AudioCodes Ltd (AUDC) 0 Q0 法說會逐字稿

Thank you, Manny.

I would like to welcome everyone to the AudioCodes fourth-quarter and full-year 2013 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 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 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 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, 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 2013 conference call.

With me this morning is Guy Avidan, our Chief Financial Officer and Vice President of Finance.

Guy will start off by presenting a financial overview of the quarter and guidance for next year.

I will then review the business highlights and summary for the quarter and discuss some of the trends and developments in our business and the industry.

We will then turn it into the Q&A session.

Guy?

Thank you, Shabtai, and good morning, 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 pro forma results reflect adjustment for the following three non-cash items: stock-based compensation expenses, which totaled $522,000; amortization expenses relating to the acquisitions of Nuera, Netrake, CTI, and MailVision assets which totaled $339,000; and non-cash deferred tax benefits in the amount of $1.8 million.

A full reconciliation of the non-GAAP results discussed on this call to our 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 previously upgraded revenue and profit guidance discussed on our conference call on October 30, 2013.

This quarter revenues were $36.3 million, which represent a year-over-year increase of 10.5%.

Looking at the sequential comparison, revenues rose 3.5% from the third quarter of 2013.

We saw continuing demand for our core networking equipment business, with an increase of 16.7% in revenues compared to the year-ago quarter.

Sales of our unified communication, enterprise SBC, multiservice business router, and our service offering continued to drive the increase, following the growing demand for Lync Unified Communication and SIP trunk services.

In terms of revenue by business group, in the fourth quarter our networking business group accounted for 85% of revenue and our technology business group accounted for 15% of revenue, compared to 82% in our networking business group and 18% in our technology business group in the third quarter of 2013.

Revenues from our networking business group in the fourth quarter grew significantly by 7% compared to the third quarter of 2013.

Revenues associated with our growing managed and technical service business line were 20% of total revenue, or $7.2 million, in the fourth quarter of 2013, up from $6.7 million in the fourth quarter of 2012 or 20% of total revenue.

Managed services and professional services helped further bind AudioCodes' high-value relationship with its customers.

Service revenues are also beneficial in that they are typically characterized by higher gross margin and usually have recurring revenue nature.

Services are based on our extensive experience and know-how accumulated in the Company.

As a percentage of revenues, sales in the Americas accounted for 55%; Europe, the Middle East, and Africa 33%; and Asia Pacific 12%.

Our top 15 customers accounted for 57% of our revenue compared to 55% in the sequential quarter.

In the fourth quarter we had a single distributor in North America that accounted for 22% of revenue compared to 14% in the sequential quarter.

GAAP net income for the fourth quarter was $2.8 million, or $0.07 per diluted share basis, an increase of $2.2 million versus the year-ago quarter and an increase of $1.8 million sequentially.

This quarter we recognized deferred tax benefit based on a statutory tax rate in the amount of $1.8 million.

Non-GAAP net income for the fourth quarter was $1.9 million, or $0.05 per diluted share, an increase of $722,000 versus the year-ago quarter and an increase of $102,000 sequentially.

In the fourth quarter of 2013, on a GAAP basis, gross margin was 57.4%.

Non-GAAP gross margin was 58.1%.

GAAP operating expenses were $19.5 million compared to $19 million in the third quarter of 2013.

Our total pro forma operating expenses were $19 million compared to $18.5 million in the third quarter of 2013.

Headcount increased this quarter by six employees to a total of 617 employees.

Net cash provided by operating activities was $5.6 million this quarter compared to $1.6 million last quarter and net cash provided by operating activities of $8.2 million in the year-ago quarter.

Short-term and long-term cash balances at the quarter end were $62.2 million compared to $58 million at the end of the previous quarter.

DSO came in at 66 days compared to 73 days last quarter.

