AudioCodes Ltd (AUDC) 2012 Q3 法說會逐字稿

Greetings, and welcome to the AudioCodes third-quarter 2012 earnings conference call. It is now my pleasure to introduce your host, Mr. Erik Knettel, Investor Relations for AudioCodes. Thank you, Mr. Knettel. You may begin.

Thank you, Jesse. I would like to welcome everyone to the AudioCodes third-quarter 2012 earnings conference call.

Let me begin today with the 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 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 Shabtai Adlersberg. Mr. Adlersberg, please go ahead.

Thank you, Erik. Good morning and good afternoon, everybody. I would like to welcome all to our third-quarter 2012 conference call. With me this morning is Guy Avidan, 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. I will report on progress made in our restructuring plan in and then discuss developments in our business and industry. We will then turn it to the Q&A session. Guy, please go ahead.

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 third-quarter non-GAAP pro forma results reflect adjustments for the following two non-cash items -- stock-based compensation expenses, which totaled $407,000, and amortization expenses relating to the acquisitions of Nuera Network and CTI, which totaled 282 (technical difficulty). The 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 third-quarter results are in line with our previous revenue guidance discussed on our conference call dated July 24, 2012, and include significant progress towards our plan to reduce annual operating expenses after our announcement issued on July 11.

As announced in July, the restructuring plan is expected to generate estimated annualized savings of approximately 10% of Company's operational expenses. At the end of the third quarter, we managed to reduce headcount by 7% compared to the end of the previous quarter. The implementation of the plan is expected to be completed in three to six months. During the period of the plan, we will monitor closely our business trends and even higher selectively in our growth areas.

In addition to the cost savings components of the restructuring plan, the Company continued to focus its investment in innovation around AudioCodes' key strategic initiative in the areas of Unified Communication, Enterprise Communications and Business Services.

Third-quarter revenue was $31.4 million, which represents a [1.1%] increase from the sequential second quarter of 2012. Aside from some headwinds we experienced during the quarter in our Technology group and OEM business, we did see solid demand for our core Networking Equipment group business, especially in the Unified Communication and Contact Center markets.

Geographically, as a percentage of revenue, sales in Americas accounted for 50%; Euro, Middle East and Africa, 34%; and Asia Pacific, 16%. Revenues associated with our Managed and Technical Services business line was approximately 17% of total revenue, or $5.4 million in the third quarter of 2012. Managed Services provide a recurring revenue driver, which helps further [bind] AudioCodes' high-value relationship with its customers.

Our top 15 customers accounted for 53% of our revenue compared to 46% in the previous quarter. In the third quarter, we added a single distributor in North America that accounted for 13% of revenue compared to 11% in the previous quarter.

In terms of revenue by business group, in the third quarter, our Networking Business Group 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 second quarter of 2012.

GAAP net loss for the third quarter was $1.1 million or $0.03 per share, a decrease of $581,000 versus the year-ago quarter, while GAAP net loss improved $927,000 sequentially. Non-GAAP net loss for the third quarter was $419,000 or $0.01 per share, a decrease of $693,000 versus the year-ago quarter, while non-GAAP net loss improved $993,000 sequentially.

In the third quarter of 2012, on a GAAP basis, gross margin was 56.8%, non-GAAP gross margin was 57.5% compared to 57.5% on a GAAP basis and 58.2% on a non-GAAP basis in the previous quarter. The 17-basis-point erosion in gross margin this quarter is predominately attributed to a higher-than-usual inventory write-off.

GAAP operating expenses were $19 million compared to $19.6 million in the second quarter of 2012. Our total non-GAAP operating expenses were $18.6 million compared to $19.2 million in the second quarter of 2012.

Headcount declined this quarter by 43 employees, which brings us to a total of 593 employees. The decrease reflects the implementation of our global operating expenses reduction program.

Short-term and long-term cash balances were $54.1 million compared to $60.7 million as of June 30, 2012. The decrease in cash balances is mainly attributed to financial activities including loan repayments and the repurchase of Treasury stock, as well as a decrease in payable deferred revenue as well as a quarterly net loss.

Net cash used for operating activities was $1.2 million this quarter compared to net cash used of $4.6 million last quarter and net cash used of $405,000 in the third quarter of 2011. DSO came in at 78 days compared to 80 days last quarter.

While we expect 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.

We are forecasting that revenues in the fourth quarter of 2012 will be higher than third-quarter revenue and the Company will return to a non-GAAP operating profit in the fourth quarter, ahead of our initial plan.

