AudioCodes Ltd (AUDC) 2016 Q3 法說會逐字稿

Greetings and welcome to AudioCodes' third-quarter 2016 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Elizabeth Parker, Director of Investor Relations. Ms. Parker, you may now begin.

Thank you, Rob. I would like to welcome everyone to the AudioCodes third-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, 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 in 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 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. Good morning and good afternoon, everybody. I would like to welcome also third-quarter 2016 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance for AudioCodes.

Niran will start off by presenting a financial overview of the quarter. I will then review the business highlights and summary for the third quarter and discuss trends and developments in our business and the industry. We will then turning to 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 third quarter were $37.2 million, up 3.7% from the prior quarter. Services revenues for the quarter were $11.3 million, accounting for 30.3% of total revenues. Revenues by geographical region for the quarter were as follows, North America, 47%; Central and Latin America, 7%; EMEA, 28%; and Asia-Pacific, 18%.

Our top 15 customers in aggregate represented 61% of revenues in the quarter, of which 41% are attributed to our seven largest distributors.

Gross margin for the quarter was 61%, compared to 60.5% in Q2 2016. Non-GAAP gross margin for the quarter was 61.7%, compared to 61.4% in Q2 2016.

Operating income for the quarter was $2 million, compared to an operating income of $1.3 million in Q2 2016. On a non-GAAP basis, quarterly operating income was $3.1 million, or 8.2% of revenues, compared to an operating income of $2.5 million in Q2 2016.

Net income for the quarter was $1 million, or $0.03 per share. On a non-GAAP basis, quarterly net income was $2.9 million, or $0.08 per share, compared to net income of $2.4 million, or $0.06 per share, in Q2 2016.

Our balance sheet remains strong. At the end of September 2016, cash, cash equivalents, and marketable securities totaled $65.1 million.

DSO as of September 30 was 63 days, compared to 67 days in the prior quarter. Operating cash flow generated during the quarter was $3.4 million.

During the quarter, we acquired 3.4 million shares for a total consideration of $15 million. As of September 30, 2016, and since we began to repurchase our shares in August 2014, we have acquired an aggregate of 10.7 million shares for an aggregate consideration of approximately $46.5 million. In October 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 share repurchases will expire on April 2017.

Now to provide an update to our guidance, we now expect revenues for 2016 to be in the range of $144 million to $147 million, compared to the original range of $142 million to $149 million. We anticipate non-GAAP diluted earnings per share to be in the range of $0.24 to $0.27, compared to the original range of $0.20 to $0.25.

I will now turn the call back over to Shabtai.

Thank you, Niran.

We are very pleased to report strong financial results and continued business momentum for the third quarter of 2016. This is one of the best quarters in the past year. As reported, third-quarter revenue came at the top range of our guidance for revenue growth over the previous quarter, and earnings came better than guided earlier this year. We enjoyed growth and prosperity across most business lines, most notably in the UCC business securities, which grew more than 20% over the year-ago quarter, growth that supports our stated target for sustained annual growth of 15% to 20% of this business in 2016 and over the next coming years.

With continued projected growth in the unified communications and IP business services market, and the global trend of service provider migrating their voice services to all IP networks year by year over the next 10 years, we believe we have strong foundation for growth and confidence in a strong and healthy business in coming years.

Not less important is the parallel process we took and continued effort on moving the Company focus from being a product vendor to a solution and services company. This major change increasingly helps us to improve our competitive position and offering in the space.

In order to better understand the results of this core and simplify things, I'll say that our business today is roughly comprised of two main business lines, the gateways and the UC-SIP, each contributing about 40% of the overall business, and a technology legacy business line that altogether contributes about 20%. What worked best for us this quarter were the developments into two key business lines.

The gateway business line held nicely. It's pretty much the same level as previous quarter, while the UC-SIP business keep growing above 20% over the year-ago quarter, as planned.

As far as gateway revenues are concerned, while we witnessed a relatively large decline in our gateway business in previous years, starting from 2015, it is important to note that we see some moderation of that trend in 2016, and we believe that this has much to do with the accelerated trend of moving to all-IP by service provider and enterprises. We're a large infrastructure of TDM-based PBXs and phones on premises, and the access part of the network needs to transition to IP transport in the SME and SMB segments.

