AudioCodes: Mixed Signals Over Profit Warning

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 |  About: AudioCodes Ltd. (AUDC)
by: Shlomo Greenberg
AudioCodes Ltd. (Nasdaq: AUDC) has found itself in the worst possible situation that a company trading on Wall Street could be in. Just as the market is falling en-masse, and the overall sentiment is bad, along comes this company and announces that it will not meet its guidance for the first quarter of 2007, and that instead of sales rising by 5% over the first quarter of 2006, it now expects them to fall by 12-14%. But the problem that I detect in AudioCodes at present is far more significant that just another temporary glitch.

After reading the statement made by company founder and chairman Shabtai Adlersberg, it looks to me that like there's more here than meets the eye, and I when say eye I refer to that of Adlersberg himself. While he did say that he hoped that this would be a minor setback and that the company would recover soon, there can be no doubting that the situation on the market has proved him wrong and left him extremely concerned.

The question now is not whether this is indeed a temporary setback, but whether the company itself could be losing ground in a niche where it has been one of the leaders for years. It's difficult to ascertain exactly where the problem lies. On the one hand, I have been bombarded with stories about the phenomenal growth in VoIP and then along comes Adlersberg and says that, "In the face of weaker market conditions, we believe it prudent at this time for us to revise our previous guidance."

As my expertise in VoIP is somewhat limited, I have difficulty understanding whether Adlersberg is referring to an overall weakness in markets or that of AudioCodes specifically, and I find that worrying. That said, in recent years the punishments that Wall Street has been meting out for failing to meet guidance have consistently lacked any economic rationale.

Supposing Adlersberg is right and that the company does indeed climb back within a quarter or two; if that is the assumption that he is working on, then once the analysts, whose current consensus estimate predicts earnings per share of $0.47 for 2007, revise downwards their estimate to the $0.39-0.40 range, (17-18% lower), at a price of $7, the stock will have a multiple of 17.5 for 2007 - a multiple that is most definitely a signal to buy rather than sell.

So I am in a quandary regarding AudioCodes. On the one hand, judging by history, I am inclined to believe Adlersberg and see the present stock price as "an interesting pickup opportunity." But having said this, what will happen if this talented man is proved wrong, and the markets continue to be hostile towards the company? Is it any wonder that sitting in a VoIP-specialist exchange traded fund is now a better option than sticking with a single stock?

AUDC 1-yr chart
AUDC

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.