As for our share repurchase program originally announced on October 3, 2011, we would like to inform you that during the third quarter, the Company repurchased approximately 1.3 million shares of common stock at an aggregated cost of $2.5 million. As of October 1, 2012, AudioCodes successfully completed the authorized stock repurchase program, having repurchased 3.96 million shares through the program since its inception at an aggregate cost of approximately $10.7 million.

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

Thank you, Guy. We are very pleased to report we returned to sequential growth and improved financial performance for the third quarter of 2012. The key business performance improvement indicators for the third quarter include, among others, the following (inaudible).

First, we have been able to reverse the trend in the top-line revenues. From a series of declining revenues, this is the first quarter that shows improving revenue. We believe that's not the only one (inaudible). For the first time, we were able to exhibit growth in revenue. This change is even more impressive when we take into account that we're talking about the summer quarter, which traditionally is weaker than the other quarters in the year.

The second indicator is our ability to lower our quarterly loss substantially from $1.4 million in the previous quarter to around $400,000 in the third quarter. In fact, taking into account the impact of our restructuring plan, we have good reason to believe that [even if plans] for Q4 growing revenues was not materialized, we will be able to show a (inaudible) of profitability in the quarter. As we plan for further growth, we believe that our return to profitability in Q4 is on the right track.

The third indicator, our ability to reduce our OpEx, headcount and have better cost control. All that will support further [production] business improvements in Q4.

Key driver to the success in delivering improved results for the third quarter were three key fundamental drivers. First and foremost, the Company has been able to plan (inaudible) and focus and converge on growing market segments. Our focus and investments in recent years in growing markets and applications, such as the unified communication market, contact center market and the move to IT-based contact centers, business communication services and (inaudible) trunking, all those segments represent the same solid demand for products and solutions in our areas. And the growing shift to cloud computing will further accelerate that. So we're looking at a very healthy demand for our offerings.

Second is the very good pickup in activity and sales in two of our leading business plans in the networking business. For years, we've been investing in developing E-SBC and the MSBR (inaudible) side by side with the current (inaudible) lines. In third quarter, we have substantially increased in sales of SBCs and MSBR. In both areas, we introduced new products. I'll talk more about that. Those products contributed much to the growing number of (inaudible) wins in the quarter, and therefore, we've been able to increase sales (inaudible) outlook going forward.

And again, coming back to the restructuring plan and the cutbacks and cost control, the determined approach we took with regard to the plan, this is where we have implemented more than 70% of the plan and this is what we are (inaudible) [to ourselves] a very excited basis going forward.

During Q3, we suffered from a very weak August, but September came very strong. September was a very strong month in terms of design win sales. We have seen the same trends in October. So the beginning of Q4 is one of the best we have in [several quarters backwards].

In the quarter, we have seen a growing number of Microsoft Lync related opportunities in many regions, most notably in North America. And we have also maintained good cooperation with members of the Lync (inaudible) management within Microsoft.

We also saw some very good success in the context in the market related to activities with Genesys. Asia Pacific seems to be growing very nice. We see a lot of activity and new contract players deployed and growing there. And we've been able to take possibly some of the [last] design wins in that region.

One new (inaudible) [that we entered this in July], the Mediant 4000 SBC, has made a dramatic change in our ability to (inaudible) session border controllers. Just to give you a scoop for best market, the enterprise session border controller market, (inaudible) is about $160 million this year, but is predicted to grow to more than $200 million in three years from today.

Now, the majority of that market is being serviced by session border controllers with a range of session capacity that stand around a few hundred and up to a few thousand. We've been lacking some of the higher densities in the past. The introduction of the Mediant 2000 in July and the (inaudible) new session border controller [with this plan] basically drove much success, very fast ramp-up in new wins and sales in Q3. And we believe that we will see continuation of that trend in coming quarters.

Like (inaudible) mentioned, that in the new market study that (inaudible) issued in October, about a month ago, AudioCodes was named number three in that market, after Cisco and Acme Packet, and we've been able to grow market share from 5% to 6% in the past six months. So that is for the session border controller.

At the same time, we have introduced a new Multi-Service Business Router, the Mediant 850. Again, we are catering for those service provider deployments [for] the ability to provide state-of-the-art combined media gateway session border controller (inaudible) function in a single [multilayer] unit. This is desirable. And the ability to support advanced [control] services such as Lync compatibility and a few more functionalities, it becomes very important.

