AudioCodes Ltd (AUDC) 2013 Q2 法說會逐字稿

Greetings, and welcome to the AudioCodes second 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, sir.

You may begin.

Thank you, Brenda.

I would like to welcome everyone to the AudioCodes second 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 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 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.

(technical difficulty)

Please go ahead, sir.

Hi.

Thank you, Erik.

Good morning, good afternoon, everybody.

I would like to welcome you all to our second 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 then discuss trends and developments in our business and the industry.

We will then turn it into 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 adjustment for the following two non-cash items -- stock based compensation expenses, which totaled $373,000, and amortization expenses relating to the acquisitions of Nuera, Netrake, and CTI, which totaled $218,000.

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, second quarter revenue were $33.7 million, which represents a 4.4% increase from the sequential first quarter of 2013.

We saw solid demand for our core networking equipment group business, with a sequential increase of 8% in revenues.

Sales of our unified communication and enterprise SBC offering drove the increase, following the growing demand for Lync unified communication and SIP trunk services.

This growth was partially offset by some anticipated headwind we experienced during this quarter in our technology group.

In terms of revenue by business group, in the second quarter, our networking business group accounted for 86% of revenues, and our technology business group accounted for 14% of revenue, compared to 83% in our networking business group and 17% in our technology business group in the first quarter of 2013.

Revenues associated with our growing managed and technical service business line were 18% of total revenues, or $6.1 million in the second quarter of 2013, compared to 19%, or $5.9 million, in the second quarter of 2012.

Managed services and professional services helped further by AudioCodes' high value relationship with its customers.

Services revenues are also beneficial in that they are typically characterized by high gross margin, and are based on the extensive experience and know-how accumulated in the Company.

As a percentage of revenues, sales in the America accounted for 50%; Europe, the Middle East and Africa 35%; and Asia/Pacific, 15%.

Our top 15 customers accounted for 54% of our revenues, compared to 50% in the previous quarter.

In the second quarter, we had a single distributor in North America that accounted for 18% of revenues, same as in the previous quarter.

GAAP net income for the second quarter was $441,000, $0.01 on a per diluted share base, an increase of $2.5 million versus the year ago quarter, and an increase of $370,000 sequentially.

Non-GAAP net income for the second quarter was $1 million, or $0.03 per diluted share, an increase of $2.4 million versus the year ago quarter, and an increase of $341,000 sequentially.

In the second quarter of 2013, on a GAAP basis, gross margin was 57%.

Non-GAAP gross margin was 57.5%.

GAAP operating expenses were $18.8 million, compared to $18.6 million in the first quarter of 2013.

Our total pro forma operating expenses were $18.3 million, compared to $18.2 million in the first quarter of 2013.

Headcount increased this quarter by 28 employees, to a total of 611 employees.

Out of them, 22 relates to the MailVision asset purchased, and 6 new employees relates to the organic growth in sales and marketing.

Net cash provided by operating activities was $4.1 million this quarter, compared to $2.7 million last quarter, and net cash used in operating activities of $4.6 million in the year ago quarter.

Short-term and long-term cash balances at quarter end were $57.5 million, same as at the end of the previous quarter.

DSO came in at 72 days, compared to 70 days last quarter.

In May 2013, AudioCodes completed the asset purchase of its affiliate company, MailVision.

MailVision is an Israeli company which develop, market and license VoIP solution for mobile, PC, Web and tablet devices for the telecom operators, service providers, and telco over the top.

While we expect demand for our new product and solution to grow at the double digits compound annual growth over the next three to five years, with this largest growth trend for our new products and solutions, we do anticipate some of this growth to be offset by a decrease in demand in our technology and legacy products.

As for our guidance, we would like to upgrade our annual revenue guidance for 2013 as follows.

On an annual basis, we forecast revenue for 2013 to be at the higher end of our previous guidance of $133 million to $137 million.

We are also upgrading our full year 2013 guidance for non-GAAP earnings per diluted share, which we now expect to be in the range of $0.12 to $0.15.

I will now transfer the call to Shabtai.

Thank you, Guy.

We're very pleased to report another growth quarter and improved financial performance.

This quarter marks the fourth consecutive quarter of sustained growth in revenues and profits since the turnaround of mid-2012 a year ago, when we realigned our activities into a consistently growing, well balanced and diversified business for years to come.

To best illustrate this change, let's review the change in our bottom line results.

We stepped from a loss of $2.2 million in the first half of 2012 to a profit of $1.7 million in first half 2013.

And as evident from our new, improved, better guidance earlier in the call, we are confident in our ability to generate sustained growth in revenues and earnings in coming quarters.

