AudioCodes Ltd (AUDC) 2015 Q3 法說會逐字稿

Greetings. Welcome to the AudioCodes third-quarter 2015 earnings 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.

I would now like to turn the conference over to your host, Mr. Collin Dennis. Thank you, Mr. Dennis. You may begin.

Thank you, Rob. I would like to welcome everyone to the AudioCodes third-quarter 2015 earnings conference call. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer, and Niran Baruch, Vice President Finance and Chief Accounting Officer.

Before beginning we'd like to remind you that the information provided during this call may contain forward-looking statements relating to 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 event, conditions, performance or other matters, are forward-looking statements as the 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 developments, upgrade and the ability to manage changes in 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 from acquired companies into AudioCodes' business, and other factors detailed in AudioCodes' filings with the SEC, the US Securities and Exchange Commission. AudioCodes assumes no obligation to update 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.

Before I turn the call over to management, I'd like to remind everyone that this call is being recorded, and an archived webcast will be made available on the Investor Relations section of the Company's website at the conclusion of this call. The call will also be archived in our Investor Relations app, which is available for free from the iTunes App Store and the Google Play Market.

With that said, I would now like to turn the call over to Shabtai Adlersberg. Shabtai, please go ahead

Thank you. Good morning, and good afternoon, everybody. I would like to welcome all to our third quarter 2015 conference call. With me this morning is Niran Baruch, Chief Accounting Officer and Vice President of Finance.

Niran will start off by presenting a financial overview of the quarter and an updated annual guidance for 2015. I will then review the business highlights and summary for the quarter and discuss trends and developments in our business and industry. We will then turn it into the Q&A session. Niran?

Thank you, Shabtai, and hello everyone. As usual, we will be referring to both GAAP and non-GAAP numbers on the call. The non-GAAP P&L metrics exclude recurring non-cash items. Today's earning press release contains a reconciliation of supplemental non-GAAP financial information.

Revenues for the third quarter were $34.2 million, up 5.6% from the prior quarter and down 12.1% from the year-ago quarter. Revenues from networking products and services increased by 10.3% from the prior quarter, accounting for 90% of revenues for the third quarter. Revenues from our technology products decreased by 23.9% from the prior quarter. Services revenues increased by 3.2% from the prior quarter, accounting for 28% of total revenues for the third quarter.

Revenues by geographical region for the quarter were split as follows; North America 45%, Central and Latin America 5%, EMEA 33%, and Asia-Pacific 17%. Our top 15 customers in aggregate represented 58% of revenues in the quarter, of which 43% are attributed to our eight largest distributors.

Non-GAAP gross margin for the quarter was 60%, compared to 59.9% in Q2 2015. Operating income for the quarter was $0.97 million, compared to an operating loss of $1.8 million in Q2 2015. On a non-GAAP basis quarterly operating income was $1.9 million or 4% of revenues compared to an operating loss of $0.8 million in Q2 2015.

Net loss for the quarter was $0.13 million, or a loss of $0.0 per share. On a non-GAAP basis, quarterly net income was $1.7 million, or $0.04 per share, compared to a net loss of $0.5 million, or a loss of $0.01 per share in Q2 2015.

Our balance sheet remains strong. At the end of September, cash, cash equivalents and marketable securities totaled $75.3 million. Day sales outstanding as of September 30 was 70 days, compared to 79 days at the same time a quarter ago.

Operating cash flow generated during the quarter was $1.8 million, compared to $3.4 million for Q2 2015. During the quarter we acquired 1.1 million shares for a total consideration of $3.7 million. We intend to continue to buy shares under the approved guided plan until the end of the year. This intent was discussed and reapproved yesterday at the Board of Director's meeting to approve the financial results for the third quarter.

In addition, the Board of Directors has approved filing a new application with the court requesting approval for the new repurchase program to become effective early 2016 for a total configuration of up to $10 million in share repurchases for a period of six months from the date of receipt of court approval.

Now to provide an update on our guidance. We now expect revenues for 2015 to be in the range of $138 million to $142 million, compared to our original range of $137 million to $143 million. We anticipate non-GAAP diluted earnings per share to be in the range of $0.11 to $0.13 compared to the original range of $0.09 to $0.12.

I will now turn the call back over to Shabtai.

Thank you, Niran. We are very pleased to report good momentum and recovery in our business, return to growth in revenues after one quarter only and improved financial performance for the third quarter of 2015.

