AudioCodes Ltd (AUDC) 2012 Q4 法說會逐字稿

Greetings, and welcome to the AudioCodes fourth-quarter 2012 earnings conference call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Erik Knettel, Investor Relations for AudioCodes. Thank you. Mr. Knettel, you may begin.

Thank you, Melissa. I'd like to welcome everyone to the AudioCodes fourth-quarter and full-year 2012 earnings conference call. Let me begin the call today with a brief Safe Harbor statement.

Statements concerning AudioCodes' business outlook, future economic performance, product introductions and plans and objectives related thereto and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters are forward-looking statements as that term is defined under US federal securities law. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results to differ materially from those stated in such statements.

These risks, uncertainties and factors include, but are not limited to, the 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, upgrades and the ability to manage changes in the market conditions as needed, possible disruptions from acquisitions, the ability of AudioCodes to successfully integrate the products and operations of acquired companies into AudioCodes' business and other factors detailed in AudioCodes' filings with the US Securities and Exchange Commission. AudioCodes assumes no obligation to update that information.

In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share. AudioCodes has provided a reconciliation of non-GAAP net income and net income per share to its GAAP net income and net income per share according to GAAP in its press release and on its website.

Joining us today from AudioCodes we have Shabtai Adlersberg, Chairman, President and Chief Executive Officer, and Guy Avidan, Vice President, Finance and Chief Financial Officer. I would now like to turn the call over to Shabtai Adlersberg. Mr. Adlersberg, please go ahead.

Thank you, Erik. Good morning, and good afternoon, everybody. I would like to welcome all to our fourth-quarter and year-end 2012 conference call. With me this morning is Guy Avidan, Chief Financial Officer and Vice President of Finance. Guy will start off by presenting a financial overview of the quarter. I will then review the business highlights and summary and then discuss developments into our business and in the industry and plans for 2013. We will then turn it into the Q&A session. Guy.

Thank you, Shabtai, and good morning to everyone. Before beginning the financial overview of the quarter, I would like to note that the following discussion will include GAAP numbers, as well as non-GAAP pro forma numbers. Our fourth-quarter non-GAAP pro forma results reflect adjustment for the following two non-cash items -- stock-based compensation expenses, which totaled $332,000, and amortization expenses relating to the acquisitions of Nuera, Netrake and CTI, which totaled $282,000. A full reconciliation of non-GAAP results discussed on this call to GAAP results is currently available for review on our website and in the press release issued earlier today.

Getting to the numbers. Our fourth-quarter results are in line with our previous revenue and profit guidance discussed on our conference call on October 4, 2012 and include the completion of the restructuring plan to reduce annual operating expenses as per our announcement on July 11. As announced in July, the restructuring plan is generating estimated annualized saving of approximately 10% of Company's operational expenses. At the end of the fourth quarter, we managed to reduce headcount by 9% compared to the end of the second quarter. The implementation of the cost reduction plan was completed this quarter.

Fourth-quarter revenue was $32.8 million, which represents a 4.6% increase from the sequential third quarter of 2012. We saw solid demand for our core networking equipment group business, especially in the unified communication and contact centers market, which was partially offset by some anticipated headwind we experienced during this quarter in our technology group and OEM business.

As a percentage of revenues, sales in the Americas accounted for 53%; Europe, the Middle East and Africa, 38%; and Asia Pacific, 9%. Revenues associated with our growing managed and technical services business line grew to exceed 20% of total revenue or $6.7 million in the fourth quarter of 2012. Managed services provide another revenue driver which helps further bind AudioCodes' high-high-value relationship with its customers. Service revenues are also beneficial in that they are typically characterized by high gross margin and are based on the extensive experience and know-how accumulated in the Company.

Our top 15 customers accounted for 58% of our revenue compared to 53% in the previous quarter. In the fourth quarter, we had a single distributor in North America that accounted for 17% of revenues compared to 13% in the previous quarter. The increase in business with this distributor is derived from the sequential increase in our revenues in the United States.