We see increased pace of RFPs and proof-of-concept trials by service provider, mainly North America and in Europe, to start migrating their voice services network to IP.

Most important, the UC-SIP business now represents close to 40% of our quarterly revenues. As of the third quarter of 2016, the UC-SIP business is comparable in size to our old gateway business and providing 15% to 20% annual growth, and it is becoming the key business line starting in 2017.

Just to remind us all, that UC-SIP business basically represents the recent two, three years' effort and you go to market on the solution and services strategy that relies on a combination of products that are in the new emerging cloud service world and comprising of session border controllers, business routers, SIP phones, Microsoft-related cloud connection gear in all our network management server products.

Before I proceed to discuss some of the developments in our business and sales, let me touch again on some of the more significant data points on the financial front, all of which I'll give you as non-GAAP numbers. As Niran mentioned, revenue grew nicely, 8.7% year over year, 3.7% quarter over quarter.

As I've mentioned before, UC-SIP grew 20% above last year, 5% on a sequential basis. Service revenues, which is one of the more sound and consistently growing businesses at AudioCodes, reached a level of $11.3 million. That is a 17.4% increase over the last year quarter and 8.6% over the previous quarter.

We have achieved in this quarter record gross margin. Gross margin came at 61.7%, compared to 60% a year ago and 61.4% in the previous quarter. All that is a result of growing share of services in our business, which is now above 30% of revenues and which is carrying better gross margin than products. The gross margin for services are about 75%. Adding to that the growing sales of server products, driven partially by the consistent shift to cloud solutions, we do expect the gross margin will at least stay at that level, if not grow further going forward.

On the operating expenses front, we had good control of OpEx. As you'll see when I will be talking about our headcount, we invested in third quarter in adding resources to our marketing and sales team worldwide to become more effective in new markets and more countries.

We have witnessed improved bottom-line performance. Operating income was $3.1 million, compared to $1.9 million a year ago and $2.5 million in the previous quarter. Operating margin reached 8.2% versus 5.4% a year ago, 6.9% previous quarter. We are well on track to get above 10% in 2017. That's our belief. That's our planning point.

Net income came at $2.9 million versus $1.7 million a year ago, $2.4 million a quarter ago. Again, very nice performance.

Cash flow from operation, as indicated by Niran, was $3.4 million. Altogether in the first three quarters of 2016, we had positive cash flow from operations of $11.6 million. Just a reminder that last year we did $17.6 million, so we are producing cash on a very consistent basis practically every quarter. That is the basis for strength and confidence in continuing our buyback operation.

We kept growing headcount to support business expansion. Across our business, headcount grew to 692 employees, an addition of 23 employees over second-quarter 2016. Leveraging on quarterly revenue growth and on the grants that we receive from the Office of the Chief Scientist in Israel this year and for the next two years, we keep adding R&D and customer-facing positions to support growth in coming years.

As Niran mentioned, on our financing operation we completed the tender offer of 3 million shares at $4.35 per share completed on July 20, and we thereafter did the buyback of 372,000 shares, altogether, as mentioned, an aggregate of 10.7 million shares since August 2014.

Going to our sales worldwide, we generally have executed to plan. We enjoyed better-than-expected performance in North America, where we topped the planning, the internal planning. We also saw a very nice increase in Asia-Pacific. Asia-Pacific now becomes a [slowly improving] market for us and we've seen sustained growth over the previous four, five quarters, and we believe that will keep growing. We also saw relatively nice performance in Europe, where, focusing on the key countries with the largest economies in the continent, we have achieved very nice performance.

So all in all, very good performance on the sales side and we believe that should be the plan going forward.

To put some color on some of the deals or transactions we had in the quarter, I'll mention a few transactions. We had a big, large contact center deal in Asia-Pacific, altogether above $0.5 million. We also saw another $0.5 million purchase order from a very large car manufacturer in Europe. That's in the Skype for Business market. Skype for Business, generally I'll touch that going forward, but all in all we saw nice, large enterprise POs in that quarter. We enjoyed more deals mainly in North America and in EMEA.

Business services also enjoyed a good quarter. We've got a few deals both in Latin America, in Europe, in Australia. All in all, we feel we are fully confident in the expansion of our business.