While we expect demand for our new product and solution to continue growing at a double-digit compound annual growth rate over the next three to five years, within this largest growth trend for our new product and solution, we do anticipate some of this growth will be offsetted by a decreased demand in our technology and legacy product, which accounted for 15% of our revenue in the fourth quarter of 2013.

Our guidance for 2014 is as follows.

On an annual basis we forecast revenue for 2014 to be in the range of $147 million to $152 million; and non-GAAP earnings per diluted share are expected to be in the range of $0.18 to $0.22.

I will now transfer the call to Shabtai.

Thank you, Guy.

We are very pleased to report a strong financial performance for the full year of 2013 and our second consecutive quarter of growing revenues and earnings.

In 2013 we have made great steps to reposition the Company to continued growth and success in 2014 and beyond.

We have returned to growing our top-line revenues.

We have recovered from loss in previous year to nice earnings, and we've generated significant cash flow from operations.

Our networking business line, where we apply most of our investments, is now 85% of revenues.

It is planned now to grow at a rate of 10% to 15% a year in each of the next three years.

And thus, as provided in our guidance for 2014, we are confident in our ability to continue this trend of success this year and beyond.

Our strategy to focus our assets and efforts on wide-area voice networking and on partnering with market leaders has proven highly efficient in 2013 and will help maintain our leadership in this space going forward.

We mostly depend on the range of very unique voice technologies not found in other companies, including, among others, technologies such as connectivity, security, routing, voice quality management and assurance, mobility, and more.

And this is a clear competitive advantage in our industry.

As we evolve, the consistent feedback from our growing base of customers and partners is that we provide them with the highest value when we provide end-to-end voice network solutions and services, rather than focusing on a best-of-breed product approach as we did in the past.

We also believe that our increased focus on software products, solutions, and services are expected to provide further strength to improve our margins in coming years.

So as we look forward to 2014, we are confident that AudioCodes stands well positioned to extend our leadership in our space.

Again, our focus is on fast-growing segments of unified communication, business services, and contact centers.

Now let me touch on some of the financial highlights, some significant data points.

As Guy mentioned, quarterly revenues totaled $36.3 million.

That's 10.5% increase over the core a year ago.

But even more significant and relevant is our performance on the networking business line.

Again, this is 85% of our revenues and this is where we invest all our efforts.

Quarterly networking revenues increased 16.7% over the quarter a year ago and 7.1% over the previous quarter.

Even more impressive is the operating income, which was $2.1 million.

That is 41% higher than the operating income in the third quarter of 2013.

This points to the leverage we have in our business and our ability to grow earnings substantially faster than top-line revenues.

To demonstrate the leverage, if -- going back to 2013 guidance, midrange of revenues represents about 10% increase over 2013, while midrange earnings represents 40% growth over 2013.

As we mentioned before, net cash provided by operating activities was $5.6 million, a very nice performance.

I would say that we are very strong in overall 2013.

Net cash generated for the full year 2013 was $13.5 million.

This is now another year of growth in cash-generating process.

Gross margin improved nicely to 58.1% from 57.1% in previous quarter.

We believe that this is a sustainable gross margin range or better, given our transition to better mix of products, among them software solutions and services.

New products continued to ramp up.

Overall in 2013 we have generated more than $20 million, and we believe that in 2014 we will grow more than 50%.

Going to our distribution, Q4 2013 has been a record quarter.

Shipments through our main distributor in North America grew more than 40% year over year and, thus, we believe that we are in a good position.

That growth from distribution sales points to the fact that AudioCodes is becoming very effective in the market, selling through our large distributor and [tens] of different value-added resellers.

That points to our success in selling into the Microsoft Lync environment, in the Avaya market, in the BroadSoft market, and a few more markets.

As we mentioned in the press release, we had a strong momentum in revenues from our session border controller products, services, and the Microsoft Lync-related activities.

In 2013, sales in the session border controller market grew for us 80%, services grew more than 20%, and Lync-related revenues grew more than 30%.

