AudioCodes Ltd.
Q3 2012 Earnings Call Transcript

Published: 5 Nov 2012

[Operator:]

Greetings and welcome to the AudioCodes Third Quarter 2012 Earnings Conference Call. It is now my pleasure to introduce your host Mr. Erik Knettel, Investor Relations for AudioCodes. Thank you, Mr. Knettel you may begin.

[Erik Knettel:]

Thank you, Jessie. I would like to welcome everyone to the AudioCodes' third quarter 2012 earnings conference call. Let me begin today with the 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 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 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 disruption 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 U.S. 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, Chairman, President and Chief Executive Officer and Guy Avidan, Vice President of Finance and Chief Financial Officer. I would now like to turn the call over to Shabtai Adlersberg. Mr. Adlersberg, please go ahead.

[Shabtai Adlersberg:]

Thank you, Erik. Good morning and good afternoon, everybody. I would like to welcome all for third quarter 2012 conference call. With me this morning is Guy Avidan, Chief Financial Officer and Vice President for Finance. Guy will start off by presenting a financial overview of the quarter. I will then review the business highlights and summary for the third quarter. I will report on progress made in our restructuring plan and then discuss development in our business and industry. We will then turn it into the Q&A session. Guy, please go on.

[Guy Avidan:]

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 third quarter non-GAAP pro forma results reflect adjustment for the following two non-cash items, stock-based compensation expenses which totaled $407,000 and amortization expenses relating to the acquisition of Nuera, Netrake and CTI, which totaled $282,000. The full reconciliation of the non-GAAP pro forma 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 third quarter results are in line with our previous revenue guidance discussed in our conference call dated July 24, 2012 and includes significant progress towards our plan to reduce annual operating expenses, that announcement issued on July 11. As announced in July, the restructuring plan is expected to generate estimated annualized savings of approximately 10% of company's operational expenses. At the end of the third quarter, we managed to reduce headcount by 7% compared to the end of the previous quarter. The implementation of the plan is expected to be completed in three to six months during the period of the plan, we will monitor closely our business trends even hire selectively in our growth areas. In addition to the cost saving components of the restructuring plan the company continues to focus its investments in innovations around AudioCodes' key strategic initiatives in the area where unified communication, enterprise communication, and business services. Third quarter revenue now $31.4 million, which represents 1.1% increase from the sequential second of 2012. Aside from some headwinds, we experienced during the quarter in our Technology Group and OEM business, we did see solid demand for our Core Networking Equipment Group business especially in the unified communication and contact center market. Geographically, as a percentage of revenue, sales in Americas accounted for 50%, Europe, Middle East and Africa 34%, and Asia Pacific 16%. Revenues associated with our Manage and Technical Services business line was approximately 17% of total revenue or $5.4 million in the third quarter of 2012. Managed Services provided recurring revenue driver, which helps further by an AudioCodes high value relationship with its customers. Our top 15 customers accounted for 53% of our revenue compared to 46% in the previous quarter. In the third quarter, we added a single distributor in North America that accounted for 13% of revenues compared to 11% in the previous quarter. In terms of revenue by business group in the third quarter our Networking Business Group accounted for 81% of revenue and our Technology Business Group accounted for 19% of revenue compared to 80% in our Networking Business Group and 20% in our Technology Business Group in the second quarter of 2012. GAAP net loss for the third quarter was $1.1 million or $0.06 per share a decrease of $581,000 versus the year ago quarter, while GAAP net loss improved $927,000 sequentially. Non-GAAP net loss for the third quarter was $419,000, or $0.01 per share, a decrease of $693,000 versus the year ago quarter while non-GAAP net loss improved $993,000 sequentially. In the third quarter of 2012 on GAAP ratio the gross margin was 66.8%. Non-GAAP gross margin was 57.5% and compared to 57.5 on a GAAP basis 58.2% on a non-GAAP basis in the previous quarter. The 17 basis point erosion gross margin this quarter is predominantly attributed to a higher than usual inventory write-off. GAAP operating expenses were $19 million compared to $19.6 million in the second quarter of 2012. Our total non-GAAP operating expenses were $18.6 million compared to $19.2 million in the second quarter of 2012. Headcount declined this quarter by 43 employees, which brings us to a total 593 employees. A decrease in the [select] implementation of our global operating expenses reduction program, short-term and long-term cash balances were $54.1 million compared to $60.7 million as of June 30, 2012. The decrease in cash balances is mainly attributed to financial activities including non-payment and the repurchase of Treasury stock as well as the decrease in payable deferred revenue as well as the quarterly net loss. Net cash used for operating activities was $1.2 million this quarter compared to net cash used of $4.6 million and net cash use of $405,000 in the third quarter of 2011. DSO came in at 78 days compared to 80 days last quarter. While we expect demand for our new products and solutions to grow at a double digit compound annual growth rate over the next three to five years, were still affected by decreasing demand in our technology products. We are forecasting that revenues in the fourth quarter 2012 will be higher than third quarter revenues, and the company will return, to a non-GAAP operating profit in the fourth quarter head of our initial plans. As for our share repurchase program, originally announced on October 3, 2011, we would like to inform you that during the third quarter the company will repurchased approximately 1.3 million shares of common stock at aggregated cost of $2.5 million. As of October 1st, 2012 AudioCodes successfully completed the authorized stock repurchase program having repurchased 3.96 million shares through the program since its inception at an aggregate cost of approximately $10.7 million. And with that, I will turn the call back over to Shabtai.