Touching on the Microsoft Skype for Business developments in the quarter, we enjoyed a relatively good third-quarter 2016, with topline revenue growing above 20% over the year-ago quarter and they were pretty much on a similar level with the previous quarter.

With Microsoft's continued push towards cloud PBX and Skype for Business online, we saw activity around the relevant products, including our Cloud 365 and Microsoft's new initiative, CloudConnect edition for pure and high-grade voice. We are now positioned for service evaluation. We serve numerous service providers worldwide and we saw increased activity in service provider, mainly in EMEA and Asia-Pacific.

More meaningful is the progress we made with our IP phones in the Skype for Business market. We saw a substantial increase in the number of opportunities and revenue compared to previous quarters and about 60% growth in sales compared to the previous quarter. Building on completing pending Skype for Business cloud PBX certification processes, we now believe that we will see even further accelerated growth in fourth-quarter 2016 and 2017 and beyond.

Last, I'll touch on our guidance. As indicated by Niran, we have raised earnings guidance for the full-year 2016 to be in the range of $0.24 to $0.27. As for the next-quarter outlook, we believe growth in fourth-quarter 2016 will continue pretty much on the same track and we plan for another 2% to 3% sequential revenue growth over the third quarter of 2016.

All in all, we are quite committed going into 2017 and believe that the type of growth we saw in 2016 will continue, with UC-SIP driving and becoming more meaningful and continuing growing at 15% to 20% annually.

And with that, I have completed my introduction and we will be open for questions. Thank you, Operator.

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

Thank you. Good morning, Shabtai. So, nice to see the strength in your UC-SIP and Skype for Business lines, and it sounded like you called out IP phones as being especially strong there. I think you mentioned 50% growth. Can you talk about why you think you are seeing such strength there? Is there any change in the competitive landscape that's driving that or is there something that you have done to drive that? And how do you feel about the sustainability of it?

I think most of the growth and the strength coming from the fact that we have a business line that's becoming much more mature, and we are going -- in order to be able to sell in the Skype for Business ecosystem and/or other partners' markets, we need to go through very long processes of certification and adjusting to a certain feature list. We have been behind in previous quarters.

We now believe that we are fairly close to closing that gap. That has been fully evident in the third-quarter operations. We just participated in a big Microsoft event in September, where we announced a new executive phone. We got more endorsement from Microsoft on that. We believe we will be a fair competing company in that space.

So, we believe that this year we'll grow at least 40% in revenues compared to last year, but we believe that in 2017 that growth rate will accelerate. Actually, we expect to grow more than 50% next year.

In the IP phone line?

Yes.

Got it. I'm wondering if you can provide a little color on the other pieces of that UC-SIP business, particularly your SBC lines and the services component of it. It sounds like -- certainly, services sounds like it's doing pretty well, but if you could give me a little color on SBC and services, that would be great.

SBC, we had a relatively good quarter. It was on par with performance of previous quarter.

We do see some new developments. We just won a very lucrative SBC deal with one of the world's largest system integrators to provide a global SIP tracking solution based on a very advanced solution we have. That solution is already used by another world leader.

So we are working with one large North American provider. We are working with one European provider. And all in all, we made progress with our virtualized implementation for SBC, et cetera.

Business routers also picked up in the third quarter, mainly due to the ongoing emergence of the all-IP migration process. Services definitely are strong. Think again, coming to the bottom [feed], the fact that we now provide more complete solution and services attached to it makes us a much more attractive supplier at large enterprise deals simply because we bring more of what's needed, and when we bring that -- and I'll mention, by the way, one more component that I haven't mentioned yet. That's the new module we introduced earlier in the year.

We call it ARM; that's AudioCodes Routing Manager. That's a routing engine that helps monitor and provide policy to enterprise voice traffic on a worldwide basis, very useful. That product, in combination with our SBCs, help us win some very large deals, which has still not been translated to revenues yet. Those are design wins, but at this stage, we believe that with that product we are on the front and we do not see yet competition in that space.

So all in all, when you combine all of these into a solution and you provide the required services to it, that would always be better than a vendor providing a specific product. So that's, I think, the bottom of it.

