AudioCodes Ltd (AUDC) 2013 Q1 法說會逐字稿

Greetings. Welcome to the AudioCodes' first-quarter 2013 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, Mr. Knettel. You may begin.

Thank you, Rob. I would like to welcome everyone to the AudioCodes' first-quarter 2013 earnings conference call. Let me begin the call with a brief Safe Harbor statement.

Statements concerning AudioCodes' business outlook, future economic performance, product introductions and plans 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 effects of current global economic conditions and conditions in general, and in AudioCodes's 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 need for additional financing; the ability to satisfy covenants in the Company's loan agreements; 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, 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 first-quarter 2013 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, and discuss developments in our business and industry. We will then turn it into the Q&A session. Guy?

Thank you, Shabtai, and good morning, everyone. Before beginning the financial overview for 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 reflects adjustment for the following two non-cash items -- stock-based compensation expenses, which totaled $344,000; and amortization expenses relating to the acquisition of Nuera, Netrake, CTI, which totaled $276,000. A full reconciliation of the non-GAAP 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, first-quarter revenue was $32.3 million, which represents a 1.6% decrease from the sequential fourth quarter of 2012. We saw solid demand for our core networking equipment group business with a sequential increase of 2.3% in revenues, especially in the unified communication and enterprise SDC following the growing demand for linked unified communication and SIP trunk services, which was partially offset by some anticipated headwinds we experienced during the quarter in our technology group.

As a percentage of revenues, sales in Americas accounted for 54%; Europe, the Middle East and Africa, 32%; and Asia-Pacific, 14%. Revenues associated with our growing managed and technical service business line were 19% of total revenues, or $6.1 million in the first quarter of 2013 compared to 17% or $5.5 million in the first quarter of 2012. Managed services and professional services helped further by AudioCodes's high-value relationship with its customers.

Service revenues are also beneficial in that they are typically characterized by high growth margins, and are based on the extensive experience and know-how accumulated in the Company. Our top 15 customers accounted for 50% of revenues compared to 58% in revenues in the previous quarters. In the first quarter, we had a single distributor in North America that accounted for 17% of revenue, same as in the previous quarter. In terms of revenue by business group, in the first quarter, our networking business group accounted for 83% of revenues, and our technology business group accounted for 17% of revenues, compared to 81% in our networking business group and 19% in our technology business group in the fourth quarter of 2012.

GAAP net income for the first quarter was $71,000 or breakeven on a per diluted share basis, an increase of $1.6 million versus the year-ago quarter, and a decrease of $453,000 sequentially. Non-GAAP net income for the first quarter was $691,000 or $0.02 per diluted share, an increase of $1.5 million versus the year-ago quarter, and an increase of $447,000, sequentially. In the first quarter of 2013, on a GAAP basis, gross margin was 58.7% and non-GAAP gross margin was 59.3%. GAAP operating expenses were $18.6 million compared to $17.7 million in the fourth quarter of 2012.

Our total pro forma operating expenses were $18.2 million compared to $17.3 million in the fourth quarter of 2012. Headcount increased slightly this quarter by four employees, which brings us to a total of 583 employees. Net cash provided by operating activities was $2.7 million this quarter compared to $8.2 million last quarter, and $623,000 in the year-ago quarter. Short-term and long-term cash balances were $57.5 million compared to $58.5 million last quarter. The decrease in cash balances is attributed mainly to a loan retainer of $2.5 million offset by net profit, as well as continuing decrease in inventory. DSO came in at 71 days compared to 68 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, within this larger growth trend, for our new products and solutions, we do anticipate some of this growth will be offset by decrease in demand in our technology and legacy products.

In April 2013, AudioCodes entered into asset purchase agreement with its affiliate company, MailVision. MailVision is an Israeli company which develops, markets, and licenses voice over IP solutions for mobile PC, Web, and tablet devices for telecom operators, service providers, and telco over the top. As of March 31, 2013, AudioCodes owned 26.4% of the outstanding share capital of MailVision or 24.1% of the share capital of the company on a diluted basis. The closing of the transaction is subject to customer conditions and is expected to occur during May 2013.

As for our guidance, we reiterate our annual guidance for 2013 as follows. On an annual basis, we forecast revenue for 2013 to be in the range of $133 million to $137 million, and non-GAAP earnings per share -- per diluted share are expected to be in the range of $0.10 to $0.14. We do not expect material change in our guidance following the closing of the MailVision asset purchase agreement.

I will now transfer the call to Shabtai.

