Will Audiocodes Connect With Profit?

Feb.17.10 | About: AudioCodes Ltd. (AUDC)

Today I am replacing the stock of e-commerce giant, eBay (NASDAQ:EBAY), with that of a smaller one, AudioCodes Ltd. (Nasdaq: AUDC; TASE: AUDC). eBay seems to be in constant reorganization in recent years, and has a chance to succeed at it. However, I anticipate a much greater return over the next year from Audiocodes, if the strategic change it is currently undergoing works.

Since the heady days of VocalTec Communications Ltd. (Nasdaq:VOCL) during the technology bubble of more than a decade ago, I have stayed away from voice over IP [VoIP] like from fire. VoIP is the industry in which Audiocodes operates.

I learned then that everyone talks about the wonders of free calls over the Internet, but no one succeeds in making money from it, certainly not equipment providers. Luckily, I was also not one of those hurt by Audiocodes's shares, when it traded in the triple figures (dollars, not cents) up to $150 at the peak, which is $75 today (adjusted for a 2:1 split in 2000).

In the days of the bubble, many technology companies in the telecommunications sector reported amazing results, because they sold systems and components to one another. After the fact, it turns out that at the end of the food chain there were no customers for the end products. The firms were all left with dying inventory which killed many companies, except for those like Audiocodes, msystems, Radware Ltd. (Nasdaq: RDWR), and others, who were smart enough to issue offerings right before the great collapse, and take the money for a second life.

A fairly aggressive recommendation a few days ago by Vivek Arya, who works with Tal Liani at Banc of America Securities-Merrill Lynch Research, claimed that Audiocodes shares are set to rise to "five dollars plus", compared with a current price of three-plus dollars. That led me to check out the company's situation. It turns out that the company went through a number of major changes over the years. It began with selling VoIP chips, moved to selling communications cards in addition to chips, and from there to entire systems of voice transmission, known in professional jargon as VoIP gateways.

Recently, Audiocodes moved to markets higher up on the food chain of the telecommunications world. This year the company will offer complete and integrated solutions for communications suppliers and enterprises, which increases its target markets from only about $250 million per year to markets of several billions of dollars per year. Analyst Arya expects that the new products will contribute in 2011 as much as 20% of revenue, which he estimates will be about $157 million compared with $126 million in 2009.

For example, to the communications suppliers market, the company will sell this year an integrated home router which provides VoIP, data routing, wireless communications, and the ability to connect calls between mobile networks and wireless DECT phones in the home.

For the enterprise market, Audiocodes is offering complete solutions, just like Cisco (NASDAQ:CSCO) is today, from the actual VoIP handset which is made for it in Asia, based on its processors and software, to handling a range of applications for voice, data, security, and the ability to route calls from employees' mobile devices through the enterprise's network, outward.

Audiocodes hopes to chip into the small and midsized business market, and also to get into the large business market through OEM agreements with giants who compete against Cisco, such as Microsoft (NASDAQ:MSFT), Nokia-Siemens(NOK, SI), Alcatel (ALU), and others.

It seems that precisely in the older niche which is not growing so fast, VoIP processors, there is a boost from the Chinese market.

Audiocodes has been generating cash for 11 quarters in a row, is profitable, and is expected by Arya to end this year with earnings per share of $0.23, and in 2011 to reach $0.31.

Disclosure: Author holds shares as part of his portfolio tracked by "Globes".

Published by Globes [online], Israel business news - www.globes-online.com - on November 17, 2009; Reprinted on Seeking Alpha with permission

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