AudioCodes (AUDC) reported earnings last week that beat Oppenheimer analyst's street high estimates of $34.8 million (revenues) and $0.03 (EPS) with $35 million and $0.04 respectively. It guided revenues higher to $36 million on stronger backlog numbers in its core networking businesses. I not only listened to the AudioCodes conference call, but listened in on Interactive Intelligence Group's (ININ) conference call and BroadSoft Corp's (BSFT) conference call and the takeaway from both companies with regards to AudioCodes is that AudioCodes has built a brilliant strategy as I see it benefiting from its partnerships with the hosted companies in the same way as it benefited from partnering with Microsoft (MSFT) with its One Voice for Lync. AudioCodes is selling itself to the hosted companies as an alternative to the tech giants Cisco Systems (CSCO) and Oracle Corp (ORCL), in the same way as it sold itself to Microsoft with great success as a Cisco/Oracle replacement. I believe that in early 2014 as further hosting company partnerships are announced we will see it being loved by Wall Street's sell-side and buy-side which will result in a strong stock performance.
Microsoft is doing what it does best in the Lync space, capturing Enterprises new business in the unified communications (UC) space. In Q3, 2013 AudioCodes grew its Lync business by 10% quarter over quarter and its growing by 25% year over year. More importantly, the backlog and new programs lined up during late Q3 and early Q4 will make 2014 a much stronger year than 2013.
AudioCodes' initial strategy with Microsoft was to position itself as an alternative to Cisco Systems, Acme Packet (which was later acquired by Oracle) and Sonus Networks (SONS). AudioCodes put itself forward as a small company that could partner with Microsoft and provide it with the pieces it was missing in order to deliver a complete end to end Lync solution to Enterprises. Microsoft embraced AudioCodes' One Voice for Microsoft Lync and the results have been telling with "Lync Voice leading in enterprise shipments".
One Voice for Hosted Services:
I believe that AudioCodes is duplicating its strategy with Microsoft, with the Hosting Companies. AudioCodes is presenting itself to BroadSoft, Interactive Intelligence Group, 8x8 (EGHT), Ring Central (RNG) and other as an alternative provider to that of Cisco Systems and Oracle Corp. It has partnerships in place with BroadSoft and Interactive Intelligence and I believe that these partnerships will only grow stronger over time as I've heard through the grapevine that the hosting companies are wary of the tech giants and feel they cannot allow them into their accounts anymore as partners. It's called sleeping with the enemy. I think BroadSoft got its first taste of it this past quarter.
It's not too often that a small capitalization company of $234 million is spoken about as a competitor to two technology giants. Oppenheimer's analyst did just that last week after the 3rd Quarter conference call when he said, "If an SMB implements a UC platform not from Cisco or Oracle there is a good chance AudioCodes will play a role in implementation." That's a bold statement for someone that has only a perform rating on the stock. I tend not to agree with this statement however, as I believe it's becoming obvious that AudioCodes is going to supersede expectations with its end to end solutions strategy implemented with One Voice for Lync a year ago with Microsoft and now rolling out to the Hosted Services companies.
I believe that One Voice for Hosted Services will prove to be a bigger windfall to top line results than One Voice for Microsoft Lync. This opportunity puts AudioCodes alongside the Service Providers and with the hosting companies feeling unthreatened they will push for these relationships to blossom. In a perfect scenario, AudioCodes will provide software SBCs to the Service Providers, E-SBCs to the end users, and IP Phones, routers, mobility and business services to both the Service Providers and end users. I believe that other hosted companies are lining up to partner with AudioCodes' One Voice program and I think we'll hear new partnership announcements in the weeks ahead.
One of the highlights from the earning call was the new products category; it is a combination of Session Border Controllers (SBC), Multi Service Routers and IP Phones. This group has seen very steady growth over 5 consecutive quarters. In fact, the group was up 150% year over year. The group has exciting opportunities going into 2014 as Microsoft just qualified its IP Phone for Lync, and its Multi Service Routers (combination of SBC, gateway and router) is a must have in wireless expansions and branch offices deploying Lync throughout the Enterprise. SBCs are now about to reach 16,000 sessions putting AudioCodes head to head against Sonus in competition for Service Providers and large enterprises. I feel comfortable with the new WebRTC phones, new SBCs and the new cloud-based products to be announced sometime this quarter. All in all it looks promising.