Continued growth in unified communication, contact centers, SIP tracking and SBC, and recent stronger trends in cloud voice and [hybrid] telephony, all point in one direction.

All of these segments represent a strong driver for us to exhibit solid target market expansion and continuously evolving opportunities, and thus, represent strategic direction for us.

Underlining this trend is a very nice increase in our networking business.

Networking business now represents 86% of revenue, and with most of the legacy issues behind us, which is now -- the legacy business is now down to 14% annually, we can now report 8% increase in networking quarter over quarter, and 14% year over year.

We believe that this 15% annual growth rate, give or take, is sustainable for coming years.

Clearly, our markets' growth support it.

We have good collaboration and partnerships aligned with leading partners from the software networking industry.

Business is well balanced and diversified towards a combination of products, solution and services, and more of software products.

And our Company resources and abilities are pretty well positioned, and aligned at this stage, towards capturing the benefits of opportunities which are continuously developing for us.

Before I delve into more details regarding the quarter, I'd like to take the opportunity and make a point regarding our strategy and position in the market as it relates to industry trends.

Industry trends clearly show a transition of the traditional network equipment players into two groups.

The first one is the application delivery players, such as BroadSoft and Microsoft, and many more.

And the other group is the networking infrastructure group, which includes players such as Cisco, Avaya and others, including ourselves.

Being an infrastructure company, our strategy has evolved through the years from a pure play product company, into a full voice solution company delivering solutions, services and products in different market segments, mainly unified communication, contact center, SIP tracking, etc.

It is therefore important to note that we focus on an end to end voice solution play, which helps entrepreneurs and service providers in their migration and transition to an all-IP voice network.

And so the emphasis here at AudioCodes is on combination of products, solution and services, and not on a specific single product line.

On top of this, with the rapid changes in technologies in our space, transition to pure cloud, hybrid cloud architectures, on-prem solution, Web RTC, session border controls, over the top, HD voice, etc., our position as a provider of a fuller voice solution helps us gain in all of the different product lines.

And this would be the right perspective through which we would be looked at and compared against other players in the industry.

Now, to specific highlights.

We have seen four straight growth quarters since July 2012 restructuring.

This consecutive best -- this quarter, we have seen the third consecutive best initial backlog for the quarter.

Very strong beginning for this third quarter.

July has been fairly strong, and better than previous months in the year, in terms of new funnel of purchase orders and opportunities created.

Most legacy issues are now mostly behind us.

Technology, some access opportunity in the media server business line.

I'll mention again that networking is now 86% of revenues, grew 8% over the previous quarter, 14% over last year.

We've seen good progress across all key programs -- among them, the Lync, Microsoft Lync program, the contact centers, services are on track, and then the session border controller in the new branch routers business.

This has been the best quarter ever for our SIP business line.

That includes a combination for analog media gate with low density digital media gate with session border controls, business routers, IP phones, and services.

We also start to see a selectively -- a funnel of opportunities developing for us in the branch office router segment, with a need to support voice services for cloud and also the operations.

I'll also mention that our relationship with our partners are currently at best time ever, among them, as mentioned, Microsoft, Avaya, [Genesys], BroadSoft, Nokia Siemens, AT&T, BT.

I'll skip the financial highlights, as those were mentioned by Guy, but I'll just say again that in the last three quarters, we've been able to generate in the course of the past three quarters almost $15 million of net cash.

We've been able to drive inventory substantially down, to -- from close to $20 million a year ago, to roughly around $14 million this quarter.

And we believe that we are on track to present good, good, good financial and operational control over expenses.

As you can see from our OpEx, we've got good control of expenses, including the new acquired assets from MailVision.

In terms of our sales, generally we've seen sales pretty much in line with the initial plan.

In terms of our regional performance, North America, Asia/Pacific, Western Europe, did according to plan.

The only weakest region in our plan was Central and Latin America, and we believe this is just a passing phenomena.

To highlight some of the deals we had, we had -- and I'll get to the Lync activity immediately, but we had a pretty nice list of new opportunities in the Lync space.

I'll mention a few.

One big accounting firm in North America using our SBC, and we won a large office implementation.

A large, known consumer company from Europe, that's above $1 million project size.

This is a classic Lync deployment, and it's going to roll out, started to roll out in the second quarter, and will generate a run rate of quarterly sales of about $200,000 in coming quarters.

We've seen a very unique sale of our call recording solutions, SmartTAP, including the Lync environment, with one of the world's largest bank.

And that represents a potential of above $1 million.

We just received the initial PO.

And then, we had a large Lync project with a very large retail company in North America, deploying thousands of our [NOL] gateways in thousands of their stores, and using our session border controls data center.

I also mentioned two projects in the contact center market, one with our largest partners, ourselves, during the quarter.