In terms of revenues by business group, in the fourth quarter, our networking business group accounted for 81% of revenues and our technology business group accounted for 19% of revenues, compared to 81% in our networking business group and 19% in our technology business group in the third quarter of 2012.

GAAP net income for the fourth quarter was $524,000, or $0.01 per share, a decrease of $146,000 versus the year-ago quarter and an increase of $1.6 million sequentially. Non-GAAP net income for the fourth quarter was $1.1 million, or $0.03 per share, a decrease of $330,000 versus the year-ago quarter and an increase of $1.6 million sequentially.

In the fourth quarter of 2012, on a GAAP basis, gross margin was 57%; non-GAAP gross margin was 57.7%. GAAP operating expenses were $17.7 million compared to $19 million in the third quarter of 2012. Our total pro forma operating expenses were $17.3 million compared to $18.6 million in the third quarter of 2012.

Headcount declined this quarter by 14 employees, which bring us to a total of 579 employees. Short-term and long-term cash balances were $58.5 million compared to $54 million last quarter. The increase in cash balances is attributed mainly to an increase in net profit, as well as decrease in accounts receivable and decrease in inventory.

As for the share repurchase program announced on October 3, 2011, we would like to inform you that through December 31, the Company repurchased approximately 4 million shares of common stock at an aggregated cost of $10.7 million. DSO came in at 68 days compared to 78 days last quarter.

While we expect demand for our products and solutions to grow at a double-digit compound annual growth rate over the next three to five years, within this larger growth trend for our new products and solutions, we do anticipate some of this growth will be offset by a decrease in demand for our technology products.

Our guidance for 2013 are as follows. On an annual basis, we forecast revenue for 2013 to be in the range of $133 million to $137 million, and non-GAAP earnings per share expected to be in the range of $0.10 to $0.14.

I will now transfer the call to Shabtai.

Thank you, Guy. We are very pleased to report the second consecutive quarter of improved financial performance. As we have stated in our release earlier today, the improvement is underlined by sequential growth in revenue, return to profitability and substantial improvement in cash flow from operations.

Growth in our networking business has been driven primarily by higher product and services sales, all in the area of unified communication, enterprise session border controllers and contact center application, all representing strategic directions for us. It is important to realize that all three market segments do represent fast-developing sectors in application in the networking world and that they are all expected to extend future growth over several years' span. And thus, they provide a very sound basis for continued growth.

Further supporting this potential is the ongoing trend in enterprise voice market with the shift to unified communication and IT-based contact centers and constant growth in enterprise voice services from pure on-premise solutions to cloud voice services in (inaudible) models. Our continued investment in integrated connectivity and newly-emerging technologies in the field of over-the-top mobility and voice quality of service SLA monitoring and enhancement will further help to enhance our position in this market.

Guy has already covered much of the details pertaining to our financial performance in the quarter, but I would still like to dwell on some of the more important ones that we achieved in the quarter.

We grew sequentially in sales 5.8%, a very nice growth. We exhibited good control over expenses and over OpEx. OpEx went down to $17.3 million from $18.6 million in the previous quarter. Just to remind us all that we target $18 million on the average on a quarterly level, and we believe that level is sustainable, the $18 million third-quarter OpEx, is sustainable over the next few quarters.

We have enjoyed big improvement over third quarter 2012 on the income line. Operating income came at $1.6 million, substantially upward from a loss of $550,000 in the previous quarter. Net income was $1.2 million compared to a loss of $400,000 in the previous quarter, so very nice developments and improvement on the income line.

Cash flow was very strong in the quarter. We have generated more than $10 million -- I'm sorry -- more than $8 million of cash from operating activities and ended up growing in our cash balance with close to $4.5 million.

Another improvement relates to our inventory. Inventory went down substantially in the quarter by more than $2 million to around $16.6 million, a record low. This level of inventory is now 20% lower than a year ago.

Headcount. Headcount declined to about 580 employees, down 2.4% from the third quarter and down almost 9% from a year ago, all in accordance with our restructuring plan announced six months ago. As we return to continued growth now, we have already started selective hiring, mainly in the customer-facing groups.

