AudioCodes Ltd (AUDC) 2018 Q1 法說會逐字稿

Greetings, and welcome to the AudioCodes First Quarter 2018 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 Barker, Investor Relations at AudioCodes.

Please go ahead.

Thank you, Rob.

I would like to welcome everyone to the AudioCodes First Quarter 2018 Earnings Call.

Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer; and Niran Baruch, Vice President of Finance and Chief Financial 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 any other matters are forward-looking statements as the term is defined under the U.S. 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 market; in particular, shifts in supply and demand; market acceptance of new products and the demand for existing products; the impact of competitive pricing and products on AudioCodes and its customers, [products]and markets; timely product and technology developments, upgrade 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 from acquired companies into AudioCodes business; and other factors detailed in AudioCodes filings with the SEC, the U.S. Securities and Exchange Commission.

AudioCodes assumes no obligation to update such 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 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 this call.

The call will also be archived on our Investor Relations app, which is available for free from iTunes App Store and Google Play market.

With that said, I would now like 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 first quarter 2018 conference call.

With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance of AudioCodes.

Niran will start off by presenting a financial overview of the quarter.

I will then review the business highlights and summary for the first quarter.

We will discuss trends and developments in our business and industry and outlook for the next quarter in 2018.

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 noncash items.

Today's earnings press release contains a reconciliation of supplemental non-GAAP financial information.

Revenues for the first quarter were $42.4 million, up 2.4% from the prior quarter and up 13.5% compared to the first quarter in 2017.

Service revenues for the first quarter were $13.7 million accounting for 32.2% (sic) [20.2%] of total revenues.

Deferred revenues balance as of March 31, 2018, was $42.4 million compared to $43 million as of March 31, 2017.

Revenues by geographical region for the quarter were split as follows: North America, 39%; Central and Latin America 6%; EMEA 43% and Asia Pacific 12%.

Our top 15 customers in aggregate represented 57% of revenues in the quarter of which 43% are attributed to our 10 largest distributors.

Gross margin for the quarter was 64% compared to 62.4% in Q1 2017.

Non-GAAP gross margin for the quarter was 64.5% compared to 62.9% in Q1 2017.

Operating income for the quarter was $3 million compared to an operating income of $2 million in Q1 2017.

On a non-GAAP basis, quarterly operating income was $3.8 million or 9.1% of revenues compared to an operating income of $2.7 million in Q1 2017.

Net income for the quarter was $2.4 million or $0.08 per share compared to net income of $1.3 million or $0.04 cents per share in Q1 2017.

On a non-GAAP basis, quarterly net income was $3.9 million or $0.13 per share compared to net income of $2.5 million or $0.07 per share in Q1 2017.

Our balance sheet remains strong.

At the end of March 2018, cash, cash equivalents and marketable securities totaled $60.1 million.

Day sales outstanding as of March 31, 2018, were 47 days compared to 60 days as of March 31, 2017.

Operating cash flow generated during the quarter was $8.3 million.

During the quarter, we acquired 1 million shares of total consideration of $7.2 million.

As of March 31, 2018, and since we begin to repurchase our shares in August 2014, we had acquired an aggregate of 16.7 million shares for an aggregate consideration of approximately $87 million.

In November 2017, we received court approval in Israel to purchase up to an aggregate of $20 million of additional ordinary shares pursuant to our share repurchase program.

The current court approval for share repurchases will expire on May 27, 2018.

We reiterate our guidance for 2018 as follow: We expect revenues in the range of $166 million to $172 million and non-GAAP diluted earnings per share of $0.41 to $0.46.

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 first quarter of 2018.

Revenue came in higher than expected, growing 13.5% over the year-ago quarter.

This better performance a test to the continuation of our LC business momentum in recent 3 quarters.

Noteworthy is the fact that this is the first time in our history that first quarter revenue topped the proceeding fourth quarter revenue.

Traditionally, we planned for a decline of about 2% to 3% of the top line, this year first quarter was essentially stronger and ended about 2.4% above fourth quarter 2017.