Again, Lync revenues are now about 15% of the Company revenues and services are now above 20% on a quarterly basis.

Now let me touch some of the more interesting business lines.

Microsoft Lync has been always our key effort and represents the best performance in 2013.

We grew more than 30%, as I have mentioned.

Q4 was substantially strong; we grew 20% over third-quarter 2013.

In 2014 we will have more products come into play.

We will have our IP phones, were -- just got certification in the beginning of Q4 2013.

We will have more services deployed.

Some of them that are now entering an automated stage of service, meaning that our costs and our gross margin on services will be substantially higher.

We do intend to introduce shortly in the next few weeks, just before the Microsoft Lync conference, a major announcement on a solution for the Lync operations center.

All in all, Lync growth territories remain substantially the US and Western Europe; also, we have seen some new developments in Asia-Pacific.

Key to the performance in that market are strategic enterprise accounts which continue to adopt Microsoft Lync.

Microsoft Lync is very successful in the market of unified communication, and we enjoy that.

We see increasingly on a quarterly basis more large enterprises deploying [tens of] sites in a gradual manner on a multiyear basis plan.

And we've seen rollouts from some of the large accounts we've mentioned in the past.

Among all those deployments, we have product and services together.

Microsoft Lync also represents a very strong and important market for our session border controller market.

We have introduced late 2012 new products, and that is definitely contributing to the sales of SBCs in our market.

Key to our good performance in this market is our close and intimate relationship with some of the leading global system integrators.

And we are enjoying increased and better relationship with a few more system integrators at the end of 2013.

As we look forward for the Microsoft Lync voice market we can see substantial opportunities there.

Based on some internal analysis made by us, we believe that our market will grow above 30% a year for the next five years.

We are leading the Microsoft voice Lync market for media gateways and SBCs.

And we believe that with the introduction of more services in IP phones we will do even better than that.

So we believe that we will keep growing next year in the Microsoft Lync space more than 40%.

Now getting to our session border controller sales.

Again, a record quarter.

We grew above previous quarter substantially and all-in-all, as I've mentioned, in 2013 we grew 80% over 2012.

We entered the SBC market only about three years ago.

The first and meaningful step to increase revenues in that space was the introduction of the Mediant 4000 back in Q4 2012.

That has contributed to a step in growing sales.

Early this year we announced the Mediant 9000 and that will represent another leap in capacity.

Now, with Mediant 4000 we were capable of responding to opportunities where concurrent session capacity was up to 4,000 sessions.

With the Mediant 9000 we're shooting for 16,000 concurrent sessions.

The Mediant 9000 meets all the connectivity, security, and reliability needs of large-scale unified communication solutions in IP contact center deployments.

AudioCodes' high-scale session border controller is also available as software-only version for deployments on common off-the-shelf platforms.

It can be deployed as embedded server or in a fully virtualized environment.

We believe we are now one of the few vendors who have a very broad range of session border controllers not focusing on large deployments only, but basically ranging from small branches up to large data centers.

We have both hardware and software solutions.

All technology comes from one source, unlike other companies, whose SBC technology comes from different technologies due to acquisitions.

We have a unified element management system to support that.

And we believe that now with the added functionality that we plan to introduce of voice quality monitoring, routing, and a few more improvements, we will be one of the more effective and efficient suppliers in the market.

In 2014 we plan to make a push on offsite services.

It's a really tightening relationship with some of the leaders in that market, and we plan to expand to access functionality with our software session border controller and virtualization.

Our plan is to grow in 2014 around 50%.

Now getting to our services operations, in 2013 we grew more than 20% on top of 2012.

That has been our record year in services; very stable, very consistent growth.

We also saw a significant increase in professional services sales.

We now plan to grow in 2014 about 50% in professional sales over 2013.

We have put in place new processes to support services selling.

We have invested in automating our professional services processes to improve our gross margins and cost.

We have invested in recruiting dedicated personnel for business development in North America and India, and we believe we will benefit from that.

