AudioCodes Ltd.
Q2 2019 Earnings Call Transcript

Published: 23 Jul 2019

[Operator:]

Greetings and welcome to the AudioCodes Second Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.I would now like to turn the conference over to your host, Mr. Rob Fink, Investor Relations for AudioCodes. Thank you. You may begin.

[Rob Fink:]

Thank you. I would like to welcome everyone to the AudioCodes second quarter 2019 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 we begin, 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 introduction, 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 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

[Shabtai Adlersberg:]

Thank you, Rob. Good morning and good afternoon, everybody. I would like to welcome all to our second quarter 2019 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 quarter, and then, we will discuss trends and developments in our business in the industry.We will then turn it into the Q&A session. Niran?

[Niran Baruch:]

Thank you, Shabtai, and hello, everyone. As usual, on today’s call, we will be referring to both GAAP and non-GAAP financial results. The non-GAAP P&L metrics exclude recurring non-cash items. The earnings press release that we issued earlier this morning contains a reconciliation of supplemental non-GAAP financial information that I will be presenting today.Revenues for the second quarter were $49.5 million, an increase of 6.3% from the prior quarter and a 13.8% increase when compared to the second quarter last year. Service revenues for the second quarter were $16.7 million, accounting for 33.6% of total revenues. Deferred revenues balance as of June 30, 2019 was $55.8 million compared to $52 million as of March 31, 2019.Revenues by geographical region for the quarter were split as follows

[Shabtai Adlersberg:]

Thank you, Niran. We’re pleased to report record financial results for the second quarter of 2019. All in all, this was one of our best quarters ever and quite successful on many fronts. Key highlights I would like to mention are the following.First, we are sitting in a very strong market, a market that develop fast, and we, AudioCodes, have got a great market position in it. We will discuss mark-to-market trends and data that were key factors in our success during the past three to four years, and which provide strong support for continued success in the next five to seven years.I’d like to mention that the quarter is very successful in creating new partnerships, we’ll talk about that. Our second quarter 2019 financial performance was great, we’ll discuss that. We will review some of the key activity area for us such as Microsoft Teams, cloud-related activities, service providers to All-IP migration performance, our services and more.I’ll just add that entering the second half of 2019, we plan to introduce new area of investment that we believe will be very significant in the future. I’m talking mainly about the meeting space, where we believe that we can take advantage of our assets that we have today, and adding more capabilities, product and services, we believe that we will be successful in a completely new area for us.Now let’s talk a bit about the markets. Actually, if one looks into market forecasts of size of the market, the UCaaS, UC as a Service market, it’s a fast growing market these days. Just to highlight some data points from Frost & Sullivan and Stephens, in 2018, the market size was about $14 billion, and we add about 13 million to 14 million users.Now if we go forward to 2022, which is just three years ahead, the market will almost double to $27 billion. And the number of users will be somewhere around 26 million, 27 million. So, we’re talking about a very fast developing market both in terms of revenues. It’s no question that, that market attracts a lot of companies, a lot of vendors. And we have seen in the first half of 2019 during the first quarter and second quarter, we see that the competition in the UC as a Service market and Contact Center as a Service market is heating up.There’s growing emphasis on collaboration and video first and meeting first versus communications in the past. We just saw in the second quarter successful IPO of the company Zoom, and also, we’ve seen Slack going public. So, a lot of activity of companies trying to get into the market, I’ve mentioned the names, we worked with and which are competing for market share

[Operator:]

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Rich Valera with Needham & Company. Please proceed with your question.

[Richard Valera:]

Thank you. Shabtai, I’d like to follow up on the Microsoft commentary you provided. So, it sounds like Skype for Business isn’t really growing but Teams is. But you suggested that the Teams’ sort of voice offering isn’t really mature yet and you see some features coming on that. So, can you just talk about what maybe you think is still needed in Teams to make that really take off and sort of how you view the trajectory of that Teams business for the balance of the year?

[Shabtai Adlersberg:]

Yeah, so I’m – again, Teams presents a big, big promise. And – but we’re talking here about very large enterprises. And these enterprises usually do make their homeworks. And before they make sure that a complete set of features that they have been used to in Skype for Business is still not implemented in Teams, they will not make the move.But we do know and we work already with few enterprises, which already took the leap and basically are doing that. So, we’re simply waiting on Microsoft’s committed roadmap to complete and deliver those missing feature in the second half. But we’d like to see that – and some of these customers still are trialing, starting to deploy and then all in all report good, good performance and quality.So, we do expect the same feature to continue into the second quarter, meaning Skype for Business – and by the way, there are enterprises which, say, we do not want to move all of our operations into the cloud. We’ll stay with Skype for Business or we’ll have some mixed operations. So, we still expect Skype for Business to be a good market for us, and but still not ramping, growing fast.On the other hand, Teams is growing very nicely. And we believe that as the missing feature will be completed, second half, we will be fully ready for a strong ramp-up beginning of 2020.

[Richard Valera:]

Got it. And then in your prepared remarks you also made reference to the fact that, I think, you expect product sales to be roughly similar into Teams’ environments relative to Skype for Business environments. Is that correct? Can you just provide a little color on how you think product sales will be into those respective Microsoft environments?