Looking forward to the second quarter, I'm glad to know that at this stage the trend continues in the month of April.

The major input and key factor in this growth is the business momentum we have in the UC-SIP area, which grew about 30% year-over-year, now representing more than 50% of our business.

Reaching above $65 million of UC-SIP revenue in 2017 and continued growth of 15% and above in 2018 and '19 should drive the UC-SIP business revenue close to a $100 million in about 2 years from today.

Growth in UC-SIP is driven primarily by our success in the Enterprise Voice business, where we became a top vendor for delivering voice connectivity and infrastructure for unified communication, unified communication as a service and the contact center markets.

Our strategy of close collaboration with market leaders in these segments and investment -- the investment and maintain strong relationships with large and global system integrators proves to be essential and effective in growing this business plan going forward.

In parallel, we enjoyed also better business momentum in our service provider side of the business, and we see continued growth of SIP trunking and continuation of the transaction to an all IP network world.

Now talking about AudioCodes in 2018, we made an important announcement earlier in the year, where we announced the establishment of new business unit, which we call Voice.

AI.

[Practically], these days AudioCodes is comprised of 2 business units.

The voice networking business unit, which you know for many years, which provides about 98% of revenue of the business, the focus is on enterprise voice, we have a history of 15 years, it's a mature business, expanding, targeting about $200 million by 2020.

UC-SIP business is the main driving force growing 15% and above annually, and we have an operating margin of above 10%.

Just to remind you that the company overall operating margin was 9.1% in the first quarter.

In the voice networking business units, operating margin was above 11%.

The other business units which is quite young and fresh, this is the Voice.

AI business unit.

Basically, it's growing startup.

We have in-depth business unit, combined activities of voice recognition and recording, which are using its vast artificial intelligence technologies to enhance the offering and the solution we provide to the market.

This year, we target a total of bookings of $2.5 million for that business unit.

We believe that we will see growth of above 50% in each of the first few years.

And obviously, we will leverage on AudioCodes the larger company footprint, the sales force and the enterprise customer base to enable and allow faster ramp up in selling of Voice.

AI solution products to the market.

Touching on some of the important results of our first quarter 2018 performance.

We already said that we grew in revenue 13.5% year-over-year.

Also, we have mentioned that we grew in the deferred revenues.

So we grew about 7.8% from $39.3 million in the fourth quarter 2017 to $42.4 million in the first quarter of 2018.

We mentioned the growth in UC-SIP.

It's important to note that all the key components starting from the Session Border Controllers through the IP phones, through the management tools, through the Microsoft appliances, all fall under that category, all enjoy the very good quarter.

Service revenue grew to 13.7%, that's 20% year-over-year.

Growth was evident both on support contracts and on the professional services side.

We had a record gross margins -- non-GAAP gross margins of 64.5%, and we believe this is -- this range around 64% is definitely sustainable for growing quarters going forward.

The better gross margin is due to the fact that we have larger portion of services and better mix of products, which are self-abased.

Headcount remained relatively stable about 700 employees.

In spite of that, OpEx grew $1.2 million in the quarter from $22.3 million in the first quarter to $23.5 million in the first quarter of 2018.

This is relating substantially to the US dollar's Israeli shekel conversion rate, which was in a bad spot in the first quarter, and we hope we will see improvement in that, but that is definitely a substantial and heavy stone on our performance.

Operating margin, we already are close to our target of 10% company overall.

As I mentioned before, in the voice networking, we reached above 11%.

Net income, we grew about 66% year-over-year, which is remarkable.

Cash flow was again strong, $8.3 million.

We had -- this is on the heels of 3 very strong and consecutive years in 2015, '16 and '17 when we grew more than -- we provided more than $15 million of cash flow -- positive cash flow for each of the years.

Relating to 1 very important geographical aspect of our business.

In 2017, we grew significantly in EMEA as compared to other regions.