Thank you, Guy. We are very pleased to report financial results which are in line with our original plan for the year. As stated in our release earlier today, the improvement is underlined by operational efficiency and progress in our strategic initiatives made in the quarter.

Growth in our networking business has been driven primarily by higher product sales and services in the areas of unified communications, enterprise session border controllers, and enterprise voice over IP networking, all representing strategic directions for us. As highlighted by market studies and indicated previously, all three market segments do represent fast-developing sectors and applications in the networking world, and are expected to extend growth over the coming years. This provides for us a very sound basis for continued growth.

Further supporting this growth factors is the fact that a continued shift in the contact center markets to become IP switch-based. And the constant growing shift in enterprise voice services from pure on-prem solutions to cloud-based voice services and hybrid models.

Guy has already covered much of the details pertaining to our financial performance in Q1. I'd like to focus on the most important ones achieved during the quarter. First, let's touch sales.

This has been a typical Q1. It was on track with the original plan and budget that we have planned for the year. We had a very slow entry into the year, mainly in January and beginning of February. The quarter has been very much backend-loaded, but this is a typical Q1 and we should accept it as it is. The good news, April has been fairly strong and better than previous months in terms of new funnel opportunities being created. And that's obviously a significant point of encouragement for us. Coming back into Q1, although we ended lower in sales compared to the previous quarter by 1.6%, sales trends have been very favorable, as I will immediately describe, with overall networking revenues growing 2.3%. This is our main direction and this is now comprising 83% of our revenues. So, while we went a bit down in sales, we achieved growth in our main line, which is networking.

While sales of legacy technology line and mid-density media gateways continued to decline as in previous quarters, we saw good trends in all of the major new focus areas for us. We saw strong sequential growth and a growing number of opportunities in the Microsoft Lync segment. We've seen sales of enterprise session border controllers growing close to 20%, with the leading new enterprise SBC platform, the Mediant 4000, growing above 50% in the quarter. We saw above 50% growth in sales of IP phones, but we just started to penetrate the link in the contact center environments, and we believe that we will see much more sales in that area.

We also started to see selectively a finance opportunity developing for us in the branch office throughout our segment, that segment which needs to support voice services from the cloud and to allow us the operations. No sales have been recorded in Q1, but we do believe that we will see, going into the second half of the year, growth sales growing in that space too. And finally, we have seen good performance on the service side where we grew 10% year-over-year.

Let me touch a few other notable operational highlights. Gross margin has been quite strong. We've seen strong performance growing to 59.3% from 57.7% in the first quarter of 2012. Operating expenses, we exhibited good control of it. Quarterly expenses amounted to $18.15 million, very much in accordance with our annual budget plans and targets. We've seen positive cash flow in the quarter. Operations provided $2.5 million, and net we grew $1.4 million in cash.

Inventory went down. We went down $1.3 million to $15.5 million. This is now 22.5% down from the level of inventory we had a year ago. Headcount, we've been fully performing on our plans. We didn't increase headcount. It went up by four employees. We were able to grow the business without growing or expenses.

Now let me go to the main areas of activity where we will see growth going forward, most notably the environments of Microsoft Lync environment. First, recent indications as to the health of this segment are coming from Microsoft. In their financial release about two weeks ago, at a conference call to their investors, Microsoft has quoted the following data points. Lync revenues grew 30% in the quarter. They indicated that the excitement around their Lync entertaining platform is continuing to grow. They indicated that 90 out of the Fortune 100 companies are now using Lync. That has huge implications for us, mainly because the first few Lync implications are mostly presence and IM-focused. And therefore, we believe that there's a large infrastructure for voice applications that's developing for us in the large Fortune 100 companies.

Today, there are more than 5 million seats of enterprise voice deployed. This tells you a lot about the quality and viability of the solution of voice in the Lync environment, and receive voice growing in numbers. At the Lync 2013 conference in February, Microsoft announced that Lync and Skype connectivity for presence, IM, and voice will be available to all Lync users by the end of June. Connecting these audiences is perceived by Microsoft to be a key milestone, as they will be delivering on the promise of truly unified communication between consumers and the enterprise world. We believe that this Lync/Skype connection will be huge driver for the evolution of voice within the Lync environment, and we will benefit from it.

We also saw another indication coming from another player in the field, Polycom. In their financial release about a week ago, Polycom and Microsoft -- Polycom said that Polycom and Microsoft joint ventures, Lync grew 30% in the first quarter of 2013. And they also said that in the second quarter, Polycom's pipeline already sees large early stage multimillion dollar deals, which will be pursued in third quarter and fourth quarter.

