AudioCodes Ltd (AUDC) 2016 Q2 法說會逐字稿

Greetings, and welcome to the AudioCodes second-quarter 2016 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Elizabeth Barker, Director of Investor Relations. Thank you. You may begin.

Thank you, Christine. I would like to welcome everyone to the AudioCodes second-quarter 2016 earnings conference call. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer; and Niran Baruch, Vice President, Finance, and Chief Financial Officer.

Before beginning, we would 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, condition, 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 development, upgrade and the ability to manage changes in market conditions as is 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 the 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 would 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 the call. The call will also be archived on 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, Elizabeth. Good morning and good afternoon, everybody. I would like to welcome all to our second-quarter 2016 conference call. With me this morning is Niran Baruch, who has been promoted as of this morning to the position of Chief Financial Officer and Vice President of Finance for AudioCodes. On behalf of myself and the Board of Directors, I would like to take this opportunity and congratulate Niran on his contribution and achievements at AudioCodes for the past 11 years, and with his promotion to the CFO position. Good luck, Niran.

Niran will start off by presenting a financial overview of the quarter. I will then review the business highlights in summary for the quarter and fully -- 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 earnings press release contains a reconciliation of supplemental non-GAAP financial information.

Revenues for the second quarter were $35.9 million, up 3.2% from the prior quarter. Services revenues for the second quarter were $10.4 million, accounting for 29% of total revenues. Revenues by geographical region for the quarter were split as follows: North America, 42%; Central and Latin America, 6%; EMEA, 32%; and Asia-Pacific, 20%.

Our top 15 customers in aggregate represented 55% of revenues in the quarter, of which 49% are attributed to our 12 largest distributors. Gross margin for the quarter was 60.5% compared to 60.3% in Q1 2016. Non-GAAP gross margin for the quarter was 61.4% compared to 61.3% in Q1 2016.

Operating income for the quarter was $1.3 million compared to an operating income of $0.9 million in Q1 2016. On a non-GAAP basis, quarterly operating income was $2.5 million or 6.9% of revenues compared to an operating income of $2 million in Q1 2016. Net income for the quarter was $0.7 million, or $0.02 per share. On a non-GAAP basis, quarterly net income was $2.4 million or $0.06 per share compared to net income of $1.6 million or $0.04 per share in Q1 2016.

Our balance sheet remains strong. At the end of June 2016, cash, cash equivalents, and marketable securities totaled $78.1 million. Subsequent to the end of the quarter, we used approximately $13.1 million of our cash in connection with the purchase of shares pursuant to our cash self-tender offer. Days sales outstanding as of June 30 was 57 days compared to 60 days in the prior quarter.

Operating cash flow generated during the quarter was $5.5 million. During the quarter, we acquired 0.4 million shares for a total consideration of $1.8 million. As of June 30, 2016, and since we began to repurchase our shares in August 2014, we have acquired an aggregate of 7.4 million shares for an aggregate consideration of approximately $31.5 million.

In May 2016, we received court approval in Israel to purchase up to an aggregate amount of $15 million of additional ordinary shares pursuant to this program. The current court approval for the share repurchases will expire on October 7, 2016. Under the existing share repurchase program, on July 20, 2016, we completed a successful cash self-tender offer and have accepted for purchase a total of 3 million of our ordinary shares at a cash purchase price of $4.35 per share.

We reiterate our guidance for 2016 as follows. We expect revenues in the range of $142 million to $149 million. As for the earning guidance, earlier in the year we provided guidance of non-GAAP diluted earnings per share to be $0.20 to $0.25. Based on second-quarter results, we now expect non-GAAP diluted earnings per share to be at the higher end of this range.

I will now turn the call back over to Shabtai.

Thank you, Niran. We're very pleased to report strong financial results and continued business momentum for the second quarter of 2016. As reported, we met the top line and the earnings targets for the quarter, in line with our guidance earlier this year. While we enjoyed growth and prosperity across the majority of our business lines, the most noteworthy ongoing theme is our success in the turnaround of the Company, and reemerging with a growing company in the [all era] space.

The transformation of the Company from a gateway-centric company to an all-IP era is now in full gear, and the transition to a focus on cloud-based unified communication and contact center services and SIP trunking is well on track. And we are moving to becoming a solution and services, cloud-based company for custom and cloud operations.

In other, not as important development in the second quarter is that we are now fully close to the point where the UC-SIP business is roughly equal in size to our existing gateway business.

The UC-SIP business now represents close to 40% of our quarterly revenues. In the second quarter of 2016, we grew 10.1% over the previous quarter and above 25% over the year-ago quarter. Assuming we continue this trend of growth, UC-SIP should be comparable in size to our gateway business in the second half of 2016, and should pass it early 2017.

