcement issued on July 11. As announced, the restructuring plan is expected to generate estimated annualized savings of approximately 10% of the Company's operational expenses. The implementation of the plan has already started and is expected to be completed in six to nine months. In addition to the cost-saving components of the restructuring plan, the Company will focus investments in innovation around its key strategic initiatives in unified communication, enterprise communications and business services.

Second-quarter revenue was $31 million, which represents a 4% decrease from the sequential first quarter of 2012. The decline in revenue primarily reflected a continued weakness in sales in North America, including a decline in our OEM technology group business and lower-than-anticipated government sales. Aside from these headwinds we experienced during the quarter, we did see demand for our core networking equipment group business, especially in the unified communication and (inaudible) market, which represent over 80% of our overall revenue.

Geographically as a percentage of revenue, sales in America accounted for 52%; Europe Middle East and Africa 32%; and Asia Pacific, 16%. Revenues associated with the new managed and technical services business line grew to approximately 18% of total revenue or $5.7 million in the second quarter of 2012.

Managed services provided a recurring revenue driver, which helped further bond AudioCodes' high-value relationship with its customers. Service revenues are also beneficial in that they are typically characterized by high gross margin and are based on the extensive experience and knowhow accumulated in the Company.

Our top 15 customers accounted for 46% of our revenue compared to 52% in the previous quarter. In the second quarter, we had a single distributor in North America that accounted for 11% of revenue compared to 14% in the previous quarter.

In terms of revenue by business group, in the second quarter, our networking business group accounted for 80% of revenue and our technology business group accounted for 20% of revenue, compared to 81% in our networking business group and 19% in our technology business group in the first quarter of 2012.

GAAP net loss for the second quarter was $2 million or $0.05 per share, a decrease of $6 million versus the year-ago quarter and decrease of $477,000 sequentially. Non-GAAP loss for the second quarter was $1.4 million or $0.04 per share, a decrease of $6.4 million versus the year-ago quarter and a decrease of $585,000 sequentially. In the second quarter of 2012, on a GAAP basis, gross margin was 57.5%. Non-GAAP gross margin was 58.2%.

Net operating expenses were $19.6 million compared to $20.6 million in the first quarter of 2012. Our total non-GAAP operating expenses were $19.2 million compared to $20.1 million in the first quarter of 2012.

Headcount increased this quarter by 16 employees, which brings us to a total of 636 employees. The increase contributed to new hires in sales and marketing personnel in Europe and Asia Pacific.

Short-term and long-term cash balances were $60.7 million compared to $70.3 million last quarter. The decrease in cash balances is mainly attributed to financial activities including loan repayment and repurchase of treasury stock, as well as an increase in payable and net loss.

Net cash used for operating activity was $4.6 million this quarter compared to net cash provided of $623,000 last quarter and net cash used of $3.9 million in the second quarter of 2011. DSO came in at 80 days compared to 75 days last quarter.

While we expect the demand for our new products and solutions to grow at a double-digit compound annual growth rate over the next three to five years, we are still affected by a decrease in demand in our technology products. Due to reduced visibility and timing in the spending environment, we are forecasting that revenue in the second half of 2012 will be stabilized at the level of the first half of 2012.

And following the implementation of the initial steps of the restructuring plan, we expect to reduce our operating expenses by approximately 5% below the current level of expenses as soon as the fourth quarter of 2012. Overall, our actions are aimed at supporting a plan to return to profitability and growth in 2013 and beyond.

As for our share repurchase program originally announced on October 3, 2011, we would like to inform you that during the second quarter, the Company repurchased approximately 750,000 shares of common stock at an aggregate cost of $1.6 million. Based on the repurchase of 4 million shares made out of the program to date, AudioCodes had approximately 1.2 million shares left under the current authorization.

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

Thank you, Guy. Earlier today, we have announced our financial results for the second-quarter 2012. As indicated in our financial results press release, revenues came short of expectations and reflect a mixed trend of balancing the shift from our legacy business and our product (inaudible), with a renewed effort to move into an end-user-oriented strategy with greater emphasis on solutions, services and products.

As we move further into the second half of 2012, the focus on partnering with leading solution vendors such as Microsoft, Genesys and others, and collaboration with global system integrators will become more current and more effective and should ease the return to growth and profitability.

In our discussion today, I would like to cover our latest announcement of restructuring of operations, but more important to put the major emphasis on redefining our strategy and go-to-markets in the enterprise space and then refocus and the change which we will be taking as a Company, as an organization going forward.

First I'll touch on the restructuring process. We plan to lower OpEx by approximately 10%, needed to adjust our expense level to be in synch with the anticipated lower level of revenues for the rest of 2012. 10% [gives us] about $8 million out of $88 million OpEx, and basically that translated to about 7% or 8% in our headcount. We plan to implement this change over the next six to nine months.

At the end of the second quarter and over the past week, we have already [to expect] that the proposed reductions is about 5% in outlook, and we expect that impact to be already visible and evident in our third-quarter results, which is three months from today.