Revenue in EMEA in the first quarter of 2018 were at 37%, as compared to 27% a year ago.

Meaning in the course of the year, we jumped more than 35% in revenues coming from EMEA.

We are enjoying several big and large countries in Europe, which provides a lot of this growth.

This reflects our investment and success mainly in the Western Europe region and in some leading economies in that space.

On the gateway front, we've seen decline of about 5% compared to the year-ago quarter.

Main decline came from the product sales.

Gateway services revenues were fully in line with expectation and did not decline.

When discussing gateway products' decline, it is important, as though, to know that discussing service providers' all IP project has some similarity in the way that gateways and MSBR use SIP for a network transformation.

As such, since they are both using (inaudible), the overall resulting decline was moderate.

We attribute --- we've seen growth in MSBR revenue mainly due to network transformation project in all-IP, North American and West Europe.

Touching on the broader aspect of our product where we focus, as indicated previously, we've now become the pioneer of choice for SIP product in most of the leading all-IP and use the application environment such as the Microsoft Skype for Business and Teams, BroadSoft and others.

And we are building similar such positions with other service providers worldwide.

Touching on some other parts of our business.

Microsoft, this was a very successful quarter, first quarter grew 30% year-over-year and more than 15% over the preceding quarter.

Its results reflect continued good business momentum on the Skype for Business front, mainly in light of Microsoft's announcement of continued support of the Skype for Business server on premise.

We also sale continued projects of Skype for Business online and evidence that the hybrid market does exist and continue to grow.

Still in view of some of the latest Teams' announcements, an increased focus on Teams versus Skype for Business, some of our customers projects were delayed as the result of the fact that they had to consider different alternatives for deployment.

At Enterprise Connect '18 about a month ago, Microsoft announced AudioCodes as a launch partner for both the Teams phones and the Teams direct routing SBC.

Because this is now being tested by several global system integrators and service providers, mainly in Europe and by several large enterprises.

First quarter 2018 was also a good quarter in terms of sales of Skype for Business online appliances.

Where 2 of our solution the CCE and CloudBond have both enjoyed higher revenues than before.

We also enjoyed very strong quarters on our IP phones for Skype for Business market, and we have seen warm market feedback to the introduction of some of our newest IP phone models.

Touching on some of the views in that space, we enjoyed a large number of $100,000 project each.

I can give you example of a large accounting firm deploying in the U.K., a large bank deploying in Asia-Pacific, large regional bank, a company -- a leader -- a global leader company -- agriculture based in Asia-Pacific and in the U.S. also, so very strong accounts.

So very successful quarter for Skype for Business.

Going into another front, which is the SBC.

SBC enjoyed very nice growth, grew more than 30% year-over-year.

We -- all in all, we target for 2018 to grow more than 20% compared to the previous year.

We've got good momentum in that space too.

It's a high margin -- high gross margin project.

Services are pretty strong in that space and contribute about 35% of our revenues.

So very solid, very solid business going forward.

In terms of our geo split, we have about 45% sold into EMEA, 30% into North America and then we sell close to 10% both in Asia Pacific and (inaudible).

To mention some of the project we enjoyed, we have a large OEM in that space, which has increased its purchasing with us for virtual enterprise SBC.

We've seen an enterprise voice with an organizational project that is using both of our SBCs and routing in Europe.

We have continued an expansion of an existing American-based large accounting firm worldwide and also a very strong beginning with the Genesys contact center-based solution in EMEA.

On more activities on the SBC front, we have launched our WebRTC SDK for web.

We do see a lot of momentum in that space, a lot of interest from customers.

We believe that our WebRTC solution is currently superior to other solutions in the market and we do expect to see growth in that space going forward, mainly in the context of the market.

We also about to launch a more advanced solution for our micro services SBC for cloud deployments, and we believe that once it's deployed, middle of second quarter, we'll see increased sales too.

So all in all very successful quarter to the SBC itself.

As I mentioned also that in our IP Phone business, we enjoyed very nice growth compared to previous year, we grew by more than 30%.

