AudioCodes Ltd. (NASDAQ:AUDC)
Q1 2013 Earnings Call
April 29, 2013 09:00 am ET
Shabtai Adlersberg – President & Chief Executive Officer
Guy Avidan – Vice President of Finance & Chief Financial Officer
Erik Knettel – Grayling (Investor Relations)
Andrew Uerkwitz – Oppenheimer
Rich Valera – Needham & Company
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.
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.
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?
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: stock-based compensation expenses which totaled $344,000 and amortization expenses relating to the acquisitions of [Nuera], Netrake, CTI which totaled $276,000. A full reconciliation of the 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.
Turning to the numbers, Q1 revenue was $32.3 million which represents a 1.6% decrease from the sequential Q4 2012. We saw solid demand for our core leverage in the equipment group business with a sequential increase of 2.3% gear revenues, especially in unified communications and enterprise SBC following the growing demand for linked unified communications and (inaudible) which were vastly offset by some anticipated headwinds we experienced during the quarter in our technology group.
As a percentage of revenues, sales in Americas accounted for 54%; Europe, the Middle East and Africa, 32%; and Asia-Pacific, 14%. Revenues associated with our growing management and technical services business line were 19% of total revenues, or $6.1 million in Q1 2013 compared to 17% or $5.5 million in Q1 2012. Managed services and professional services helped further by AudioCodes’ high-value relationship with these customers. Service revenues are [also efficient] 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 50% of revenues compared to 58% of revenues in the previous quarter. In Q1 we had a single distributor in North America that accounted for 17% of revenues, the same as in the previous quarter. In terms of revenue by business group, in Q1 our networking business group accounted for 83% of revenues and our technology business group accounted for 17% of revenues, compared to 81% in our networking business group and 19% in our technology business group in Q4 2012.
GAAP net income for Q1 was $71,000 or break-even on a per diluted share basis, an increase of $1.6 million versus the year-ago quarter and a decrease of $453,000 sequentially. Non-GAAP net income for Q1 was $691,000 or $0.02 per diluted share, an increase of $1.5 million versus the year-ago quarter and a decrease of $447,000 sequentially.
In Q1 2013 on a GAAP basis, gross margin was 58.7% and non-GAAP gross margin was 59.3%. GAAP operating expenses were $18.6 million compared to $17.7 million in Q4 2012. Our total pro forma operating expenses were $18.2 million compared to $17.3 million in Q4 2012. Headcount increased slightly this quarter by four employees which brings us to a total of 583 employees.
Net cash provided by operating activities was $2.7 million this quarter, compared to $8.2 million last quarter and $623,000 from the year-ago quarter. Short-term and long-term cash balances were $57.5 million compared to $58.5 million last quarter. The decrease in cash balances is attributed mainly to a loan repayment of $2.5 million offset by a net profit as well as continuing decrease in inventory. DSO came in at 71 days compared to 68 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, 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 in our technology and legacy products.
In April 2013, AudioCodes entered into a purchase agreement with its affiliate company MailVision. MailVision is an Israeli company which develops markets and licensed voice over IP solutions for mobile, PC, web and tablet devices for telecom operators, service providers, and telcos over the top. As of March 31, 2013, AudioCodes owned 26.4% of the outstanding share capital of MailVision or 24.1% of the share capital of the company on a diluted basis. The closing of the transaction is subject to customary condition and is expected to occur during May 2013.
As for our guidance, we reiterate our annual guidance for 2013 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 diluted share are expected to be in the range of $0.10 to $0.14. We do not expect a material change in our guidance following the closing of the MailVision asset purchase agreement.
I will now transfer the call to Shabtai.
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: Lync revenues grew 30% in the quarter, and they indicated that the excitement around the Lync platform is continuing to grow.
They indicated that 90 out of the Fortune 100 companies are now using Lync. That has huge implications for us, mainly because the first few Lync indications are mostly presence- and IM-focused and therefore we believe that there’s a large infrastructure for voice applications that’s developing for us in the large Fortune 100 companies. Today there are more than 5 million SIPs of enterprise voice deployed. This tells you a lot about the quality and viability of the solution of voice in the Lync environment, and we see voice growing in numbers.
At the Lync 2013 Conference in February Microsoft announced that Lync and Skype connectivity for presence, IM and voice, will be available for all Lync users by the end of June. Connecting these audiences is perceived by Microsoft to be a key milestone as they will be delivering on the promise of truly unified communications between consumer and the enterprise world. We believe that this Lync/Skype connection will become a huge driver for the evolution of voice within the Lync environment and we will benefit from it.
We also saw another indication coming from another player in the field – Polycom. In their financial release about a week ago, Polycom said that Polycom’s and Microsoft’s joint venture Lync grew 30% in Q1 of 2013. And they also said that in Q2, Polycom’s pipeline already sees large, early-stage multi-million dollar deals which will be pursued in Q3 and Q4.