We (inaudible) redefined our strategy and go-to-market in two key areas. One, focus on enterprise communications, unified communications and business services go-to-market. That should be our key go-to-market strategy for the next two or three years. At the same time, in current periods, in the next three, four months, we will be redefining the organizational structure that will best fit the new strategy in this market.

The renewed focus aims to take advantage of the rapid changes emerging in the world of enterprise and in our SMB communications and business services, where we see much disruption occurring and we anticipated the plan of some of the largest incumbents who use, control and own many of the enterprise communication accounts over the past 20 years. With the change in many of the (inaudible) for us, the need for restructuring and change of the organization to feed the new strategy is now clear, and we will touch that in a moment.

We intend to reevaluate our various business plan activities to fit with the renewed strategy and realign Company assets and resources towards more effective operations around the new strategy.

A cornerstone of our strategy is the fact that we are gradually becoming one of the very few independent sources for voice products and voice services in our expertise. That is the reason for becoming the [planner] of choice of AudioCodes by some of the largest vendors in recent years in voice (inaudible) and professional services fields.

Another key factor in the (inaudible) business is a gradual move from the product excellence focus to a focus that now combines solutions, services and products. The enterprise communications and telephony market as we know it, and more so the SME/SMB market, will be going through major change and will be heading towards, we believe, the breakup of the hold of some of the largest known incumbents (inaudible). This (inaudible) means more opportunity for more agile and (inaudible) specialized solution and product companies, and we definitely see us as one of the leading companies taking advantage of that evolution.

With the advance of new unified communication functionality, the rapid decline in industry (inaudible) as a result of the impact of the newest changes in communication technology, the disruption becomes [obvious]. (inaudible) telephony, these will all be claiming close to 20% of the enterprise communications market these days. Same goes with cloud. We see more and more businesses considering using services from the cloud.

With businesses quickly becoming the more (inaudible) enterprise communications by CIOs and IT managers compared to past years' focus on completely different things, such as PB access, (inaudible), and costly annual maintenance fees.

Without going into too lengthy of a discussion here, it is clear that the assets that we are bringing to this market will open for us huge world of opportunities. And the technology, the know-how, the people, the customers, the (inaudible), our plan and (inaudible) execution, that will pave us the way to success. Being smart enough and agile enough, we believe we will play a major role in capturing the newly developed (inaudible) in the emerging (inaudible) communication world and unified communication.

Now just to give some examples to that trend, we are active in two key areas with the new unified communications market and in the contact center market. I can tell that in that quarter, second quarter of 2012, we have been awarded, announced, that we are part of very large unified communications deployment. Some of them, the markets are (inaudible); some of them use the contact center (inaudible).

In the unified communications arena Lync space, a long list of small wins. We have been awarded two big contracts. Each adds few millions of dollars over the next three to four years. We believe this is just the tip of the iceberg, and that is just the signal that (inaudible) that we are [at a] few more large very significant deals.

One very important point to make here is that while in the past we were selling mostly product, in these two big contracts the services portion is especially larger, and again is in the amount of few millions of dollars. (inaudible) in the contact center area, we are gradually becoming a company whose voice expertise are fully important together to implement high-quality voice solutions.

With that out of the way, I will end up that part of the session, and I will turn the session into the Q&A part. Operator.

(Operator Instructions) Jay Srivatsa, Chardan Capital Markets.

Thanks for taking my questions. Shabtai, as you look beyond 2012, what are some of the investments you are making today that you think will start to materialize meaningfully next year?

A, our excellence and leadership in the Gateway market is known, and we believe that that will be capped in coming years. Day by day, we hear about other players exiting the market. Just today, I've been told that the largest player in that market has ended the supply of one of these key products. So we do expect that our gateways definitely in the enterprise and the enterprise communications market will keep be a major selling item.

Side-by-side with that, I am glad to say that services is becoming a very stable strong momentum source of revenues for us. And again, we do expect -- last year, I think we have mentioned that we have sold about $22 million in that space. We will see growth this year on the order of close to 20%.

The two new hot business lines that still are not providing much but will becoming much more effective in 2013 would be the Enterprise SBC activity and the market for these Business Gateways. Those have reached a level of maturity, selling in a few millions this year, but we do believe that going forward and we have good inputs regarding our MSBG product line in recent months that make us believe that we have one of the best products in that area. So side-by-side with gateways and services activity, we believe that the MSBG and the SBC would start contributing.

Even more than that, I think you -- what I've been focusing earlier. Again, we have been developing internally (inaudible) a series of enterprise communications oriented technologies. Among them, the key is mobility. We are basically trialing this month with a Lync-related mobility solution. We will provide a more general product for any vendor telephony system as a product mobility solution in early Q4.

We -- based on inputs from the field, if you do a study and you inquire, CIOs and active managers, I believe that these days the emphasis to upgrade telephony system is not big. However, whenever you are mentioning mobility, whenever you are mentioning the ability to provide IM presence or voice on the move, that increases especially productivity, the ability to make your mobile workforce much more agile. And we believe in that area we will be leaders.