Again, most of our sales are in Skype for Business market and some are targeting also contact center application.

Going into our service provider sales, we've seen growth.

This is consistent growth of CPE to some of the largest service provider both in North America and in Europe.

So service providers CPE grew also targeting mainly SMB and branch offices.

Providing more color on the services booking.

Booking grew almost 30% as opposed to the invoice, which was recognized business, which was about 20%.

Key growth was in the professional services area where we grew a 100% from last year.

It is still a small amount but does show our focus and ability to provide growing professional services to some of our largest customer.

So all in all, very strong year.

Substantially, we've seen the services provided in the EMEA and the Asia Pacific region.

Going into the Voice.

AI business, we've seen very nice activity on the Voca, the voice recognition side of the business.

We've seen increased opportunity win in Israel.

We started to work and promote the solution in Germany.

We've seen first year success there and in view of that success, we believe that we will start deploying more -- the solution in other countries.

In smart app, which is our recording solution.

Basically, we do see new developments coming in the next few quarters.

Summarizing the call, I'll go to our guidance and outlook.

As mentioned by Niran, outlook remains very positive.

Our main voice connectivity business is well on track with good performance and position in the market.

We see nice pickup in activity in our Voice.

AI, a new initiative.

Reference the guidance, we are not changing it (inaudible).

It's only the first quarter in the year, so we are not changing, as Niran mentioned, the range of revenues and range of earnings.

And that is pretty much substantially, would have prepared this and update to the quarter.

I'll turn the call now to the Q&A session.

Operator, please?

(Operator Instructions) Our first question comes from the line of Rich Valera with Needham & Company.

So it looks like the SIP -- UC-SIP business was well ahead of your expectation.

Just wondering if you can break down at all what drove the upside in that business?

And then you previously talked about that being kind of a 15%-ish growth business and you basically double that in the first quarter.

Do we still think 15% is the right number?

If not, what?

And then just on the gateways, I know, I think, we've talked about that possibly being kind of a low single-digit to grower this year, it looks it was down, down kind of mid-single digits in the first quarter, any change in your thoughts on the Gateway outlook as well?

All right, Rich.

So on the UC-SIP, basically we do plan on annual growth that's between 15% and 20%.

The first quarter was substantially better.

As I've mentioned before, UC-SIP is deployed in 2 key markets, which are unified communication and contract centers.

We have seen good momentum, I mean practically all of the different categories of products in that space, which are the SBC, the IP phone, the MSBR, the operations center, management solution, the routing solution, which is very attractive and grew dramatically in the quarter and the markets of cloud-related appliances.

Now growth in UC-SIP was almost equal between products and services, so a very good quarter.

Going to the gateways.

All in all, the Gateways business was almost kind of flat with previous quarter, but there was distinctive difference between products and services.

Products, and I've mentioned that, products declined about 5% -- between 5% and 10%.

On the contrary, services grew, and combination of product and services really gave us a result, which is less than flat, but not that declining.

We do expect that going forward, we will probably see continued decline on the product side.

We do not expect much change in the services side.

So declining over the overall Gateway business will be moderate.

Still, I will also make a comment of caution that this is the first quarter only, and you know we'll be in better position to make a call after the second quarter or even the third one as to the true trend in the Gateway business in 2018.

Got it and then just with respect to your guidance, you mentioned the strong trends, I think you'd seen in the first quarter continued into the first month of the second quarter, and historically, you've tended to be sequentially up in that second quarter.

Do you -- can you give any sense of where we would expect to be on that second quarter relative to the first that we think we're sequentially flattish off that stronger first quarter than typical or any color there would be helpful.

Right.

It's too early to make a call as I've mentioned, the first quarter was substantially better than planned.

Second quarter started well.

So very difficult to say at this stage whether we will see further substantial increase in second quarter or just a mild growth.

All in all, the business is good.

And we do not -- we expect 2018 to be an up year, substantial.

So too early to make a change to the guidance, but we feel very good about second quarter.