In 2013 we also saw for the first time significant number of medium and large-scale project opportunities being deployed and implemented across EMEA and North America.

So we are very confident that we will keep growing on that.

Last business line is the AudioCodes One Voice for hosted services.

Here we are addressing the hosted services needs to accelerate deployment in the market.

The VoIP business services market evolves rapidly as it transitions to a unified communications service and also PBX services.

Market reports indicate that currently IP-based business access lines on a global basis penetration is less than 20%, and we believe that we will see substantially increased pace in deploying cloud-based IP PBX services.

We are now teaming up with one of the leaders in that market.

We are planning a very intensive go-to-market.

We have worked on optimizing our portfolio and our services.

We believe that at this stage we are the only vendor that can provide all on-premise devices.

I put aside Cisco, of course.

That will include IP phones, session border controllers, analog telephony adopters, routers, gateways, etc.

We have a vast know-how in enterprise communication.

We have created bundles that will make this attractive, and also we have worked hard on provisioning in order to make this easier attach operation.

We do intend to go to market substantially in the first quarter in EMEA; already planned some activities in that market.

And with that, I have basically finished my introduction and I will now turn the session to Q&A.

Operator?

(Operator Instructions) Rich Valera, Needham & Company.

Thank you.

Good morning, gentlemen.

First question on gross margin.

You saw a nice sequential uptick in gross margin and I think you mentioned in your prepared remarks that you saw gross margin sustainable around that level.

Just wondered if you could guide, if you could give a little more color on gross margin expectations relative to that 58% you saw in 4Q.

Thank you.

We discussed this issue before.

There are actually two components into this very nice growth in gross margin.

The first one is there is like a 20 to 30 basis point based on this $1 million growth in revenue; and the rest is based on favorable product mix.

We expect that level to continue going forward in 2014.

Around that sort of 58% (multiple speakers) level?

Yes, around 58%, 58.1%.

Great.

And then with SBCs, it sounds like you saw tremendous growth year over year in that category in 2013.

I was wondering if you could give us a sense of what the revenue contribution was in 2013.

And I think you said you expected around 50% growth there in 2014 and just wanted to confirm that number.

Yes, that is correct.

We are planning for 50% increase in 2014.

I believe that majority of this growth is coming from two key elements.

One is the close association we have with some of our partners, and we sell substantially in our partners' ecosystem, including Microsoft, BroadSoft, Genesys, Avaya, and others.

Also, as I mentioned before, key is the fact that now we have a full line of SBCs, hardware, and software densities from the lowest to the highest.

We are now, for the first time since we have begun selling in that market, next to our peers.

So, yes, that is the plan for 2014.

Okay.

Then, with respect to your software-based SBC, I know that's pretty new into the market.

But I was wondering if you could give any color on what you are seeing with respect to how and where that's deployed and what kind of traction you expect with that going forward.

Right.

Initially in 2014 I believe that we will see deployments mainly in data centers, which are used for also the PBX services.

Among them it will basically be in access SBC.

We do expect, though, that we will see going forward also deployments in data center at on-prem and with much lower densities.

Now part of that is our already long-term relationship with some of the manufacturers in that market, for which a software implementation will fit very well for their IP PBX strategies.

That's great.

Then, with respect to Microsoft Lync, very impressive growth targets there.

I think you said you expected your Lync business to grow at around 40%, at least in 2014, if not beyond.

Wondering if you can give any sense of the drivers of that on a product category.

I know you've got a number of things that comprise that, from services to branch routers, SBCs, and software.

Just any color on the drivers of that impressive Lync growth would be helpful, Shabtai.

Sure.

So basically we see adoption, faster adoption of Microsoft Lync in the sales.

It is now the fourth year that the product is available.

I think several of Microsoft customers are now beyond the first stages of trials and proof of concept and initial deployment.

I know at least of two large companies we worked with that now planning much more massive or extensive deployment in 2014.