Now to some of the business trends in the quarter. We have seen -- as we've mentioned, we've seen strong momentum of sales in the third quarter. The majority of it came from networking, which has recovered and showed close to 5% sequential growth. Services, and more so professional services, are emerging strong and stable source of revenues and stability for our business. In the fourth quarter, services grew more than 20% over third quarter; professional services grew more than 40% in the quarter.

Microsoft Lync environment. Two of the most leading sectors in sales in Q4 were Microsoft Lync and then our activity in the contact center. We had growing number of Microsoft Lync opportunities. We saw larger sales in this business segment. Sales in the fourth quarter grew 20% above third quarter and are substantially above the average level in overall 2012. In the contact center market, growth in sales grew more than 15% over third quarter.

Getting to a third growth engine in our business, enterprise session border controllers. That was a substantial performance in the quarter. The Mediant 4000 SBC that we have introduced in August, third quarter, was key in growing sales. That product, which covers a few thousand of concurrent sessions opens for us a huge portion of the market that has been closed for us for [so many] years. Sales of session border controllers grew above 25% in the quarter and are now in a running rate that's above $10 million annually.

Just to remind us all, we saw a market study issued by Infonetics in October; we have been named third runner-up in that sector, and we have named to capture 6% of that market. We do believe that with the growth in the Lync environment and the contact center environment, we will see our market share growing up.

Another source for encouragement is new product sales. We do define certain products, such as the Enterprise SBC, the IP phones, the enterprise routers and professional services combined as new product sales. The contribution of new product sales in the fourth quarter was very substantial. Actually, it has been more than double than the level we've seen in the second quarter of 2012.

New growth engines product sales are now above 10% of Company sales. And from early trends in January, we see continued growth, mainly in unified communication related sales of Enterprise SBCs, IP phones, enterprise routers which embed advanced voice capability, et cetera. As mentioned before, together with new professional services practice, on top of this emerging new growth engines, we do expect solid growth going forward.

Now getting back to the largest opportunity we face in next several years, or the opportunity going forward. Strategically, we have invested heavily in (inaudible), those three key growing segments, which I've mentioned before -- unified communication, IP roving contact centers and SIP trunking. We have aligned ourselves with world leaders in those segments.

In the unified communication market, we focus primarily on the Microsoft Lync ecosystem, which is the fastest-growing and mind share leader in the space. We've seen -- and this is based on an Infonetics report that came out in December of 2012 -- Microsoft is taking the lead with continuing strength, it is a driving force in this space, and it is now 33% license share in the third quarter of 2012. If you compare Microsoft Lync performance against other competition from Cisco and Avaya, we have seen Microsoft increasing licenses, and we see a decline in the other two.

Now, AudioCodes' growth is a derivative of Microsoft Lync penetration. And as Lync revenues have been growing more than 35% annually, we do expect that we will see our revenues from that ecosystem growing substantially. What separates AudioCodes from the pack -- from our competition in that space is the fact that AudioCodes is the only single-source provider for Microsoft buyers for complete end-to-end voice solutions. We do provide all of the products, all of the expertise, service solutions, practically a complete (inaudible) removal for the Lync voice ecosystem.

As we look ahead to 2013, AudioCodes stands well-positioned to expand its presence within the market -- billion-dollar market for unified communications. We believe that our leadership in the markets of Lync voice ecosystem as the only single-source provider for Microsoft partners for end-to-end voice product and services solution is a clear competitive advantage within one of the most attractive segments of the communication sectors.

With the recent launch of our AudioCodes One Voice for Lync offering in early January, we are simplifying and accelerating voice enablement of Lync implementation with a complete portfolio of products and services. This includes, among others, IP phones mitigate with Enterprise Session Border Controllers, survivable branch appliances, a Session Experience Manager and more advanced complete metric management and assessment tools supporting professional services. This is today by far larger and much more advanced solutions than any of our competitors in the market.