We've announced a major win with Bezeq, the industry-leading service provider. That tells you that we've been competing against the top-tier players in that market -- you know the names -- among them, Cisco, Juniper and others. And I think that win is a vote of confidence for the type of technology we bring to market. We do have plans to introduce more products (inaudible). Again, this quarter is very important in terms of to basically drive new business in networking, SBC and MSBR.

Brand-new areas that we have seen much interest in the market is the area from voice quality and [quality] assurance. As voice traffic grows over IP network, and as everybody in the industry understands, those (inaudible) primarily been designed to handle data network and together with [Bezeq] (inaudible), not necessarily to support real-time voice and media functions, it becomes quite (inaudible) to be able to monitor voice quality, to identify problems in the (inaudible) to attach [fee system] attachments to them. And we have seen a lot of interest in our session (inaudible) manager product and services around that. So that would be another key driver for growth going forward.

In terms of our business focus, we continue to focus on our enterprise and business services go to market. We have been very successful in growing a solid network of (inaudible) sales channels in North America in (inaudible) places. We will be developing more emphasis on not only going through the channel, but also on creating some (inaudible) and touching some of the more known names, the larger enterprises. That will drive further sales.

We are being basically pushed, I would say, by our customers and clients to provide more than just a product set. We are basically being pushed to be more to voice (inaudible) to provide an end-to-end voice solution. And when I come to talk a bit about Lync, we will show you that the very broad (inaudible) products we bring to market makes our acquisition (inaudible) to our end-to-end solution. There was similar such quotes when we announced work with Microsoft Lync to certify our IP phones and that comment was made by the (inaudible) product manager.

We are investing primarily in (inaudible). We work very closely with some of the world's leading (inaudible), and that will assure us more and more success. We have got many types of collaboration within the marketplace ecosystem, Genesys, Avia, (inaudible) and a few other large companies. But that is the basis that will drive our business going forward.

On our activity related to Microsoft Lync, we have seen a very good quarter (inaudible) activity offering new opportunities. At this stage, AudioCodes represents the most comprehensive (inaudible) to Lync. That includes (inaudible) session border controllers, (inaudible) appliances IP phones, (inaudible) management systems, quality of service management and services. We are a [growth planner] at Microsoft. We have wins with some of the Fortune 1000 known names; among them Ernst & Young, RadioShack, eBay, (inaudible) and a few more. We do align ourselves very closely with some of Microsoft's (inaudible) system integrators, among them AT&T, British Telecom Global Services, Verizon Business, Dell, HP and others.

All in all, the success we had in the SBCs, MSBR and our primary (inaudible) system drives much of the activity going forward.

I'd like to mention, too, that we will be active much more in the mobility market, as far as mobility, where the trend to add mobile CBX capabilities is very evident, (inaudible) trying to very (inaudible), and we will see much activity on that front.

And one more piece of growing engine for us will be the IP phones. We have been investing in the last three or four years on IP phones. We make (inaudible) integration which will make them more attractive into the environment, and we believe that in 2015, we will see much growth in that area.

To touch on some more opportunities that we (inaudible) going forward starting in 2015 and going forward are the (inaudible) capability when [shortcutting] solutions we think will be very key. High-definition voice is catching up very nicely in many areas. We will see that in over-the-top (inaudible) solution in voice-over IP market. And again, our investment in monitoring (inaudible) and providing solutions and the shift to cloud computing, which allows (inaudible) product that we are (inaudible).

That's my introduction for the call, and we will now go to the Q&A session (multiple speakers).

(Operator Instructions) Andrew Uerkwitz, Oppenheimer & Company.

Thanks, guys, for taking my questions. Just kind of around Microsoft Lync, are you seeing lowering of -- to the best of your knowledge, are you seeing more enterprises adopting the voice feature for that, or is that still a pretty low percentage?

And then from a general enterprise perspective, how do you kind of foresee the drivers going into next year? Is it going to continue to be the small businesses, or is the midsize kind of driving the growth?

In terms of Microsoft Lync opportunities, we have seen good, slow progress activity. Hard for us to say, because we do not own that information about what percentage of Lync deployment includes voice on top of IMM in present.

I would tell you that for the growth we are planning for, the level of voice project activity looks good enough and sufficient. We know from some of our work with the largest system integrators that large projects to large enterprises will start (inaudible) next year. We have at least two or three such projects that we are working on initial stages, like proof of concept, and according to plans known to us, we will see in 2013 deployments in large enterprises.