Within this category of business, progress has been made across multiple business lines, including the Microsoft Skype for Business market, the SBC business line, the emerging IP phone business, our One Voice operations center network management service, services, and more.

Key to our success are two major activities: the migration to cloud-based services and the evolution to a solution and services company.

Regarding our activity that relates to cloud operation, most notably there are two areas in which we have increased activity and progress for cloud operation. Those are the Microsoft Skype for Business and the SBC. In the SBC area, our software has received product and virtualized editions, are integrated and deployed in enterprise virtualized data center, as well as private and public clouds.

These solutions comply with the NFV architecture and certified by leading orchestration [band rates]. Our software and virtualized SBC products as related to cloud operation represents a core 25% of our total SBC revenue in the first half of 2016, compared to less than 30% -- 13%, 1-3 percent -- in the same period in 2015. So we have almost doubled our operation into cloud-related SBC in 2016.

And we are doing similar such efforts in the Microsoft Skype for Business segment. CloudBond 365 and the recently announced Cloud Connect edition with appliance for the Microsoft environment enables service provider worldwide to offer advanced [in effect] communication and business productivity services based on Microsoft Cloud PBX solution. That is a cloud-related activity.

CloudBond 365 facilitates delivery of full features as a business offers services that service provider private cloud. And Cloud Connect edition appliance enables through selling Microsoft Cloud PBX services to local [SDN breakout].

I will also say a few words about solution. We have long ago decided to abandon the passive grade product approach and go for a solution mode. And that is helping us tremendously in winning market opportunities.

I will just mention our One Voice for Skype for Business solution, our One Voice for contact center solution, our routing solution; the combination of our session border controllers, the IP phones, and the One Voice operation center network management services; and services, and a few more elements, all contribute to our success in the field. So, solutions are the key, I would say, strategy that enables our future going forward.

Now, before I proceed to describe in more detail some of the developments in our business, let me touch first on some significant data points on the financial front, all of which are non-GAAP numbers.

Quarterly revenues increased 3.2 sequentially and 10.7% over the year-ago quarter. UC-SIP grew above 25% compared to the year-ago quarter. Now that UC-SIP revenue compare roughly on a quarterly level with gateway revenue, we expect that the past lumpiness in our quarterly revenue will fade gradually, and it will provide for a more consistent quarterly revenue growth [lesson] going forward.

Service revenues growing annually above 10% a year for the past three years, grew 11.5% year-over-year. Gross margin was a record 61.4% compared to 59.9% in the second quarter of 2015, a year ago. The increasing gross margin is related to higher service revenues and growing sales of software products, driven at the consistent shift to cloud solutions.

Net income was $2.4 million or $0.06 compared to a net loss of $537,000 in the prior-year period. Quarterly cash from operating activities was $5.5 million, and $8.2 million in the first half of 2016.

This is the right point to mention that we generate cash for years on a very consistent basis. I'll just mention that we have generated $14.1 million in 2013, $6 million in [2015], $17.5 million in 2015, and now $8.2 million in the first half of 2016.

Gateway business continued to decline moderately. In the second quarter of 2016 gateway revenue declined 5.3% sequentially, and increased, surprisingly, 17.3% over the year-ago quarter. On a semiannual basis, gateways revenue declined 6.3% compared to the first half of 2015.

On the OpEx front, we were right on our plan with operating expenses at 19.55, exhibiting good control of operating expenses. Operating margin grew to 6.9% from 5.7% in the previous quarter. We target to reach above 8% in the fourth quarter of 2016, and grow to above 10% in 2017.

Headcount grew to 669 employees and additional [stand] employees over the first quarter of 2016. Leveraging on revenue growth, and on the grant from Chief Scientist Israel, Chief Scientist this year and the next two years, we keep adding R&D and customer-facing positions to support growth in coming years.

Now to more details on developments on the business line side. First, let me touch on the markets of Skype for Business second-quarter results. We enjoyed a very strong second-quarter 2016, with top-line revenue growing above 40% over the year-ago quarter, and above 30% sequentially. With Microsoft continuing to push towards Cloud PBX and Skype for Business online, we saw increased activity across our CloudBond 365 and Microsoft's new initiative for Cloud Connect edition for pure and high-grade voice solutions.

We have been the first company to release the Cloud Connect edition appliance during the second quarter of 2016, and we have enjoyed much interest. I can say that our early adopter campaign has generated around 100 leads from partners, system integrators, and end customers.