So, A, we will see more deployments, more companies jumping on that bandwagon.

Second is our ability to provide a very broad range of the on-prem devices, from gateways to session border controllers to SBAs.

As I mentioned before, the large-capacity Mediant 9000 will now allow us to deploy session border controllers in high-capacity situation in companies' headquarters, so we expect an increase there.

Also, while we further to deploy services or sales services in 2013, we see an increasing trend in end-users opting to buy these systems from us, all within our partnership with the global system integrator.

So it's all done in cooperation with our partners.

But more services -- and phones.

We just got certified about three months ago.

We now start to see more.

And as we gradually add more and more features and functionality, we believe with our approach of One Voice, which [allows] for a complete solution, that is most of the time much more preferred than an end user using several partners.

One more important announcement that I have mentioned before will be made in the next three weeks.

We have basically developed a suite of servers which allow for very efficient network operation.

Basically, the intent is that that platform will be part of our AudioCodes One Voice portfolio.

It will significantly help to improve operational expenses and budgets for IT manager who operate a large-scale global Lync network.

Among other things, it will control all of the various components in the network.

And I don't know of any other company offering a management solution that manages IP phones, session border controllers, gateways, SBAs, etc.

On top of that, we will add routing capability.

We will add session experience management capability, all integrated in one package.

And I believe that would be a major decision factor in turning projects towards us.

Okay, that's helpful color.

Thank you.

Dmitry Netis, William Blair.

Good morning, gentlemen.

Just a quick clarification.

I thought, if I heard you correctly, the new products in the One Voice for Lync categories, were they roughly -- what did you say, 15% of revenue for both?

No, not One Voice for Lync.

All of our sales in the Lync environment represent about 15% of the Company revenues, but not One Voice.

One Voice is a smaller percentage of that.

Okay, got you.

And then what -- the new products were (multiple speakers)?

The new product is basically meant to provide a comprehensive suite of management, quality monitoring, security, and network management for large-scale deployments.

No, I understand, but I thought there was a category called new products which included session border controllers (multiple speakers).

No, no, no.

The new product category at this stage counts on the session border controllers, IP phones, and the multi-service routers.

That product is still not sold and that's included in that category.

And what was that as a percent of revenue in the quarter?

We do not give numbers.

I can tell you that we've seen another growth quarter on the new product front.

All-in-all, I think we've mentioned before that in 2013 we more than doubled 2012 revenues.

Okay, all right.

I will take it offline to get a better color on the split there.

Also, I wanted to get a sense on that legacy plus technology group that you mentioned, which I think I heard you say represents now 50% of revenue.

Is that correct?

Correct.

Okay.

So can you give us some puts and takes in that group?

What -- how that fared specifically in this quarter?

Also, maybe if you could relate to the mix between the enterprise and service provider as it stands at this juncture, what that mix is and what are some of the growth drivers or secular growth drivers in each of those categories, and how that affects your business.

Dmitry, generally we do not have accurate numbers and we do not strike the division of our revenue between enterprise and service providers.

But I can tell you that I would estimate it to be like 60%/40%.

60% in enterprise and 40% in service providers.

Okay, that's good enough.

Okay, thanks.

Then on the other question as far as how the legacy products potentially fare within each of those segments, or what the expectation is.

Actually, technology is really excluded from being divided into these two categories.

It goes into a completely different set of customers, and I have no idea.

Understood.

Let's exclude technology and just maybe focus on the media gateways.

So media gateways, again, it's not legacy.

It's a very vivid market.

Just to mention again -- this is a good opportunity -- that we sell gateways primarily in the enterprise market for unified communication and contact centers.

And actually we have seen slight growth in 2013.

We have seen a single-digit growth and we believe that as unified communications continues to develop we will not see any decrease in media gateway sales in enterprise.

Drop usually relate substantially more to service providers, but we are not really active in that market, in the core market.