Zev Lerner, the founder of MailVision attended an event in Israel this past October where he spoke about AudioCodes' new mobile platform going cloud-based. This could be what AudioCodes' CEO was referring to on the conference call. According to Lerner, "In many organizations, the mobile phone is the main organizational device, so that they do not have the office phone. It's the central idea behind our solution, Mobility Plus is a smartphone or other smart device will be conducted as a landline phone, organizations will be able to get the same kind of service both comes to solving in HD and good audio quality. Likewise, it connects to the cloud, and there is no need to integrate all employees in the organization." He noted that partnerships are in place with UPC cable company (Liberty Media (LMCA) - 90 million subscribers), Comverse (CNSI), Telefonica Argentina and Peru along with Bezeq. He then stated Marvell is launching a social enterprise together, which should go out next month.
Where Do We Go From Here?
I believe that AudioCodes will not be a stand-alone company as we see more Hosted Companies sign up as partners to its One Voice for Hosted Services and they become as successful as its partnership with Microsoft. Microsoft has countless partners in every aspect of its businesses. If you don't believe me, you can check out its partnership program. The fact that AudioCodes got Microsoft's ear, interest and success rate, speaks volumes to what One Voice means to the software platform provider. Microsoft was fighting Cisco in early 2013, as on the eve of the Microsoft Lync conference, Cisco put out an announcement stating that Microsoft would not be able to provide the end to end solution to the enterprise and basically buyer beware. As mentioned earlier, Microsoft put out a great blurb last month stating that it is shipping more Voice Lync than any competitor this year. AudioCodes is a derivative of this success. AudioCodes will be showing this example to the hosting companies it talks to.
AudioCodes has $58 million in cash and the company has generated cash flow for the last 3 quarters in a row ($2.3 million, $4.3 million and $1.6 million). Last year it generated $8 million in the 4th quarter and I'll be surprised if it doesn't beat that number this year.
I put my year end estimate at $137.5 million (previously $138 million). I think it's closer than the $133 million the analyst had to start the year. 2014 looks to be stronger than 2013 on every measure. Investments made in services in 2013 should bear fruit in 2014. Mobility going cloud-based should be incremental and helpful in solidifying hosted companies joining One Voice. New products should outperform as Microsoft Lync and other new partnerships flourish.
I put my 2014 revenue and EPS estimate at $152 million and $0.25 versus the Street's $148 million and $0.20. My 2015 estimates are $166 million and $0.40 versus the Street's $163 million and $0.34.
AudioCodes should start to trade at 2.25 times the 2015 $163 million street estimate or $9 per share. Announcing new partnerships in the One Voice for Hosted Services could wake up investors to the value proposition as they see AudioCodes as a replacement to Cisco and Oracle with current and new partners.
A takeover premium should be warranted post the announcements of new partnerships as UC is a very large market and AudioCodes makes a perfect plug and play solution to much larger players in the market. We think Sonus Networks should be able to find the funding and buy them outright or maybe a Dell, IBM (IBM), Hewlett Packard (HPQ) or other tech player will eventually step in and pay 3 times AudioCodes' 2015 revenues. Watch out for the company after it posts its first major revenue beat as this will be the first sign the company will entertain takeover offers.
Analyst Coverage Coming:
AudioCodes has spent the past 2 days marketing the company and will continue late into Friday as a number of Broker Dealers are sponsoring them. The demand has got to be much stronger than in quarters past and we know the volume has certainly picked up over the last 3 - 4 months. Oppenheimer is even hosting AudioCodes for meetings this Friday per my Institutional broker there. Oppenheimer is our back stop here, as its research speaks very positively on AudioCodes' strategy and execution. It could be that the analyst is being too cute with his timing or it could be that he's got a beat on it. I believe the longer AudioCodes stays at these lower levels then the more likely that a host of analysts (Needham, Northland, William Blair), that were on the last conference call, initiate coverage or we see an Oppenheimer upgrade with a much higher price target. I also, see Jefferies and Cowen as potential followers as they have great coverage in the space. In the end, I believe it's time buy AudioCodes as the Lync ramp has begun and as its Hosting PBX ramp develops into early 2014 which will result in better than expected quarterly results. This sets the stage for a $10 - $12 takeover which will pay very large investment banking fees.
AudioCodes has carved out a niche spot in a gigantic market place ($12 billion) which has pitted it head to head with Cisco and Oracle in supplying the hosted services companies. Since AudioCodes only specializes in voice, it's not hard to expect that it may be an equal or better provider of solutions than the two giants. I believe in 6 months, AudioCodes will not be a stand-alone company as its hosted services strategy shows nice partnerships and Microsoft Lync ramp is in full gear making its results reflect "the little engine that could" and some of the investment banks start to shop them. This is a pause before the breakout, and I'm confident that we've got a strong player here.