In the second quarter we saw increased activity with service providers in EMEA and in Asia-Pacific, who have evaluated the adoption of Cloud PBX in conjunction with Skype for Business server, to serve their customers in large and midsized businesses.

Similar to the first quarter of 2016, we saw a meaningful increase in the level of IP phones sold in the Skype for Business market segment. In the first half of 2016, sales of IP phones in the Skype for Business ecosystem were almost equal to the overall revenue in 2015. Building on completing [handing] Skype for Business Cloud PBX certification, we believe we will see accelerated growth of our IP phone sales into the Skype for Business environment in second-half 2016 and beyond.

We also won a big deployment project with potential of few tens of thousands of phones, and are in various stages of beading more projects similar to the one we just won. Biggest Skype for Business IP phone win to date was made in the second quarter, with more than 20,000 phones in one deal, over two or three years. We expect to become more competitive in second-half 2016 as we work to enhance our portfolio and add more models, which will substantially increase our line of offering.

We have also reinforced the value for One Voice for Skype for Business by introducing a new advanced session routing manager, which substantially increases the value for our One Voice solution for large and midsized enterprises spread globally or nationwide over tens, hundreds, and thousands of locations. We already enjoyed first such large customer win.

Moving on to the session border controller area. Just like Skype for Business segment, we enjoyed a strong second quarter, with top-line revenue growing above 40% over the year-ago quarter and around 10% sequentially. In terms of market activity, we saw several large customer wins both in the enterprise space and the service provider space. We won a multimillion-dollar opportunity in EMEA and others in North America in the enterprise space; and several quarters, we see opportunities with service providers, all centered around our new offering of software SBC and virtualized SBC products.

We have increased service on the software and virtualized SBC protocol private cloud implementation. We have seen in first half 2016, sales of software and virtualized SBC reaching several millions and growing more than 200% over the first half of 2015.

Two notable developments in the quarter were increased rate of opportunities win, based on solution combining sales of session border controllers with our One Voice operation [center] around network management server, offering unique system capabilities for large enterprises.

Also, in the introduction of the new, state-of-the-art SBC-based VoIPerfect solution which provides for resilient, HD quality alternative to costly MPLS-based trunks will definitely pave for us a lot of business going forward.

In terms of ranking, we continue to be part of the top three vendors in the enterprise SBC space, next to Cisco and Oracle, and gaining near [13%] market share.

To IP phones business, already mentioned the success in the Skype for Business ecosystem. All in all, in that line, we supply our phones to several partners. Revenue grew above 50% over the year-ago quarter and around 20% sequentially. We are on track to achieve growth of 50% in 2016 over 2015. We expect above 50% revenue growth in 2017 and beyond, as we add more models, complete certification activity with several UC-as-a-service vendors, and become more recognized in the market.

As to our network management service solutions, we enjoyed a very strong quarter. Revenue grew above 80% over the year-ago quarter and around 50% sequentially.

Also, a newly introduced, innovative session routing manager called ARM, which enables large enterprises to better manage and route calls over a large end-market-sized voice over IP network, so much success in the quarter. We enjoyed first wins and paved the ground for more customer wins, with initial trials and several proof-of-concept activities.

Lastly, I will come to our guidance and outlook. We are not changing, at this time, our revenue guidance, which remains at $142 million to $149 million. Regarding earnings guidance, as indicated by Niran, we now guide for the higher end of the range guided earlier in the year to be between $0.20 to $0.25. As for the next-quarter outlook, we believe growth in the third quarter will continue. And we plan right now for a 3% to 4% growth in the third quarter compared to the second quarter.

And with that, I have completed my introduction, and I'll turn the call over to the Q&A session.

Operator?

(Operator Instructions). Rich Valera, Needham and Company.

Shabtai, [just going] to get a nice growth corridor for your UC-SIP business. You said 25% plus year-over-year growth there. And I think you were at around 20% year-over-year growth in the first quarter. And I think last quarter you talked about that being a 15% long-term growth business for you. Is that still how you're thinking about that, or do you think there could be an upside to that long-term growth target for the UC-SIP business?

Right. We do witness [mute] growth. We definitely think we can maintain at least 15% a year. We should be able to, several quarters, growing to 20% year-over-year. We need to remember is that the UC-SIP is a combination of several business lines. And while one is slowly advanced and mature, like the SBC, and it is growing 20% a year, there are smaller lines which grow above that. IP phones and the network management grow 50%. However, there's another line, the multi-service business routers, which is not growing that fast. Or it's some specific industry market segment.

So, just to be on the safe side, we will deliver, I believe, at least 15% annually. We target to do 20% annually. We will probably do somewhere in the middle, in several quarters.