[Shabtai Adlersberg:]

Right, so on Skype for Business the key product that we are selling are on one hand connectivity, which is gateways and SBCs. We’re selling phones. And, obviously, we’re selling some management software and solutions.On the cloud area, you still need connectivity. You still need to reach headquarters and branch offices from the cloud. So, as we see, we’ll continue to be sold and actually will replace, in many cases, the role of gateways instead of connecting to the PSDN, to the central offices, you will be connecting to clouds. And phones will keep being used, although we all know that along the years, we’ll some reduction in the percentage of phones being sold versus headsets.We have mentioned earlier in the call; we do see lot of interest in the meeting space. So are expecting more devices to be sold in that area, meaning conference phones, different sizes of conferencing devices such as for other rooms or medium rooms, large rooms. There will be a lot of equipment. So, all in all, I do not think that transition from Skype for Business to Teams will change dramatically or in any way the percentage of products, other products sold versus Teams versus Skype for Business.

[Richard Valera:]

Great. That’s helpful. And then, when you’re talking about the UC landscape, you mentioned, a lot of major companies, some that have UC offerings that you were working with. Of those, I knew Microsoft and I know Cisco. But you mentioned a number of others that I hadn’t really heard before as customers. Can you repeat that list and kind of talk about your relationship with some of those companies that haven’t been sort of regular mentions in recent conference calls?

[Shabtai Adlersberg:]

So obviously, we’re tied by nondisclosure agreements, so can we talk really as you have mentioned about Microsoft and Cisco. We also announced a few months ago, partnership with Amazon, selling our SBC in conjunction with their SIP trunk services. There are few more names that we sell, UCaaS players. And I think, I’ve mentioned before that, take analog gateways, which is a very common product that needs to be sold to support offices. And many of the players lack them.So, we have seen business in the past with companies such as 8x8 and Vonage and RingCentral and few more. And there are few more names, but I’m not allowed to talk about. So, all in all, everybody needs infrastructure. And there are only a few companies who can accomplish that, so not competing with them, becoming a very natural partner to all of these companies.

[Richard Valera:]

Got it, take it that the two new partners you signed this quarter fall into that nondisclosure agreement?

[Shabtai Adlersberg:]

Yes, yes.

[Richard Valera:]

Fair enough. And then, just looking at the updated guidance for the year, to get to the midpoint of your EPS guidance, basically you kind of flat-line at $0.22 per quarter for the next sort of two quarters, that would kind of get you to the midpoint. And, I mean, historically you’ve tended to always have some improvement in the back-half EPS-wise or are we just being kind of conservative? Was maybe Q2 a bit of an unusual degree of upside from some lumpiness or how should we think about that back-half EPS?

[Shabtai Adlersberg:]

Okay. All in all, I’ll tell you that, A, we intend in view of an increased potential activity with partners going forward for the next 18 months, we will definitely add resources on – I mentioned that it’s going to be controlled and – but we still need to add resources to support new activities.Also, there are some moving parts in our OpEx. It has to do with locations. It has to do with onetime – we had a company event in the second quarter. We’ll have some change in the U.S. dollar exchange rate versus shekel, Israeli shekel. So lately, the Israeli shekel become very strong, that will affect our finances for the third and fourth quarter.We are hedged about 50%. All in all, there are some moving parts. We would like to act conservatively. We believe we will grow. But all in all, I think we are in good shape, to try and beat that flat number that you mentioned.

[Richard Valera:]

Okay. That’s all for me. Thanks very much.

[Shabtai Adlersberg:]

Sure. Thank you, Rich.

[Operator:]

Thank you. Our next question comes from the line of David Kreinberg with Globis Capital. Please proceed with your question.

[David Kreinberg:]

Hi, Shabtai. Congratulations on a great quarter. I just missed one thing. What was the gross deferred revenue number again at the end of the quarter?

[Shabtai Adlersberg:]

Again, can you repeat, David, gross…?

[David Kreinberg:]

What was the gross deferred revenue number?

[Shabtai Adlersberg:]

Oh, deferred revenues, I think it was – it grew from about 55 to – from 56 to – okay, again, I’m being corrected. Deferred revenue grew from $52 million to $56 million.

[David Kreinberg:]

$52 million was the Q1.

[Shabtai Adlersberg:]

Yes.

[David Kreinberg:]

So sequentially, you grew from $52 million to $56 million. But I believe that number at the end of 2018 was $42.6 million. So, if that’s right, you grew 30% year-over-year on the deferred revenues, is that correct?

[Shabtai Adlersberg:]

Yes, that is correct, yeah.

[David Kreinberg:]

Okay, great, tremendous. Thank you.

[Shabtai Adlersberg:]

Sure.

[Operator:]

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I’ll now turn the floor back to Mr. Adlersberg for any final comments.

[Shabtai Adlersberg:]

Thank you, operator. I would like to thank everyone who attended our conference call today. We’ve continued good business momentum and execution in the first half of 2019. We believe we are on track to achieve another year of growth for our business and top the initial guidance provided at the beginning of the year.We look forward to your participation in our next quarterly conference call. Thank you very much. Have a nice day.

[Operator:]

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