And we are already (inaudible) into it as well. In fact, this is fully similar to what we have been starting to see in the last few weeks and more so in early April. We see a nice uptick in creating a number of new Lync-related opportunities which are substantially larger in size than before, a lot of which are in early stages and in the proof of concept phase. Those would translate to multi-million dollar projects each in the next years. As a matter of fact, this quarter we started the implementation of a first such large project.
Our products for the environment – in the past we have been primarily focused on selling connectivity products, gateways, session border controls, SBA. We now start to see more demand for IP phones and services. Another key development which we haven’t made public so far is that we had a major win for our call logging application in the Lync environment and we are now on our way to see more follow-on big projects in the sector. We are involved in the beginning of two such more projects. This could be huge, could bear huge importance for us.
We will leave it to our leadership in the markets of Lync voice ecosystems as the only single source provider for Microsoft buyers for end-to-end voice products and services solution is a clear competitive edge and SmartTAP, the call logging application, is a true indication of that. With the recent launch of our AudioCodes One Voice for Microsoft Lync offering in early January we are simplifying and accelerating voice enablement of Lync implementation through a complete portfolio of products and services.
Now to another growth area for us – the enterprise session border controller market. In 2013 we see two key growth engines leading sales growth in the business in the second half: Microsoft Lync and Enterprise SBC.
In Enterprise SBC we’ve started creating market acceptance for our products. The Mediant 4000 introduced in Q3 2012 is key in this growth. This opens for us the market for a few thousands of concurrent sessions. Sales of Enterprise SBC grew close to 20% in the quarter and now are in a running rate that should bring us to more than $15 million annually. Among key application areas are mainly Lync and contact center.
Major investment areas for us – we do plan to make two key announcements in the coming months. I should also mention the Oracle Acme acquisition event which is opening for us more opportunities in the market as we find more customers open to do business with us.
Now to the acquisition of MailVision assets – as I mentioned MailVision is (inaudible) of the top mobile voice player active in the space for several years. We have the leading investment position there. We have had a recent agreement with them and acted as their key go-to-market. Together we won projects at Vonage, Telefonica, and a few other large service providers.
In parallel, at AudioCodes we have developed our own solution for enterprise mobility called MobilityPLUS . The solution is now in beta stage with several organizations. We view the over the top market as strategic in importance for us to extend the application of some of our very unique technological assets in VoIP and networking technologies to the mobility space. We do believe that combining the assets of these two operations can become quite successful in delivering mobile (inaudible) communication solution for enterprises in the service provider market as early as 2014.
Before I conclude my introduction let me touch on WebRTC. WebRTC is recently growing mindshare in the communications industry. WebRTC is an effort started by Google to build a standards-based open source real time communications media engine into all of the available browsers. With WebRTC in a browser a web services application can now make a real time voice or video connection to another browser using no special [needs]. There’s no need any more for any special voice or video technology with this.
The first WebRTC-enabled browsers, Chrome and Mozilla, will come out later this year. WebRTC is rapidly becoming the mainstream trend adopted by practically most of if not all of the communication market there. The significance and implication of this model to the communications world, contact centers market, and mobile service providers are numerous.
Now to our angle of it – if WebRTC becomes successful and popular it will provide a strong push to the use of Enterprise SBCs. The assumption is that a substantial portion of the WebRTC [baseline] traffic will bypass the traditional fixed and mobile voice networks and will arrive to the enterprise on a broadband internet connection. This will be a strong driver for Enterprise SBCs.
There’s another angle for us in the WebRTC game. It’s called voice quality. There are known voice communications quality issues and implications to voice when travelling over unregulated broadband internet routes versus relatively highly-priced MPLS basic trunks. Opus, the WebRTC voice carrier, is one of the recent and best-[voiced] carrier capable of treating a major part of this issue dealing with packet loss, packet jitter and packet delay.
We believe that AudioCodes, who have good control of voice processing and technology, will have an edge in providing better voice quality for WebRTC-based voice calls traversing the internet. And by providing further enhancement we do plan to be a leader in that space.
With that I have concluded my introduction. I’ll turn the call to the 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 – Oppenheimer
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?
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 – Oppenheimer
Great. And then last question here: on the OPEX side, OPEX I think if I remember right was up $1.5 million quarter-over-quarter. Should I expect relatively similar trends going forward or was this just a one-off because you had the Lync Conference and a couple other things?
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 – Oppenheimer
Great. Thanks for the reminder, I appreciate it guys. Good job, thank you.
(Operator instructions.) Thank you. Our next question is from the line of Rich Valera with Needham. Please proceed with your question.
Rich Valera – Needham & Company
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.
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 – Needham & Company
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?
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 – Needham & Company
Okay, that’s helpful. Thank you.
Thank you. At this time I would like to turn the floor back over to management for closing comments.
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.
This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.
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