That's helpful color. Thank you. And then I was hoping you could elaborate on your Cloud Connect solution that you referenced for Skype for Business. And I just want to understand, is that exclusively for deployment of the Skype for Business Cloud PBX option? And what do you actually provide in that solution?

Right. Yes, the Cloud Connect edition appliance is sold only for the Microsoft Skype for Business online solution, or Cloud PBX. The solution, the appliance, comprises of a Microsoft-provided software that is embedded on our Mediant 800 and other series appliances. We do provide a few more elements on it. So, we always try to come up with a more comprehensive solution than just the bare Skype for Business solution. And this is what we do. So, we [analyze] the [SIP to it], SBC, the interconnect to break out to the service provider IP network. And in some cases, we will provide more. That is what we do.

That's very helpful. Thank you. And then, Niran, a question for you. And by the way, congratulations on your promotion. But I wanted to get the near to the best estimate to current share count. Obviously you bought back I think 400,000 shares, and that probably wasn't fully reflected in the ending share count. And then you bought back 3 million after the end of the quarter. So wanted to get your best estimate of where the share count is today, and maybe roughly what we would expect to see for a third-quarter share count. Thank you.

Now, you are right about the 400,000 that we purchased this quarter. Most of it is already reflected in the number of shares we presented for Q2. With regards to the 3 million shares which we bought as part of the tender offer, two-thirds of it will be reflected this quarter, and the remaining 1 million will be reflected in Q4. This is due to the closing date on July 20. So you can estimate that 2 million shares less for Q3.

Perfect. That's great. And then just one final one. You mentioned that UC-SIP, it sounds like it's close to 40% revenue. Can you give a sense of where the gateway businesses is as a percent of revenue? Is that also around 40% of revenue now? Just wanted to get a sense of the relative size of those two businesses.

Yes. Roughly in the second quarter of 2016, they were apart by only about 3% or 4%. So yes, gateway business is now down to somewhere around 43%, give or take.

Okay. That's very helpful. Okay. Thank you, gentlemen. Appreciate it.

(Operator Instructions). Mike Latimore, Northland Capital.

Within UC-SIP, is the multi-service router or the SBC the largest subsegment of the UC-SIP, or something else?

Yes, the largest contributor to UC-SIP is our SBC business, which is roughly I would say 40% to 45% of the overall mix for UC-SIP.

Got it. And then on the Skype for Business opportunity you've been highlighting here, how much of that is driven by Skype for Business hybrid, where there is an on-premise and in-the-cloud option combined versus the pure Cloud PBX?

Okay. So far in terms of sales, all sales are related to CloudBond 365. And it's being sold for several quarters now. The CCE is fairly new. It has been announced. We believe we will see samples being sold in the third quarter. We will not see pickup in volume before the later part of the year.

Okay, got it. And you may have given this, but what percent of revenue was UC-SIP in fiscal 2015 overall?

Well, I think I gave a numbers. I'll give you -- UC-SIP business was about $46 million to $47 million in 2015. So we can do together the math -- divided by 140, I think -- yes (multiple speakers) 35% plus.

Yes, okay. And then you are not going to be breaking out technology versus network anymore?

Yes, it doesn't make sense. And I can give you -- technology I believe was shy of 10% this quarter, the second quarter. But networking really is a combination of gateways and UC-SIP. And while gateways decline and UC-SIP grows, it makes no sense to use networking anymore. So we will break out in the future mainly to UC-SIP, to gateways, technology and [legacy]. We have a very small part that applies to application. I have not mentioned it on this call, but we have like three applications we sell today. The level is nothing more than $1 million a quarter. So that is roughly the division.

Okay. And then maybe just -- can you just touch on some of the terms in your -- among your other important partner ecosystems like, say, Broadsoft or Interactive Intelligence, Genesys? Any kind of notes? Anything worth noting there?

Well, I can tell you that in the second quarter we have actually increased. I did not touch that on the call. But we have much more activity with several of our largest partners around the Microsoft, Genesys Interactive, and others. So, yes, there was definitely -- I think our value as a partner to allowing our partner to provide a complete system solution is becoming more and more clear. And we become much more important to our partners, so that's an activity that grows on an ongoing basis.

Thank you.

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

Thank you, operator. I would like to thank everyone who attended our conference call today. Based on a good business momentum and execution of our plans in the second quarter of 2016 and the first six months of 2016, we believe we are on track to achieve another year of growth and progress, and continue to build a growing, profitable business for coming years.

We look forward to have you on our next quarter call. Thank you very much. Have a nice day. Bye-bye.