As stated in our press release earlier this morning, we continue to grow on our networking business and deliver about 10% growth in the networking revenue. We saw healthy demand across mass networking business lines which now contribute about 90% of the quarterly revenue.

Touching on the highlights of the passing third quarter I believe we can confidently say that we were able to recover nicely from two of the three main reasons for the shortfall in the second quarter this year and emerge back to growth in revenue and profitability.

To remind us all, we have three key reasons for the miss in second quarter 2015. First one was lower sales in countries suffering from weaker economy, some of which is related to the crisis in oil prices affecting the economy of these countries. Among these we have mentioned Brazil, other Latin America countries and Russia. Unfortunately, in the third quarter of 2015 we have not seen much change on that front and we do not expect any major change in next few quarters.

In order to mitigate this factor we are adjusting and diverting our focus in sales efforts and resources to stronger economies in anticipation of improving the revenue levels there to compensate for the loss in missing revenue on a geographical basis.

Second factor was the miss in the contact center business revenue which declined by several millions in the second quarter compared to the start we had. This was a result of several number of small hundred thousands of dollars opportunities which were pushed up to the third quarter. I'm glad to inform that we have recovered fully, nicely back to the level expected for the contact center business in the third quarter.

In fact, as a result of the improving OEM relationships with partners in this space we experience now a good pipeline of customer wins and product sales and we believe we are on the right track to benefit from the momentum in this area.

The third factor related to lower growth we encountered in sales into the market of Skype for Business market segments where we grew in the second quarter only about 10% quarter over quarter this was mainly due to the announcement of the new release for Skype for Business and Microsoft's new initiative of Cloud PBX.

I am glad to report that in the third quarter of 2015 we grew nicely above 15% quarter over quarter and above 20% year over year.

Another very important achievement in the third quarter is our execution on the cost reduction plan announced at the end of July. In the original plan in July we expected to generate an estimated annualized savings of 5% to 10% in our OpEx in the following 6 to 12 months. In the third quarter we achieved already 4% of the stated goals and reduced the quarterly run rates to about $19.4 million. As announced in our press release this morning we intent to continue to focus on improving OpEx control in 2016 and beyond.

Now to the product front. Sales of SBC products and services showed very nice increase in the third quarter, exhibiting above 20% growth quarter over quarter. With the broad SBC product portfolio with growing sales in software SBC which now accounts together with our SBC blades to 15% of this quarter SBC revenue we are confident that our SBC revenue and business line will continue to grow going forward.

Key drivers in SBC sales growth were related to sales for SIP trunking application and managed enterprise SBC services to service providers.

On the media gateway sales front we saw stable revenue compared to the previous quarter, which was encouraging in terms of the overall trend of annual level of media gateway sales. We believe that the All-IP migration trend of tier one service providers will support sustained sales of media gateways in coming years.

Our services business continued to exhibit solid growth. In terms of bookings we grew nicely 14.4% over the previous quarter. On the front of network transformation, which is the focus of large tier one service providers in the US and globally, we made good progress with more service providers beyond the wins of the two large multi-year projects we mentioned in the second quarter.

We now believe that this network transformation effort into an All-IP network will be a major focus for us the next five to seven years. The pipeline we see now is for more than $100 million over next seven years in the 10 to 15 projects we compete on.

Obviously the overall potential globally over these five, seven years will be substantially larger as we make more progress into this service provider space.

We've also continued our focus on developing and selling more complete end-to-end solution and software solutions bringing more value to our end customers. Finally, as we continue to adapt and align our offering towards solid industry trends, such as NFV and SDN and the migration into hybrid and pure Cloud environments, we are confident in our ability to prosper in the markets in coming years.

Now let me start on some more significant financial data points, all of which are in non-GAAP numbers.

As Niran mentioned, revenue grew 5.6% to $34.2 million as planned. Gross margin improved nicely to 60%. We expect to continue and improve our gross margin going forward, mainly as a result of growing our services business and software sales, which provide better gross margins in our product sales.

On the bottom line, third quarter earnings at $1.6 million versus a loss of $540,000 in the second quarter of 2015 were better than anticipated.

This is mainly due to the fact that we had lower-than-expected OpEx at $18.7 million versus our original plan and versus the $20.2 million OpEx in the second quarter. The excess in OpEx reduction in the quarter is attributed mainly to a one-time cost savings in payroll implications and better currency hedging activity.