So it really does not affect us now.

Okay, appreciate that.

Then last question would be on the mix between the three growth drivers you mentioned.

I think you said you see business services and contact center -- I think business services I see being closer to 20% of the business now.

With the other two categories what's the rough mix and where does that shake out in 2014?

So in our unified communication, Microsoft Lync is the primary application.

I have indicated before we plan to grow more than 40%.

I do not have with me breakdown of the growth projection for contact center and business services, but we are investing huge amounts of efforts in going for the offsite services market, our collaboration and go-to-market to the large Tier 1 service providers.

So I expect that to take off nicely in 2014.

I do not have any estimate at this stage for what we would see in the contact center, but the process there is essentially on.

PBM links are replaced by IP links and the movement to cloud will all -- again will support growth in that market.

I would guess your relationship with Interactive Intelligence, who is one of your largest distributors into that vertical or into that segment, is continuing.

Yes, correct.

Two of our largest customers in this space are Genesys and Interactive Intelligence, yes.

Okay.

Great.

Thank you for that color.

Appreciate it.

Andrew Uerkwitz, Oppenheimer & Company.

Thanks, guys.

I appreciate the color in the press release around unearned revenue growth.

Can you give a little bit more color on that mix between services, products?

How much of that do you think is driving your forecast for 2014?

And how much do you think that can grow in 2014?

Andrew, so as we mentioned before, Q4 the breakdown was like 20% on services and 80% on hardware.

A, we are seeing better gross margin on services than our average.

If you look at our deferred revenue numbers, you can realize that we are expecting growth in our services on the coming quarters.

Still it is not the largest portion of our revenues, so we cannot really build our guidance based on services only, but a portion of services are growing constantly quarter over quarter.

Great, that's appreciated.

When I look at your service revenues on a quarterly basis, they kind of bounce around a little bit and the gross margins obviously do as well.

I'm assuming those are correlated.

Again, the ups and downs in terms of revenue are always related to revenue recognition.

We are selling services for between one to three years; and revenue recognition obviously makes fluctuation, especially when you talk about smaller numbers.

Gross margin, however, is pretty steady in services.

Okay, perfect.

I think that's all I got.

Appreciate it, guys.

Thank you.

Les Sulewski, Sidoti & Company.

Good afternoon, gentlemen.

Thank you for taking my questions.

One quick one regarding -- you mentioned hiring in 2013 additional -- some people.

I just wanted to see where that's concentrated.

Is it on professional services side or sales role?

And then typically how long do you expect the hires to become productive?

Right.

We are absolutely confident in our business momentum at this stage and the additional people would be really across the Company.

We have a plan that's depending on some funding by the government of Israel.

If that's going to be approved, we will see more investment being done.

So all-in-all it's all across the board: customer-facing positions, sales, marketing, biz-dev, and R&D.

Okay.

Then just curious on the strength of Lync.

Is it consistent across all regions?

At this stage the key activity goes on in the US, majority of the market, and several large countries in Europe.

We have seen signs in Asia-Pacific, also in places like Australia.

We believe too here also that in China we will see Lync starting to be deployed this year.

We feel very good about that.

Okay, that's all for me.

Thank you.

[Todd Kaufman], [Concourse].

Thank you very much.

Just an earlier question that I think you didn't answer; what percent of your SBCs is -- represented of your total revenue?

We are not giving that number.

We have never provided that number.

So it is an important part, but still not that important of our revenues.

And then just a clarification; you called it out.

How big was that one large distributor as a percent of total revenue?

22%.

Thank you very much.

Good luck.

Thank you.

We have no further questions in queue at this time.

I would like to turn the floor back over to management for any closing remarks.

Thank you, operator.

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

Based on current business momentum, we believe we are on track to continue our trail of growth and success in the year 2014 and continue to build a sustainable, profitable operation for coming years.

We look forward to have you on our next quarterly conference call.

Thank you very much.

Bye-bye.