It topped $1 million, combination of gateways, session border controls and IP phones.

And then we had a very nice contact center project in Asia, again, comprising for our gateways and session border controls.

As I've mentioned before, we saw nice penetration in the router business, which will grow for us in coming years.

We had a huge, huge deal in the Class 5 replacement area in Asia/Pacific, totaling above $1 million, and a few more deals.

Now, getting to the specific business lines, I'll start with Lync.

As we all know, Lync is very successful -- Microsoft Lync is a very successful, growing business line for Microsoft.

In their recent financial release, they have mentioned that Lync revenues grew in second quarter 30% over previous quarter, and they have said that 90 out of the Fortune 100 companies are now using Lync.

And in total, there are more than 5 million [sites] of enterprise voice deployed.

This is a huge infrastructure for Lync voice that's being created, and we believe, being the dominant and leading company in deployment of voice solution in that market segment, that we will enjoy that funnel in coming years.

According to reports from -- in (inaudible), Microsoft keeps growing in the [UC] market, and that is, to some extent, on the expense of its two largest competitors, Cisco and Avaya.

Beyond that, I'll mention that Microsoft is saying that right now, 70% of the Fortune 500 companies use Lync.

They have more than 40 million Lync licenses sold, which is a huge, again, infrastructure for us in coming years.

And there is a nice, important point, which is federation.

Federation basically allows one employee from a company call another employee on another company, through Lync, through self [duration] mechanism.

And right now, they have 4,000 federated organizations.

Again, huge potential for us growing coming years.

Coming to our numbers in that market segment, we can say that we have seen by now 100% growth since 2011 two years ago.

2013 is on track to show 30% growth year over year.

At this stage, we are deployed at hundreds of enterprises globally.

Many of the Fortune 500 customers.

We have a large global reseller community, on a global basis.

And second quarter is very unique in two key terms.

We have mentioned in the past that we won several multi-million, multi-year projects.

In the second quarter, we've seen the deployment of those projects starting to kick in.

So, two large companies, an accounting company, and a pharmaceutical company, started a very initial deployment in three, four, five locations out of tens and hundreds of location.

So that shows a momentum in deployment of Lync Voice.

Also, I'd like to mention that in the second quarter, we have seen the largest number of new, large enterprises initiating a Lync project, and we've seen those mainly in North America and West Europe.

So all in all, Lync represents for us very successful activity.

I'll mention two more data points.

One is that our One Voice for Lync is now capturing a lot of attention and position, with more than 150 resellers around the globe, and we've got a good, strong relationship with a few large global system integrators, one in North America getting us into large enterprises deals, one with a global integrator getting us into deals in Asia/Pacific and other regions, and with a very known computer server company that now we are part of their formal Lync offering.

Getting to our SBC activity, again, a growth area for us.

We grew 8% quarter over quarter.

The key areas and application in which our session border controls have been deployed in were Lync, the contact center market, and we have seen just the beginning of deployment in the access.

And we'll be talking more about the access SBC in coming months.

Definitely, the growth clearly evident in cloud services, voice moving into the cloud, and also, telephony helps to build the momentum towards the need of session border controls in the access side of the business, and that would be a new market segment for us in coming months.

Definitely, it will help us more than double our revenues at this stage.

We have announced in the quarter our development in the software SBC area.

That is a major development for us, for two main reasons.

One, when you are software-based, our ability to be deployed in data centers and cloud application becomes much, much easier, as we've been used with server products, software only.

Second is the fact that we will be able to rapidly increase our capacity in terms of concurrent number of SBC sessions running at the same time.

We will be delivering, as we have announced, 4,000 concurrent sessions based on the software (inaudible) SBC architecture in Q3, and we target 10,000 in January of 2014, and we will probably grow that capacity more as we move into 2014.

And that pretty much covers most of the opportunities at this stage.

We expect 2014, therefore, to become much more strong for us in terms of our SBC, simply because more than doubling or tripling our concurrent session capability will open for us more segments in the market.

We also see a very positive development in the development of Web RTC.

We believe that that will help drive much of our enterprise session border control business.

Again, I'll mention our median 4,000 session border controls, which is now growing substantially quarter over quarter.

And basically, that pretty much is my presentation for today.

And I'd like to move now the session to Q&A.

Thank you.

We will now be conducting the question and answer session.

(Operator instructions) Our first question comes from the line of Andrew Uerkwitz with Oppenheimer & Company.

Please proceed with your question.

Hey, thanks, guys.

You mentioned that your backlog looks pretty good.

What changed the visibility, and why do you think it -- or, do you think it -- that visibility, the better visibility is sustainable into the back half of the year?