We expect fourth quarter OpEx to be higher, we believe it will be around $19.4 million. Third, the cost reduction plan headcount declined by 19 employees versus the 666 employees we had in second quarter 2015. Net cash provided by operating activities was $1.8 million, net cash provided by operating activities for the past 12 months was $12.2 million.

Now let me go to some highlights of our sales in the various regions. In North America we saw recovery in enterprise sales which recovered from a decline in the second quarter. Sales into the Microsoft Lync Skype for Business grew nicely but the pipeline for new opportunities in North America is weaker than before in anticipation in the market for the launch of the Microsoft Cloud PBX. So we'll have to watch that activity going forward.

In Latin America sales in the region is mostly based on selling to service providers in various countries. In the second and third quarter sales into Latin America dropped substantially by about $600,000 in each quarter, [addition] to that loss came mainly from Brazil where economic and political situation affected the overall market in this country.

In EMEA we saw sales in the region improving compared to the second quarter. In general, sales into the stronger economies such as Germany and the DACH region, UK, France and Benelux were on target, while sales in South Europe were lower than anticipated. Sales in Russia continued to be weak. In Asia-Pacific we enjoyed great success. Asia-Pacific provides the best sales performance in the Company these days and we see continued growth and success in our networking business over several quarters now in a row in Asia-Pacific. So good sales execution in the Microsoft Lync (inaudible) market segments in addition to growing contribution of the service providers segments.

Let me put a bit more light on the markets of Skype for Business activity and provide more detail. So we were able to grow sales in that sector by more than 15% quarter over quarter and more than 20% year over year. We saw significant run rate revenue from large enterprises who started Lync rollout one to three years to go. So we now enjoy a lot of the wins that we have been able to generate in the past two, three years.

We saw Microsoft continuing its push for the Cloud PBX, which may limit in the future our on-prem sales, but we are confident that for the next three to five years we will see hybrid implementation of combined Cloud and on-prem implementation and that we believe will be a solid portion of the deployment.

We continue to enjoy good success with our One Box go to market and got the attention of several -- some very large service providers. In the third quarter we won a very large global system integrator who selected One Box as part of its official solutions, that is a big win of the -- investing many years in penetration efforts.

Now to our updated guidance that we have provided earlier on the call. We now plan on revenue growth of 3% to 5% in the fourth quarter comparing to the third quarter. So we have trimmed down the guidance on revenue range to be in the range of $138 million to $142 million. We now anticipate non-GAAP diluted earnings per share to be in the range of $0.11 to $0.13 compared to the July announced range of $0.9 to $0.12.

Lastly to our share buy-back program. During the quarter we acquired 1.1 million shares for a total consideration of $3.7 million. As of September 30th, we have acquired an aggregate number of 4.7 million shares for an aggregate consideration of $20.3 million.

During the month of October we have acquired an aggregated amount of 4.95 million shares. We continue to buy in the market every day up to the limit that we are being allowed to by SEC rules.

As stated earlier on the call and as discussed and decided yesterday on our November 2nd Board of Directors meeting, we intend to continue buying shares under the improved buyback plan until the end of the year and apply to the court for an approval of a new plan for 2016 with an approved budget of another $10 million. I am confident and I am expressing the Board's confidence that execution so far in the buyback program and the Board of Directors yesterday decision reflects on our confidence in the Company ability to succeed and prosper in the future.

I will now completed my introduction and we will turn the call back to the Q&A session. Operator?

(Operator Instructions) Richard Valera, Needham & Company.

Shabtai, I was hoping if you could give a little more color on your thoughts on the Skype for Business trajectory, I think you said that in the short-term you expect lower on prem sales there as Microsoft pushes for the Cloud-hosted version of that product, but longer term you are optimistic of seeing some rebound, I think, as you see hybrid installations. Can you explain or give a little more color on which products you don't expect to be selling near-term and why would we see a rebound in those products over time? Thanks.

Well, the change of architecture from Skype for Business putting much more focused on the Cloud, Cloud PBX means that -- means mainly one thing that the network will increasingly point more and more towards the Cloud. Before we go into all kind of explanation one needs to segment the market into smaller organization and larger ones. The small offices, smaller organization, I would probably look at below 50 and/or 100 employees, will definitely enjoy a Cloud only operation, pure Cloud operation and therefore in such implementation there will be a need mainly for two kind of products, one would be the IP phones and second one would be a new sort of a Cloud services gateway and/or appliance that will help connect that small office to the Cloud.