[Shabtai Adlersberg:]

Thank you, Guy. Very pleased to report we've turned to sequential growth and improved financial performance for the third quarter of 2012. Key business performance improvement indicators for the third quarter include, among others the following

[Operator:]

Thank you. (Operator instructions) Thank you. And our first question comes from the Andrew Uerkwitz with Oppenheimer and Company. Please proceed with your question.

[Andrew Uerkwitz:]

Hey, great thanks guys for taking my question. Since that around Microsoft Lync. Are you seeing more from synergies - you're seen more enterprises adopting the voice feature for that or that's top pretty low percentage and then just from the general enterprise perspective how do you turn up or see the drivers got in the next years they are going to be clear this small businesses or either it's a mid size kind of driving the growth.

[Shabtai Adlersberg:]

Okay. In terms of Microsoft Lync of opportunity, I would tell you that the growth we are planning for the level of voice project activity looks good enough and sufficient. We know from some of our work with the largest some of our working clients is that it's an integrating that a large project - these large enterprises will start to kick in next year. We have at least two to three such projects that we are working on the initial stages right [focused concepts] according to clients known to us we will see in 2013 deployment in large enterprises so it's a gradual process I would, basically also know that for us we care much whether it would be close voice in the initial stage or we will be close voice at a later on edition. But any company that has started to use Lync for a time I presence, is as such that, the functionality will be enhanced to include voice is high and that will happen in the course of next year. So all I all those are good opportunities for us. If I have heard correctly your second question related more to the larger enterprises right?

[Andrew Uerkwitz:]

Sure, yes.

[Shabtai Adlersberg:]

That's so, basically activity versus these large enterprises integral to our large system integrator partners and we're working with few of them we have to and been inactive, we now see in other one. We do believe that there's a much, there's really confidence level, that enterprises basically developed with type of solution and I think again our drive become with a complete end-to-end solution, meaning we take responsibility and charge for our voice parts makes up a sensitivity because it's allowed the customer to be much more confident that in that - in the Lync solutions for Microsoft and on the other end our ability is to provide directly to the mid-market or the large integrators to the larger enterprises at the end of the day, an end-to-end solution approach makes sense and we will have to move that further along.

[Andrew Uerkwitz:]

Hey, great appreciate the color thanks guys.

[Shabtai Adlersberg:]

Sure.

[Operator:]

(Operator Instructions) Our next question comes from the line Rich Valera of Needham and Company. Please proceed with your question.

[Rich Valera:]

Thank you, good morning. Question on operating expenses levels [audio gap] gross margin to be back up into that sort of 60 – 50ish percent range of 59 once you are back from normalize write-down level?

[Shabtai Adlersberg:]

Generally, yes, we expect in Q4, we expect to be back on the Q2 level, which was 58.2% on a non-GAAP basis.

[Rich Valera:]

Actually that's helpful. And then bigger picture looking at your networking business, granted you've had obviously with the technology business rolling off which you should have acknowledge its legacy, but networking has been down pretty significantly for rather few quarters, and just wanted to understand that other components of that, I know some things sound like they're still growing you mentioned SBC and few other noteworthy - high growth areas but what the different components of networking maybe what's been dragging it down recently and when do you think those components turnaround and actually start growing again? Thanks.

[Shabtai Adlersberg:]

Right, so basically this quarter, we have not mentioned that specifically but networking related sales to grew 2.3% over Q2. Now in terms of the bigger picture, we have seen at the beginning of the year decline in some of our Media Gateway business in two key areas, one was specific one OEM collaboration with a large player in the carrier VoIP market, which after many years working together. We believe that their revenues went down and therefore our revenues went down. So high-density media gateways that is something that one specific customer we lost. Then we saw also in the beginning of the year, declining our Government business. Now when we go to the other side feature of we're – what has driven networking sales higher this quarter, basically it's mainly two types of areas, one is again the cooperation is will or - is upon us that increase the sales of gateways NBCs and Survivable Branch Appliances SBA in their solution, meaning Microsoft [Genecity] et cetera. Second is that three specific business plans, the SBC, the MSBR, and the IP phone, are witnessing growth. And therefore going forward into 2013, we will see some – we don't see much change in the media gateway business, which we roughly predict to be about flat. We will see definitely a substantial growth coming from SBC, MSBR and IP phones.

[Rich Valera:]

Great, that's helpful. And then try and give any comments on the momentum in the business, sounds like in your prepared remarks that you had a strong finish to Q3, and a good start to Q4, which would certainly I think lead you to conclude – you're probably going to be up in Q4, so just wanted to get a sense of your confidence and the visibility towards being up in Q4, given that strong start to the quarter.

[Shabtai Adlersberg:]

Actually, you've said it yourself. We had good September, similar good October, and we've have a size backlog that's been developing in the beginning of the quarter, we have high level of confidence that we should be able to growing revenues in Q4.

[Rich Valera:]

Okay, that's helpful. Thanks Gentlemen.

[Shabtai Adlersberg:]

Sure.

[Guy Avidan:]

Thanks, Rich.

[Operator:]

And at this time I would like to turn the floor back over to management for any closing remarks.

[Operator:]

Okay, thank you operator.

[Shabtai Adlersberg:]

In summary of our call, we look forward to continue to grow networking business in coming quarters and the years and follow-on the momentum in growing distinctly the markets and industry. I'd like to thank everybody that attended our conference call today and we look forward to have you on our next conference call. Thank you very much. Bye-bye.

[Operator:]

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