Got it so one more if I could, just.

You mentioned the shekel being a headwind on the expense line.

How should we think about OpEx going forward?

Should we use that first quarter OpEx baseline as kind of the right level to use going forward?

Yes, so I think we've seen substantially most of the increase in the OpEx in the first quarter.

This is simply because, not going into too much details, but the fourth quarter we did not add any edge, and we were not in good position.

So as mentioned that OpEx in the first quarter had jumped $1.2 million, still we were able to provide a lot of success.

However, I do believe that going forward of course (inaudible) -- second, third and fourth quarter will not be substantially different or may even be lower since we started to see some better conversion rates in April, and also, there's another factor, which is tied up to vacation, which is usually higher in the first quarter than in the other quarters.

So taking these 2 factors into account, we do not expect worse OpEx figures for the year, we may see even some relief.

Our next question is from the line of Dmitry Netis with William Blair.

I'll phrase the question a little bit differently, but it's sort of on the same track as Rich just inquired, as far as the guidance goes.

I mean it sounds like you're tracking well ahead of the plan, your bookings are up 30%, invoices up 20%, deferred is nicely up.

I get some of the nuances around the product versus services and gateway assumptions -- for media assumptions -- for media gateways, but you are essentially coming in right now at the higher end of the guidance.

So what's the reserving tone here with respect to reiteration of this $169 million to $172 million, why wouldn't you kind of weigh that guidance if you think it's so well aligned as you go through the year?

Right, the only reason would be that this is the first quarter, and we just pass for a month in the year.

If nothing will change, we may see some guidance update in -- after the second quarter.

But at this stage, we simply would like to be more conservative.

Just conservatism.

Okay that's helpful.

There's no other reason to be.

Got it, got it.

That's helpful.

And then on the bottom line, similar question.

It sounds like OpEx was up, it was up substantially, but your explanation was that it is due to Israeli shekel and effects unless there was something else in there, but you do expect that to come down as you go through the year.

So as revenue improves and OpEx stays flat to better than Q1, shouldn't that put some positive pressure on new EPS?

We're passed the guidance range already as it seems, you know brawling in your (inaudible) into the remaining quarters of the year.

So that guidance also was maintained for the year, so I'm just wondering why didn't you change that either.

Again, we want to be on safe grounds.

We just went through the first quarter only.

We do not see major substantial change in the year, but before we go through another quarter and verify the trends, we would like to be more cautious.

Okay.

It sounds like you just have more control on the bottom line than you do the top line, which is why I phrased that question separately.

Okay, I understand that this is conservatism, I'll just simply move on.

All right, I just -- the next couple of questions that you may -- I'd like to touch on your channels.

Maybe starting with Microsoft, you mentioned some nice pick up of the server -- Skype for Business server business.

Do you anticipate that business decline as teams kind of become to go to standards with their introduction of hybrid voice services in June?

Is that something you're watching, and you expect to pick up in that line of business?

And will that sort of move the right in front(inaudible) kind of a traditional on-premise Skype for Business server to more of a cloud hybrid deployment with Teams?

Right, so we're watching closely, and we're working very closely with our partners to make sure that as soon as voices deployed in Teams, middle of this year, we'll be among the first one to deploy and work with the first few customers.

In terms of effects on our revenues, we -- I would again tend to be more cautious.

We will put like a 6-month delay on that.

So I think, the key impact of that new introduction, middle of this year, will probably be seen in early 2019.

But all in all, we do enjoy great business with the already deployed Skype for Business on-premise and the online solution.

And we've seen growing revenues and growing need to expand networks and few more accounts.

So we believe that hopefully with the introduction of voice in Teams.

This year I think much of the answer in terms (inaudible) of some of the customers will trend away, and we will -- but we will see the effect of that on the -- maybe 9 months from today.

Okay, that's helpful.

And some of the specifics if you may provide us with -- around those projects that were delayed when customers kind of shift it from Skype for Business online to maybe Teams.