Now, we have our angle into it as well. In fact, this is surely similar to what we started to see these past few weeks and more so in early April. We see a nice uptake in creating a number of new Lync-related opportunities, which are substantially larger in size than before, a lot of which are in early stages and in the proof of concept phase. Those will translate multimillion dollar projects each over the next years. As a matter of fact, this quarter, we start the implementation but prefer such large projects.

Our products for the environments -- in the past we have been primarily focused on selling connectivity products, gateways, session border controllers, SBA. We now start to see more demand for our IP phone and services. Another key development which we haven't made public so far is that we had a major win for our core logging application in the Lync environment. And we are now on our way to see more follow-on big projects in the same sector; we are involved in the beginning of two such more projects. This could be huge -- it could bear huge importance for us.

We believe that our leadership in the Microsoft Lync voice ecosystem is the only single source provider. Microsoft partners for end-to-end voice product and services solutions is a clear competitive edge. And smart apps, the core logging application, is a true indication of that. With the recent launch of our AudioCodes One Voice for Microsoft Lync offering in early January, we are simplifying and accelerating voice enablement of Lync implementation with a complete portfolio of products and services.

Now to another growth area for us -- the enterprise session border controller market. In 2013, we see two key growth engines leading sales growth in the business in the second half -- Microsoft Lync and enterprise SBC. In enterprise SBC, we saw increasing market acceptance for our products. The Mediant 4000 introduced in the third quarter of 2012 is key in this growth. This opened for us a market for few thousands of concurrent sessions.

Sales of enterprise SBC grew above -- grew close to 20% in the quarter, and now in a running rate, it should bring us to more than $15 million annually among key application areas of mainly Lync and contact center. Major investment areas for us, we do plan to make two key announcements in coming months. I should also mention the Oracle Acme acquisition event, which is opening for us more opportunities in the market as we find more customers open to do business with us.

Now to the acquisition of MailVision assets. MailVision -- as Guy mentioned, MailVision is really based over the top mobile voice player active in the space for several years. We have the leading investment position there. We have had a recent agreement with them and acted as their key go-to-market. Together we won projects at Vonage, Telefonica and a few other large service providers. In parallel with AudioCodes, we have developed our own solution for enterprise mobility called MobilityPLUS. The solution is now in beta stage with several of our organizations.

We view the over-the-top market as strategic and important for us to extend the application of some of our very unique technological assets in VoIP and networking technologies to the mobility space. We do believe that the combining the assets of these two operations can become quite successful in delivering mobile SIP trunk communications solutions for enterprises in the service provider market as early as 2014.

Before I conclude my introduction, let me touch on WebRTC. WebRTC is recently -- has growing mind share in the communication industry. WebRTC is an effort started by Google to build a standard based open source real-time communications media engine into all of the available browsers. With WebRTC in a browser, Web services application can now make real-time voice or video connections to another browser using no special needs. There is no need any more for special voice or video technology expertise.

The first WebRTC-enabled browsers, Chrome and Mozilla, will come out later this year. WebRTC is rapidly becoming a mainstream trend adopted by practically most of, if not all of, the communication market players. The significance and implications of this mobile communication world contact centers market and mobile services provider are enormous.

Now, to our angle of it. If WebRTC becomes successful and popular, it will provide a strong push to the use of enterprise SBCs. The assumption is that a substantial portion of the WebRTC-based voice traffic will bypass the traditional fixed and mobile voice networks, and will arrive to the enterprise on a broadband Internet connection. This will be a strong driver for enterprise SBCs.

There's another angle for us in the WebRTC game. It's called voice quality. There are known voice communication quality issues and implications to voice when traveling over unregulated broadband Internet routes versus relatively highly priced MPLS basic trunks. Opus, the WebRTC voice critic, is one of the recent and best voice critic capable of treating a major part of these issues dealing with packet loss packaging during packet delay. We believe that articles who have good control of voice processing technology will have an edge in providing better voice quality for WebRTC-based voice calls transversing the Internet. And by providing further enhancement, we do plan to be a leader in that space.

With that, I have concluded my introduction. I'll turn the call to the operator.

(Operator Instructions) Andrew Uerkwitz, Oppenheimer.

Two quick ones here. The first one is Shabtai, you mentioned several large projects. Can you guys talk about the logistics and dynamics, and how that gets filled? And how that gets expensed? Should we expect some upfront expenses and revenue come in later?