Just to mention a quote from Microsoft on that press release, Microsoft's general manager of marketing -- Lync marketing said, "We see AudioCode's One Voice for Lync program as an opportunity to accelerate deployment of voice-enabled Microsoft Lync deployments."

I am glad to inform today, two weeks after that announcement, that since we announced that solution initiative, we have now more than 35 Microsoft partners in North America, Europe, Asia Pacific and Latin America who joined this One Voice for Lync program with us, and they are all listed -- their names are listed on our website. Additionally, I can tell you that we have already signed more than five new first end customers for the One Voice solution. I would also mention that some of the new Enterprise SBC wins in the first quarter are in the Lync environment.

And with that, I have concluded my presentation for today. Thank you very much. Operator, we will take it to Q&A.

(Operator Instructions) Andrew Uerkwitz, Oppenheimer & Company.

Thanks for taking my call. Appreciate everything. Shabtai, could you give us your view here on the voice-over IP adoption in Lync? It looks like Lync is doing quite well, but some enterprises are not adopting the voice side of it. Could you kind of give us your thoughts of how you see that playing out, what is going to be the catalyst there longer-term and how that is going to shake out?

Yes, I will try to do my best on that. Unified communication, primarily (inaudible) Lync, is focused, at least from the customers' end, in the initial deployments on two key functionalities, which are presence and instant messaging. Usually those are the first productivity tools that customers select to start with.

VoIP is coming on these days. Voice is primarily more about collaboration, mobility. And there has been some slowness in starting with voice application about two years ago; we've seen some pickup in the past six months. We do believe that going forward, and especially with our announcement of One Voice for Lync, the ability to deploy -- first, actually, plan, design, implement and deploy, provision a complete voice solution end-to-end will be much easier. So we believe that we will see acceleration of that in 2013.

Rest assured that any customer who has deployed Lync and is not using voice today will definitely transition either this year or next year as to retiring the old PBX. All in all, complexity is playing for us, allowing us to create advantage. And then by providing a complete solution, we do believe that with -- and Microsoft introducing mobility, we have heard early this year -- we do believe that voice will pick up as well. All in all, we have a huge infrastructure of Lync that will be developing for us.

Great. Thanks. Do you think it is on the IT manager just doesn't want to upgrade -- or doesn't want to change out the PBX? Or is it just a matter of that the budget, say, previously could handle the presence and the next year's budget is going to do the voice? What is kind of like your experience talking with these projects from -- how is the IT manager kind of looking at it?

Before we get to that, I'll just mention that we've seen much emphasis from Microsoft on licenses, and licenses has not necessarily included voice in the past. So we do believe that part of the reason for voice not being developed two years ago and last year was primarily because the emphasis was on pure licenses.

That is changing now, and we know that as of fiscal year 2013 at Microsoft, there is emphasis on voice, too. So that has changed.

Also from the IT manager point of view, as you mentioned, there is usually no forklift in such a situation. Usually, the move and transition to Lync would be first to deploy the presence in IM and then add gradually the voice. I believe -- I do believe that mobility is a key factor, and the fact that Microsoft will be introducing Lync mobility we understand in the next few weeks, that will definitely make a change in deploying voice in Lync, too.

Okay, perfect. And then if I could just ask one quick one here. Could you kind of review kind of the strategy or the thought process behind you leaning more towards the service -- moving more towards the service aspect of the voice-over IP? Because it looks like your competitors are not going that direction. So could you guys talk through your thought process there?

Yes. Well, I think we haven't focused on it, but I think we really in many ways, this is a milestones year in the Company history in that we are changing strategy from a Company that focuses on best-of-breed products. And we've been always very good in deploying gateways and session border controllers and other stand-alone products. We now move to more complete solutions and services that are needed to deploy those solutions.

Now, we do see that the end customer has substantially higher appreciation for a complete service and solutions. And I think we are basically playing toward the end users' requirements. And that is the shift.