Again, I think it pretty much talks to our diversified portfolio and solutions.

Our ability basically to rely on opportunities coming from different market segments, as I've mentioned, unified communication, contact centers, SIP tracking, etc.

And then, sell a combination of products and solution.

Basically, that gives a broad base for our ability to grow.

And I think now -- and we mentioned, by the way, that April was also a very strong initial month in the quarter for us, last quarter.

So I think we will see that trends -- and basically, if we look internally on those initial backlog trends, that is the key reason.

Also, as I have mentioned, we're entering multi-year projects in Lync and other spaces, and that basically translates into a pipeline of purchase order on account of a single project throughout the years.

So that gives rise to more initial backlog in the quarter.

Great, thank you.

One more quick one.

You touched on your One Voice solution for Lync.

That's -- I think that's a fairly new initiative.

What's been the general feedback from partners, customers, and at this point, even though it's early, is that meeting, exceeding expectations?

Actually, we're very pleased with what we see so far.

I think one vote of confidence is that, you know, at this stage, as I've mentioned, we have more than 150 different resellers around the globe signing to that project.

Basically, each project -- and I think this is one of the reasons for us to move from mere product focus into a solution focus is that each deployment is very unique, in terms of its being deployed in every enterprise in a completely different infrastructure, and combination of trunks and all the equipment and PBXs, etc.

So the value for the customer, at the end of the day, the enterprise is really much more in the conclusive, comprehensive solution, tying together all the different pieces of connectivity, the gateways, the session border controls, the SBAs, the phones, the management system, the voice quality solution.

So our ability basically to provide complete solution really gives relief to the end customer, and therefore, that is valued sometimes even more than the product itself.

And that is basically why we would see that phenomena.

Hey, great.

I really appreciate it.

An excellent quarter again.

Thanks, guys.

Thanks, Andrew.

Our next question comes from the line of Rich Valera with Needham & Company.

Please proceed with your question.

Thank you.

Question on your SBC revenue comments you made.

I think, Shabtai, you said you saw a path towards doubling the SBC revenue.

Can you -- is that in this year, year over year in 2013 versus 2012?

No.

What I said was that we've been so far focused on the enterprise market, and with the new software SBC, and ability to deliver even higher capacity, reaching 10,000 concurrent sessions and above, and a few more functionalities, we'll be able to create a completely new segment for us in the SBC market, which is the access market.

And that basically will open for us in 2014 the ability to, a, continue growing the enterprise, but even more important, penetrate a completely new segment SBC market for us, which is the access market.

So you were suggesting, sort of, it's more of a doubling of your TAM, like your addressable market?

Is that what the comment was?

I just was a little confused by the comment.

Yes.

Yes, yes.

The TAM will definitely -- will more than double if the access market is probably one of -- if not the largest segment in that market, and balance sheet, it will open for us a lot of room for cooperation with [asset] telephony companies with voice moving into the cloud, etc.

So definitely, we'll see acceleration for session border control sales in 2014.

Great, and just a related follow up on the software SBC.

It sounds like the driver of that R&D effort was to penetrate the access market?

Is that fair?

Just wondering what -- what's sort of the end market driver of your software SBC initiative here?

Yes.

One of the considerations, obviously, is that if you want to be deployed in data centers, sometimes in cloud infrastructure, you need to become very flexible in standard products.

Now, obviously, in those installations, standard servers from large companies such as HP and Dell and IBM and others are the key infrastructure, and thus, our ability to deliver a very unique, specific communication technology as a flexible software that can be customized and sized to the actual, specific application really helps us, rather than having to come in with a proprietary hardware that's much more difficult to scale and change towards different needs of data centers and cloud infrastructure.

No, that makes perfect sense.

And just one more detail follow up there.

So, is your software SBC virtualized, i.e., is it actually running on a hypervisor, or do you plan to do that?

Just --

It is virtualized, since day one.

Okay.

And can you say which hypervisors it runs on, or is that getting too far in the weeds here?

I'd like to leave it -- we'll cover that and get back to you.

But I know that right now, we are basically running on at least one virtual environment server.

Perfect.

Thanks very much, and nice results, gentlemen.

Thanks, Rich.

As there are no further questions at this time, I'd like to turn the floor back over to Mr. Adlersberg for any closing comments.

Thank you, operator.

In summary of our call, I'm glad to say that we just reported another good quarter for growth, our fourth consecutive quarter since mid-2012.

Based on current business outlook in early Q3, we believe we will exhibit continuing growth in second half 2013, and build a sustainable, profitable operation for coming years.

I'd like to thank everybody who attended our conference call today, and we look forward to have you on our next quarterly conference call.

Thank you very much.

Bye bye.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time, and thank you for your participation.