So it is a gradual process. (inaudible) also know that for us, we care much whether we deploy voice in the initial stage or we deploy voice as a later-on addition. But any company that has decided to use Lync for its IMM presence, percentage that the functionality will be -- has to include voice is high, and that will happen in the course of next year. So all in all, all those are good opportunities for us.

If I recall correctly, your second question related more to the larger enterprises, right?

Sure, yes.

So basically, activity with large enterprises really goes through our large system integrator partners, and so we are working with a few of them. We have -- have been active. We now see another one.

We do believe that there is much -- it all relates really to the confidence level that enterprises basically develop towards this new (inaudible) solution. And think again, our drives to come with a complete end-to-end solution meaning, we take responsibility and charge for our voice product makes sense simply because it allows the customer to be much more confident that you've got, on one end, the Lync solution from Microsoft, and on the other end, our ability to provide directly to the midmarket or through the large integrator to the lesser enterprises. At the end of the day, an end-to-end pure voice solution approach makes sense and will allow us to move that further around.

Appreciate the color. Thanks, guys.

(Operator Instructions) Rich Valera, Needham & Company.

Thank you. Good morning. Question on operating expense levels. Guy, I wonder if you would be willing to say where you think optimum expense will settle out once you're completely done with your restructuring relative to the $19 million that we saw for pro forma OpEx in this later quarter.

Actually, this quarter, it was around $18.5 million non-GAAP. And what I can say is that although we already mentioned it, we reduced 43 employees this quarter. Most of the effect of this (inaudible) will be seen in Q4 and later on in 2013, so we expect OpEx to be even below $18 million on a non-GAAP basis.

Okay, that's helpful. And then with respect to gross margin, you mentioned there was an unusually high level of inventory write-down. So should we expect gross margin to be back up into that sort of 60 -- or sorry 58-ish percent range or 59%, once you are back to a normalized write-down level?

Generally yes. In Q4, we expect to be back on the Q2 level, which was 58.2% on a non-GAAP basis.

Got you. That's helpful. And then just bigger picture, looking at your networking business, granted you've had obviously the technology business falling off, which you sort of acknowledged is legacy. But networking has been down pretty significantly the last few quarters.

Just wanted to understand better the components of that. I know some things sound they are still growing. You mentioned SBC and a few other noteworthy sort of high-growth areas. But what is sort of the different components of networking? Maybe what has been dragging it down recently, and when do you think those components turn around and actually start growing again? Thanks.

Basically, this quarter, we have not mentioned that specifically, but networking-related sales grew 2.3% over Q2. Now in terms of the bigger picture, we have seen at the beginning of the year a decline in some of our media gateway business in two key areas. One was specific -- one OEM collaboration with a large player in the carrier growth market, which after many years of working together, we believe that their revenues went down and therefore our revenues went down. So high-density media gateways, that is something that one specific customer we lost. Then we saw also in the beginning of the year decline in our government business.

Now, when we go to the other side of the [feature], what has driven networking sales higher this quarter, basically it is mainly two type of areas. One is, again, the cooperation with our partners that increases the sales of gateway (inaudible) and [2000] (inaudible) supply (inaudible) solutions, meaning Microsoft, Genesys, et cetera.

Second is that three specific business plans, the SBC, the MSBR and the IP phone, are (inaudible). And therefore, going forward to 2015, we will see (inaudible) if we don't see much change in the media gateway business, which we roughly predict to be about flat, we will see definitely potential growth coming from SBC, MSBR and IP phone.

Great. That's helpful. And then just wondering if you can comment on the momentum in the business. It sounds like from your prepared remarks that you had a strong finish to Q3 and a good start to Q4, which would certainly, I think, lead you to conclude you are probably going to be up in Q4. So I just wanted to get a sense of your confidence in the visibility towards being up in Q4, given that strong start to the quarter.

Actually, you said it yourself. We had good September, similar good October, and with the type of backlog that has been developing in the beginning of the quarter, we have a high level of confidence that we should be able to grow in revenues in Q4.

Okay. That's helpful. Thanks, gentlemen.

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

Thank you, operator. In summary for our call, we look forward to continuing to grow our networking business in coming quarters and years and follow on the momentum and growing (inaudible) markets in the industry. I'd like to thank everybody that has attended our conference 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 for your participation.