AudioCodes Ltd.
Q1 2013 Earnings Call Transcript

Published: 29 Apr 2013

[Operator:]

Greetings. Welcome to the AudioCodes Q1 2013 Earnings Conference Call. (Operator instructions.) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Erik Knettel. Thank you, Mr. Knettel, you may begin.

[Erik Knettel:]

Thank you, Rob. I would like to welcome everyone to the AudioCodes’ Q1 2013 earnings conference call. Let me begin the call with a brief Safe Harbor statement. Statements concerning AudioCodes’ business outlook, future economic performance, product introductions and plans 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 both 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.

[Shabtai Adlersberg:]

Thank you, Erik. Good morning and good afternoon, everybody. I would like to welcome all to our Q1 2013 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 for the quarter and discuss developments in our business and industry. We will then turn it into the Q&A session. Guy?

[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 Q1 non-GAAP pro forma results reflect adjustments for the following two non-cash items

[Shabtai Adlersberg:]

Thank you, Guy. We’re very pleased to report financial results which are in line with our original plan for the year. As stated in our release earlier today the improvement is underlined by operational efficiency and progress in our strategic initiatives made in the quarter. Growth in our networking business has been driven primarily by higher product sales and services in the areas of unified communications, enterprise session border controllers, and enterprise voice over IP networking – all representing strategic directions for us. As highlighted by market studies and indicated previously, all three market segments do represent fast-developing sectors and applications in the networking world and our expected to extend growth over coming years. This provides for us a very sound basis for continued growth. Further supporting these growth factors is the fact that there’s a continued shift in the codec-centered markets to become IP switch based as the [constant] growing shift in enterprise voice services from pure on-prem solution to cloud-based voice services and hybrid models. Guy’s already covered much of the details pertaining to our financial performance in Q1 and I’d like to focus on the most important ones achieved during the quarter. First, let’s touch sales. This has been a typical Q1. It was on track with the original plan and budget that we had planned for the year. We had a very slow entry into the year mainly in January and beginning of February. The quarter has been very much backend loaded, but this is a typical Q1 and we should accept it as it is. The good news – April has been fully strong and better than previous months in terms of new final [efficiencies] being created, and that obviously signifies lots of encouragement for us. Going back into Q1, although we ended lower in sales compared to the previous quarter by 1.6%, growth trends have been very favorable as I will immediately describe, with overall networking revenues growing 2.3%. This is our main direction and this is now comprising 83% of our revenues. So while we went a bit down in sales we achieved growth in our mainline, which is networking. While sales of legacy technology line and (inaudible) media gateways continued to decline as in previous quarters we saw good trends in all of the major new focus areas for us. We saw strong sequential growth and a growing number of opportunities in the Microsoft Lync segment. We’ve seen sales of enterprise session border controllers growing close to 20% with the leading new enterprise SBC platform, the Mediant 4000, growing above 50% in the quarter. We saw about 50% group in sales of IP phones but we’ve just started to penetrate the Lync and the codec-centered environments and we believe that we will see much more sales in that area. We also started to see selectively a funnel of opportunities developing for us in the branch office router segment – that segment which needs to support voice services from the cloud and to allow hosted operations. No sales have been recorded in Q1 but we do believe that we will see going into the second half of the year sales growing in that space too. And finally we’ve seen good performance on the service side where we grew 10% year-over-year. Let me touch on a few other notable operational highlights. Gross margin has been quite strong. We’ve seen strong performance growing to 59.3% from 57.7% in Q1 2012. Operating expenses, we exhibited good control of it – quarterly expenses amounted to $18.15 million, very much in accordance with our annual budget plans and targets. We’ve seen positive cash flow in the quarter. Operations provided $2.5 million and net we grew $1.4 million in cash. Inventory went down – we went down $1.3 million to $15.5 million. This is now 22.5% down from the level of inventory we had a year ago. Headcount, we have been slowly performing on our plans to increase headcount. It went up by 4 employees. We were able to grow the business without growing OR expenses. Now let me go to the main areas of activity where we will see growth going forward, most notably the environmental Microsoft Lync environment – first, recent indication as to the health of this segment coming from Microsoft. In their financial release about two weeks ago and a conference call to their investors, Microsoft has quoted the following data points

[Operator:]

Thank you. We will now be conducting the question-and-answer session. (Operator instructions.) Thank you. Our first question is from the line of Andrew Uerkwitz of Oppenheimer. Please proceed with your question.

[Andrew Uerkwitz:]

Thanks, guys, just two quick ones here. The first one is, Shabtai, you mentioned several large projects. Can you talk more about the logistics and dynamics of how that gets billed, how that gets expensed? Should we expect some upfront expenses and revenue coming later?