Got it. Thank you. And a couple of modeling questions, I missed the -- I think you said an operating-margin target for 2017, Shabtai, if you could repeat that. And one other one is just, what share count should we use for the fourth quarter? Obviously, it will be below the average share count for the third quarter, but wondering if you could give us sort of a rough idea of what share count we should use for the fourth quarter. Thank you.

So we ended third-quarter 2016 with 8.2% operating margin. We plan to cross the 10% operating margin in 2017, so that's in reference to the first question.

In reference to your second question, for the third quarter of 2016 we had 34,000,971 shares and we believe we will see another drop in number of outstanding shares to about 33,800,000. That's better than the buyback process that we just initiated last week.

Got it. And just to be clear, the 10%, is that for the entire year 2017 or hitting that in the back half?

No, that's on a quarterly level. But I assume -- again, we have got good chances. Usually, first quarter is lagging the fourth quarter, so we'll see some drop there, but I expect that as of the second quarter of 2017 we'll be above 10% on a quarterly basis.

Got it. Thanks very much.

(Operator Instructions). Mike Latimore, Northland Capital.

Great. Thanks a lot. On the product versus service mix here, should we kind of look at the product growth and service growth in this quarter and in the third quarter? Is that the type of growth rates you are expecting for those two categories over time?

Okay. As far as services are concerned, I believe that we usually plan for 10% to 12% growth annually, so from that you can derive the quarterly growth.

As far as products, we do believe that we will grow, as I've mentioned, UC-SIP at 15% to 20%. However, for the whole Company, you need to combine that with the gateways, and as we all know, in the gateways it's tied up to some quarterly fluctuations. So, it's pretty difficult. This year, we will see declining gateway products of around 10%. We will probably need to model that also going into 2017. So, I think that towards the beginning of 2017 we will provide a more calculated figure that takes into account those gateways and UC-SIP.

And then, how do you generally think about the growth rate of the legacy technology area? Is that stable? Is that going to decline a little bit?

It's going to decline a bit. We will definitely see between at least 5% to 10% decline, but, again, this is unfortunately kind of a cash cow these days and we are not investing in it to sell.

Sure. And then on the Skype for Business commentary, is a lot of the traction that you are getting in Skype for Business, is that on-premise deployments of Skype in the hybrid or are you seeing solid uptake in the cloud PBX arena as well?

The majority of the business we see is the continued on-premise business. We see basically massive -- or almost all of the Company started with the silver edition, which is the premises edition, continue with it. As far as cloud PBX, we see some -- we see quite interest in testing it, in evaluating it. We are involved in a pretty large number of evaluations, but I cannot say at this stage that cloud PBX is comparable in pace to the silver business.

So you are seeing interest in testing cloud PBX. Is that the pure cloud PBX or is that more of a hybrid deployment?

Usually, cloud PBX is being considered for pure solution. But we still see -- we have invested in cloud model, which targets hybrid implementation, and there's definitely continued effort on that.

So anybody who started with CloudBond continues with it. CloudBond adds definitely an advantage when it relates to hybrid implementation, as there are quite a significant number of enterprises really do not want to move all of their facilities into the cloud. If you are talking about smaller branches or small facilities, those facilities are prone to go to cloud, but with headquarters in large facilities, I believe there's some hesitation as to a CIO giving all of their ability to control their network completely into the cloud. It will be a process. It's going to happen, but it's not happening yet.

And then on the SBC business, do you expect the SBC category to grow kind of in line with the overall UC-SIP category?

Yes. This year, we'll grow. This year, we grow about 15%. I expect such growth in 2017.

And then, can you talk just a little bit about the contact center vertical? You mentioned one deal -- I'm guessing that was an on-premise deal, but I'm not sure. What are the prospects around contact center, both on-premise and cloud, at this point?

So in the contact center market, our go-to-market relies heavily on partnering with Genesys, and at this stage Genesys is OEMing a full portfolio for our products, starting from gateways to SPCs to phones to network management modules. Genesys just announced a few weeks ago the acquisition of Interactive Intelligence, which is also a pretty significant player. So all in all, our play in that market is fairly solid, tied up to the success of PONers, and we definitely see some growth there.

Okay. Thank you.

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

Thank you, Operator. I would like to thank everyone who attended our conference call today. Based on good business momentum and the implementation of our plans for the first nine 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 having you on our next quarterly call. Thank you very much. Have a good day.

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