However, when you go into larger organizations such as mid-markets 100 to 1,000 and/or into large organizations you need to think about companies who have got many facilities spread either nationally and/or global wide and there I think CIOs at least from what we hear tend to rely on an hybrid implementation, meaning small offices in remote areas will enjoy Cloud PBX type services but companies, larger companies will still need to rely on kind of an on-prem implementation towards (inaudible 24:27) Edcore and larger facilities.

That means that again in this architecture IP phones will be sold, we believe that there will be a need for that Cloud appliance that will provide quality of service, will provide connectivity, resiliency to IP network. So all in all we will miss -- what we will be missing in coming years is mainly SBA sales, SBA stands for survivable branch office appliance, which use and still, by the way still is connecting to the PSTN and will connect to PSTN over the next good two, three years but will vanish three to five years from today as resiliency will count more on dual one, dual IP connection rather than relying on the PSTN. So that is the key change.

Got it, that's helpful. And within that context what is your feeling of the near-term trajectory of that business, I mean it was up obviously very nicely in 3Q quarter-over-quarter do you expect that to continue to improve sequentially as we move into the fourth quarter?

Yes, I think we went through like six to nine months of hesitation in the market, before organization could analyze and understand the meaning of the new Skype for Business release. All in all, for us, my belief is that while we saw in the past growth rates of above 30% year over year I think this year and going forward, at least this year and maybe part of next year will be more like 15% to 20%, but I am confident that as Skype for Business gets deployed and people gain more confidence in the release and the launch of Skype for Business and Cloud PBX I think we will see continued growth of above 20% annually.

Great, that's helpful. And then just on the gateway business, last quarter you spoke about meaningful decline I think especially in the low and mid-density gateways and maybe some questions about whether that was heading into kind of a secular decline after several years of relatively stable performance. Just wanted to get your thoughts on the, generally speaking, the media gateway business, and do you think we have kind of reached a level of stability or you are thinking there could be further declines as we move into next year in that business?

Where we are sitting today, we should talk about gateway. And I think for us, and I need to go through another two to three quarters to solidify my assessment, but I would tend to think -- we divide the gateway sales into three key segments, the mid-high, the low-mid and then the analog. We definitely see decline in the mid-high but that segment has reached a level from which we believe that at least for the next two years we will not see any major decline.

The low to mid segment was very successful for us until six months ago. We believe that much of the confusion on the Skype for Business market and what we suffer from weak economies is contributed to lower sales in that segment. On the third segment, which is the analog media gateway, we actually see very significant growth. It's all related to what we call the All-IP transformation trend.

What is happening is that the world moved to IP previously mostly in large- and mid-sized organization and in those organizations the main connection was through high capacity tracks, E1s, E3s, et cetera.

The lower-end markets, which is mainly analog lines was really moving less towards IP and was basically pushed by the channels to buy reduced cost TDM stuff. Now that the network is going to transition full into IP and in the next five, seven years it will -- all PSTN lines will be terminated, there is a big push by the large service providers to get all those small analog offices phones on to IP. The only way to do that would be through the use of analog gateways.

So we have seen that trend very strong in that past five, six months. We also have been to events such as hospitality events, if you think about large hotel network names like Marriott, Hilton and others, which have millions of rooms. Each hotel are 500 rooms, et cetera. Those networks do not plan on replacing the phones with new IP phones, because that would be too costly. So the only way to go IP would be to put a large capacity analog gateway, which we just announced by the way two weeks ago

So just to conclude, we'll see lower sales in the mid-high range and I think we will see support for higher sales in the analog range. So, all in all, either stable and/or declining slowly, but we definitely will not see a collapse coming soon.

Got it. That's very helpful. Thanks Shabtai.

Sure.

(Operator Instruction) [Vijay Dev], Northland Capital.

I've got a couple of questions on the business segment. Could you tell me how much is the network revenue?

I'm sorry. Again, what was the question?

The network revenue, how much was it in --

Networking?

Yes.

Yes, networking revenues were 90%.

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

Okay. Thank you. Thank you, Operator. I would like to thank everyone who attended our conference call today. We enjoy good business environment in third quarter of 2015 and executed on our plans. And we believe that we have set a stage for continued growth and momentum in the next coming years.

We look forward to have you on our next quarterly conference call. Thank you very much. Have a good day.

This concludes today's conference call. Thank you for your participation. You may now disconnect your lines at this time.