Okay, so we do see a growing number of new enterprises, large enterprises, starting to do proof of concept and plan their Lync deployments. We're involved with a large number of them, above 10 at this stage. We believe that in coming quarters that will translate to relatively low level of sales, but definitely will create for us the infrastructure for substantially larger sales volume in 2014. However, our ability to take on so many large new opportunities does signify that we are being perceived as a leader in that space.

No, no upfront investments efforts that are beyond our current operations. So, we don't see any implication to expenses, but we do see definitely revenue starting to climb slowly, more into 2014.

Great. And then last question here. On the OpEx side -- OpEx, I think if I remember right, was up about $1.5 million quarter-over-quarter. Is that -- should I expect like relatively similar trends going forward? Or was this just a one-off because you had the Lync conference and a couple of other things?

Andrew, regarding the OpEx, as you can recall, we had a one-time event in Q4, so OpEx was a little bit lower. On a run rate basis, we already guided OpEx would be a bit above $18 million for the quarter. We will guide again when we close the acquisition -- the asset and with MailVision, that will increase a little bit the OpEx, but on the other hand, it will reduce the -- it will increase the gross margin as well. So as mentioned, it will not change dramatically the bottom line.

Well, great. Hey, thanks for the reminder. Appreciate it, guys. Good job. Thank you.

(Operator Instructions) Rich Valera, Needham.

I was wondering if you could give a little more color, Shabtai, on the pipeline, which you mentioned, I think, was strengthening nicely through April, and what kind of conviction that gives you that you'll see a sequential increase in your networking revenue? And relatedly, just wondering about your technology business, how comfortable you are of that remaining at roughly its current level. You know, right now it looks like kind of on a trajectory to be down about 10% this year. Is that kind of roughly where you think that's going to fall out? Thank you.

Sure. Let me relate first to your second question. Yes, the answer is yes. We've seen a very mild decrease/decline in the first quarter. At this stage, it looks like we'll lose between 10% and 15% of our technology revenues this year. Just to remind us all, we have been at $24 million last year, so that will translate to about $2.4 million to $3.6 million in 2013 as a whole.

As to the Microsoft space, actually, we do see a change in the [OpEx] rate. I mean, we have not seen that change in previous quarters. We -- you know, just relying on Microsoft quote that Lync is being adopted or look at more favorably with a larger number of enterprises, it does start to seem like it's taking success in the market. And my take is that once we see Skype connected to Lync mid-year, which means that we'll be much more voice call coming -- not on the IM, but also voice call coming into the enterprise into Lync from tens and hundreds of millions of users. We believe that will, again, be a driver for growth of voice within Lync.

So, combining together indications from Microsoft, Polycom, the Skype/Lync connection, and what we see actually coming from our sales force, we do have a reason to be quite optimistic about the future of more portion in that market.

Great. So (multiple speakers) --

I'd also like to maybe say that we are lately experiencing success in some of the large system integrators, the global system integrators. Mainly due to the fact that we have a global technical and sales force, and our ability to support multi-site, world-based large projects with large enterprises, which usually have hundreds of locations all around the world, is becoming a winning factor. And as with the unique applications we have developed, like smart app, I think we are in a good course here.

Great. I was just hoping to distinguish between your specific sales funnel, which you mentioned had strengthened in April, and some of the industry developments, which you also mentioned, like WebRTC and Skype/Lync integration. Just wondering, do you see your sales funnel strengthening, generating revenue, incremental revenue in 2Q? Or do you see that more of a second-half realization?

Okay. So, throughout the past few quarters, we've been growing on sales of Lync sequentially on each single quarter. And in Q1, we had about 5% growth, which we normally plan -- we planned earlier in the year for growth of 20%. I don't see that changing much. We will see leading growth in coming quarters, but I do see more -- and I cautiously would use the term hockey stick -- starting to come in probably 9 to 12 months from today, simply because then, you know, many of the proof of concept and initial deployments will prove successful and viable. And this is where the larger orders will kick in. So, I would assume linear growth in coming quarters and then substantial increase more into 2014 and '15.

Okay, that's helpful. Thank you.

Sure.

Thank you. At this time, I would like to turn the floor back over to management for closing comments.

Okay. Thank you, operator. In summary of our call, I'd like to say that we look forward to continue to grow our business in 2013 and build a sustainable profitable operation over the coming years. I would like to thank everybody who attended our conference call today, and we look forward to have 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, and thank you for your participation.