The fact that we -- we saw that about two years ago, and this is why we have -- while some people did not understand why we invest in IP phones and why we do engage in more products, the idea was always here is a -- unified communication is going to be one of the largest markets in the world. There is an open network solution, Lync, Microsoft Lync that is developing. There is a room for companies with clear competence on voice to play there. And that was the strategy that we have basically initiated two years ago. And therefore, we have developed so many different pieces of equipment.

Obviously, other people take a best-of-breed approach and will try to compete on a gateway side only or session border controller only or IP phones only. But we do believe that our comprehensive solution, bundled with services, that will be a winning factor. I think for an end customer, it will be much easier to get a complete working and supported solution from one vendor than having to deal with four, five, six or seven different parties.

Great. Thanks, Shabtai, for that color. Really appreciate it. Makes sense to me. Thanks.

(Operator Instructions) Rich Valera, Needham & Company.

I got a call a little late, so pardon me if some of these questions have been answered already. But Shabtai, I was wondering if you could talk about what percent of your revenue was derived from Lync-related sales in the fourth quarter and how you see that trending through 2013.

Okay. Well, usually we do not report on the breakdown of sales into specific segments. I'll say generally that in 2012, Lync was about -- above, I'm sorry -- above $15 million of sales. We do ask fact that in 2013 we will grow in the Lync environment more than 35%. So those are the numbers we can quote.

That's very helpful. And then, with respect to the competitive landscape for your business, you mentioned you are kind of the only end-to-end supplier. I think one of your major competitors here is NET, recently acquired by Sonus, or at least last year acquired by Sonus. How do you see them in the marketplace and how has that transition been? Has it been disruptive, i.e. beneficial to you? And how do you differentiate yourselves from them, because they talk a lot about their Lync certification as well?

Right. Well, you know, I don't think one can compare between the two companies. We do provide a complete solution, end-to-end solution, including phones, including gateway session border controllers, session experience management will come with unified management, a lot of -- well, a complete solution.

NET acquired by Sonus do compete on a very narrow basis on the gateway side and on the integrated gateway and session border controller side. So we do see them as competition on that partial area, but not in the full context. And I do believe that an end customer facing a decision to go with several vendors, among them NET/Sonus, or choosing a more complete, fully-working solution, in my mind, I think the answer is no. So that is how I relate to that competition.

Great. That's helpful. And then the technology segment has obviously been declining for a while here. It had a pretty big decline in 2012. Can you give us any sense of where you think we are on the revenue trajectory of that relative to 4Q levels? Do we think we've found some stability here, or should we expect to see further declines to some level in 2013?

Right, to a certain level, we've seen in the last two quarters, since the middle of 2012, we've seen some stability. To give you numbers, in 2011, we sold about $34 million in that line, and in 2012, we came down to $24 million. We do not see any more such broad changes going forward, so we do believe that we might see a 10%, 15% decline from the $24 million level, but we do not see a major decline as we've seen in the past two years.

That's helpful. And finally, I don't know if you gave any color on how the first quarter is looking, but either way, I wonder if you could talk about how you are thinking of the first quarter from a revenue sort of seasonality standpoint, and if we think these expense levels from the fourth quarter are about the right level to model going forward or if there might be any variation from them. Thanks.

Right. Usually, the first quarter at AudioCodes is roughly about flat or, give or take, a few hundred to thousands. This is the plan now. We do not see major deviation this year.

Also, you know we are at the end of January, and January usually is a slow start for the year. So there is no ability for us to give you any differences. In our plans, Q1 should be around Q4, give or take. In terms of OpEx, we do expect to keep managing expenses on an $18 million level per quarter. So we do not see major change in the quarter for that.

Okay, that's very helpful. Thank you, gentlemen.

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

Okay. Thank you, operator. In summary of our call, we look forward to growing our business in 2013 and further build the infrastructure, continuing to (inaudible) in coming years and follow on the momentum that we have generated in the second half of 2012.

Finally, I would like to thank everybody for participating in our conference call today, and we look forward to have you on our next conference call. Thank you very much. Bye-bye.

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