The technology that provides such a solution is really very comprehensive. You need to be able to provide, as everybody understands, clients for the various smartphone operating systems. You need to have a server. You need to have control of -- a [session] for the controller technology. You need to be able to combine some voice quality capabilities in order to provide good services, because people will not use bad quality voice on the WiFi, and we will provide that.

And you also need to be able to provide services, because each time you are coming into an enterprise installation, you will find a different set of data and voice metric, with different (inaudible) and routers and switches. And usually, it sometimes becomes a nightmare for the IT managers to control the quality of service, mainly for voice-over-data and over the wide-area network.

So by owning and advancing mobility, SBCs, voice quality, services, I think that combination will make us one of the very unique organizations capable of providing a stable and high-quality solution, and that would be our goal.

So there will be a focus on enterprise communication from mobility standpoint, from voice quality standpoint and other technologies that we are developing.

All right. In terms of the enterprise market itself, given that your OEM business and the government business is declining, what is your view on the macro outlook for enterprise spending in the second half of this year, and then more so as you look into 2013?

Again, we are not vendors of mainstream telephony, enterprise telephony. But I would assume that the appetite of IT managers to spend on replacing telephony systems is not big. On the other hand, I do see definitely [willingness] and attractiveness in providing mobile solutions, unified communications solutions, et cetera.

All right. Given some of the cost reduction measures you are doing, what does it do to your breakeven revenue run rate? What is the sweet spot now?

We started seeing basically at the current revenue levels to become about breakeven, meaning -- the whole idea behind doing the restructuring was really to stop the bleeding. And we believe that if we reach a level of about 10% OpEx reduction, we should become, at that level of revenues, about breakeven. But we do expect that going forward into 2013, we will be profitable again.

All right, last question. In the past, you've given a full-year revenue guidance of $140 million to $150 million. Are you revising it, are you sticking with it? And how do you hope to be able to achieve that given the weaker first half?

Actually, if you listened to Guy, we basically said our -- we are not providing guidance at this time. We state our objectives for the second half of this year to be able to stabilize our level of revenues at the same level that we achieved in the first half of 2012, and that is our [plan] of record. It's not a guidance.

Thank you.

Robert Katz, Senvest Capital, Incorporated.

I was wondering if you can elaborate on some of these big contracts you won. How many seats do they represent, over what time frame, and do you see more contracts like that in the pipeline?

Yes, basically, those are multinational, huge global companies. One is spread over, I would say, [10] or even close to 100 countries, with hundreds of locations. We are talking about a timeframe up to about [two] years. And as I mentioned before, the split is much more in favor of our services. But we do have a considerable amount of hardware in that.

The second one that we just have been told that we won is larger. I'm not sure how many countries and locations [we could visit] here, but the second one is larger. We basically believe this is a trend. We believe that at this stage, if you consider unified communications, the solution needs to be completely agnostic of the various telephony systems that you have in each and every side. Therefore, it is an advantage for a newcomer, such as Microsoft, to be able to deploy unified communications solution on top of just any telephony system from any vendor.

As such, their ability to win large enterprises, which by definition are spread over many countries and many offices, becomes (inaudible). And therefore, it's becoming more and more evident that if we won these two big contracts and we won them through a very large system integrator, I believe that we have earned the confidence of the system integrator.

And therefore, with the success of Microsoft and Lync and the success of the system integrated suite we work with, we believe that will allow us to win more such projects, mainly paving and building for us a very nice stream of revenues from the beginning of 2013 and beyond.

And the system integrator defers to you for services, integration services, for the VoIP?

Yes, by far. The project is much larger. I would assume that our percentage of that is lower than 20% or maybe 15%. But all the numbers I've mentioned so far relate to voice -- are voice-related.

And then, with the lack of guidance, so you're hoping that revenues stabilize around here. Are you seeing any indication of that yet, or is there still more uncertainty with Q3?

There are several areas, as you may -- you can assume, we try to speed up growth in our revenues by trying to identify those products that we believe we will be able to ramp up faster, providing some of the missing revenues going forward. So there is such effort in the Company.

Therefore, first quarter is not the best quarter to excel in, given it is summer and given the turmoil -- the economical turmoil we are going through because of the European crisis and the weakness in some of the emerging markets. But we are confident and that is the plan and focus internally that already in Q4 we will increase revenue.

In Q4. Okay, great. In terms of the exposure to the shekel and how that is impacting your P&L, are you seeing any benefit from it yet, or do you have to wait for your hedges to play out?

Unfortunately, almost no benefit because we were hedging, [oddly] enough.

For how far out are you hedging?

Currently, almost the end of 2013.

End of 2013. Okay. All right. Very good. Thank you, guys.

It appears we have no further questions at this time. I would now like to turn the floor back to management for closing comments.

Thank you, operator. In summary for our call, 2012, we are redefining our strategy of moving from a product [excellence] business into a more end-user-oriented business and with greater emphasis to solutions, services and products. This change is already taking place this month. This, we believe, will provide our customers (inaudible) value, which we believe will transpire into a new growth and prosperity.

I would like to thank everybody for attending our conference call and look forward to have you on our next call. Thank you very much. Bye.

This concludes today's teleconference. You may now disconnect your lines at this time, and thank you for your participation.