[Shabtai Adlersberg:]

So we do see a growing number of new enterprises, large enterprises, starting to do proof of concept and plan their Lync deployments. We’re involved with a large number of them, about ten at this stage. We believe that in coming quarters that will translate to a relatively low number of sales but definitely will create for us the infrastructure for substantially larger sales of volume in 2014. However, our ability to take on so many large new opportunities does signify that we are being perceived as a leader in that space. No upfront investment as to that or beyond our current operations, so we don’t see any implications to expenses but we do see definitely revenues starting to climb slowly more into 2014.

[Andrew Uerkwitz:]

Great. And then last question here

[Guy Avidan:]

Andrew, regarding the OPEX as you can recall we had a one-time event in Q4 so OPEX was a little bit lower. On a run rate basis we already guided OPEX will be a bit above $18 million per quarter. We will guide again when we will close the acquisition of assets with MailVision that will increase a little bit the OPEX, but on the other hand it will increase the gross margin as well. So as mentioned, it will not change dramatically the bottom line.

[Andrew Uerkwitz:]

Great. Thanks for the reminder, I appreciate it guys. Good job, thank you.

[Operator:]

(Operator instructions.) Thank you. Our next question is from the line of Rich Valera with Needham. Please proceed with your question.

[Rich Valera:]

Thank you, good morning gentlemen. I was wondering if you could give a little more color, Shabtai, on the pipeline which you mentioned I think was strengthening nicely through April and what kind of conviction that gives you that you’ll see a sequential increase in your networking revenue? And relatedly, just wondering about your technology business – how comfortable you are of that remaining at roughly its current level? Right now it looks like on a trajectory to be down about 10% this year. Is that roughly where you think that’s going to fall out? Thank you.

[Shabtai Adlersberg:]

Sure. Let me relate first to your second question – yes, the answer is yes. We have seen a very mild [clear] decline in Q1. At this stage it looks like we’ll lose between 10% and 15% of our technology revenues this year. Just to remind us all we had been at $24 million last year – that will translate to about $2.4 million to $3.6 million in 2013 as a whole. As to the Microsoft space, actually we do see a change in the uptick rate. I mean we have not seen that change in previous quarters. We are just relying on Microsoft’s word that Lync is being adopted or looked at more favorably with a larger number of enterprises. It does start to seem like it’s taking success in the market, and my take is that once we see Skype connected to Lync midyear – which means that there will be much more voice calls coming, not only IM but also voice calls coming through the enterprise into Lync from tens and hundreds of millions of users – we believe that will again be a driver for growth of voice within Lync. So combining together indications from Microsoft, Polycom, Skype-Lync connection and what we see actually coming from our sales force, we do reason to be quite optimistic about the future of our portion in that market. I’d also like to maybe say that we are lately experiencing success with some of the large system integrators, the global system integrators, mainly due to the fact that we have a global technical and sales force and our ability to support multi-site [world-based] large projects with large enterprises, which usually have hundreds of locations all around the world is becoming a winning factor. And as we have the unique applications we have developed like SmartTAP, I think we’re on a good course here.

[Rich Valera:]

Great. I was just hoping to distinguish between your specific sales model which you mentioned has strengthened in April and some of the industry developments which you also mentioned, like WebRTC and Skype-Lync integration. I’m just wondering do you see your sales funnel strengthening, generating revenue, incremental revenue in Q2 or do you see that more as a second half realization?

[Shabtai Adlersberg:]

Okay, so throughout the past few quarters we’ve been growing on sales of Lync sequentially in each single quarter, and in Q1 we added about 5% growth which we planned earlier in the year for growth of 20%. I don’t see that changing much. We will see Lync growth in coming quarters but I do see more and would cautiously use the term (inaudible) starting to come in probably nine to twelve months from today simply because then many of the proof of concepts and initial deployments will prove successful and viable. And this is where the larger orders will kick in. So I would assume linear growth in coming quarters and then a substantial increase more into 2014 and 2015.

[Rich Valera:]

Okay, that’s helpful. Thank you.

[Operator:]

Thank you. At this time I would like to turn the floor back over to management for closing comments.

[Shabtai Adlersberg:]

Okay, thank you Operator. In summary of our call I’d like to say that we look forward to continuing to grow our business in 2013 and build a sustainable, profitable operation for coming years. I would like to thank everybody who attended our conference call today and we look forward to having you on our next conference call. Thank you very much. Bye-bye.

[Operator:]

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