Is it just -- how do you pick up some of that business in your server, mark business or customers are simply kind of holding off and waiting for the Teams release?

How -- anything you can provide there would be helpful.

Yes.

I think that you know a very strong position in the Microsoft Teams Skype for Business market comes from the fact that we're able to deploy any of the architectures that a customer will choose.

Some of them will choose an on -- a straight on-premise solution.

Some will favor in hybrid solution, combining on-premise and cloud, and some of the new ones will probably go with the new Teams solution.

So our ability to play all of the 3 different alternatives, plays great to our ability to be successful in the market.

So we are staying very close to any new development.

We've been working on each of the previous 7, 8 years to be on top of any new development and provide a solution to it.

So the situation is manageable, and I believe that because we [invested] this effort, we are one of the more successful vendors in this space and the ones that usually kind of default (inaudible) selection when selecting diverse connectivity and the infrastructure solution.

And the next question around -- focuses around Cisco, and their acquisition of BroadSoft, clearly your major partner on the voice side -- voice of SBC side.

Have you seen any changes of shift there with respect to their approach to SBC, selling SBC into those BroadSoft environments?

So we -- our product has been designed into the BroadSoft solution and are now part of BroadSoft solution, it's sold by Cisco.

We are -- we need to remember that in the end of the day the customer that buys those products is the service provider.

And we do have a very strong position with those service providers.

Just to mention that about a month ago, we had a very big event here in Israel, which we called Accelerate 2018 where many, close to 200 people came from around the world, mainly service providers to participate.

So our relationship with the service providers will basically determine how successful we will be in the broad(inaudible) of Cisco environment.

And right now, in the first quarter of 2018, we've not seen change.

And as we believe that as long as we remain competitive and still interruptible with the BroadSoft solution, we will be successful.

Okay that's also very helpful.

It makes sense.

And then lastly maybe on the buyer and them coming out of bankruptcy.

You had some kind of pockets of weakness, I suppose when they were in bankruptcy.

Now that they're out of it, what have you seen out of the safety ecosystem?

Has that business gotten better or stayed the same?

Any color there on that front will be helpful too.

Well, nothing to note.

I mean the business was just about the same and no change, no change.

Not better, not worse.

Do you anticipate the buyers' deployment?

I mean I know they have some SBC that they acquired years ago, but is there a relationship there that can get better?

Or you don't expect that to happen anytime soon?

No idea.

Quite frankly.

We definitely talking to all of the potential partners in this space.

And as you know, things evolve over time.

We still need to be consistent with our superiority in the SIP space.

We hope that at some point that will be useful also for partners such like a buyer, but at this stage, I have no evidence of that.

Right.

But nothing stops the channel partner or their consultant to resell it(inaudible) saw that sell your SBC with their topics on deployment for example.

No, nothing changed.

Of course.

Okay, okay.

My last one and I'll drop off the line.

Is -- regarding the media gateway, just wanted to see -- I get the kind of product services shift -- mix shift potentially as you go through the years, but your guidance was for low to mid- single-digit growth, has that guidance changed at all?

Or, yes, I suppose that guidance included both product and services.

So anything you can help us, you're reiterating that are not, just give us a sense of that.

Okay, we do expect Gateway services to at least remain flat and/or grow, simply because as each year goes by, we do sell -- we used to be selling each year about 60 million of products to the market and those products needs service.

So just imagine the amount of gateway products that is accumulating these days in the market, and therefore, we should expect services to continue to be successful business.

Okay, so flat through the year for product and services combined, is that your guidance for me...

I wouldn't say flat.

If I have to make a call, I will say flat to -5.

But that's my guess.

At this time, I'll turn the floor back to management for any further remarks.

Okay.

Thank you, operator.

I would like to thank everyone who attended our conference call today.

With good business momentum and execution of our plans in the first quarter of 2018, we believe we are on track to achieve another year of growth.

We look forward to your participation in our next quarterly conference call.

Thank you very much.

Have a nice day.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.