Audiocodes Turning Around Despite Heightened Expenses

Shares of Lod, Israel-based Audiocodes (AUDC), a quarter-billion market cap maker of equipment to run voice calls and other media over data lines, were up sharply after reporting a profit of 3 cents per share, excluding some costs.

The report, announced Tuesday morning, was above expectations for 2 cents profit, for its second quarter ending June 30. The company’s sales of 38.4 million also beat analysts’ estimates of $37.2 million. One point of concern, however, is that the company’s operating expenses seem out of control, rising 36% year-over-year compared to the 15.5% jump in revenue.

On a GAAP basis, the company had a net loss of two cents per share compared to eight cents per share in the year earlier. Nonetheless, some think there are signs of a turnaround at work at the company.

Ittai Kidron with CIBC World Markets says he’s “waiting on the sidelines” and maintaining a Sector Perform rating on the stock (he has no price target for the shares), though he sees some signs of improvement in the company’s cost structure. “Audiocodes’ 2Q07 results are a step in the right direction as the company continues to benefit from strong fundamentals and executes its turnaround plan.”

Products look good and the market looks good, says Kidron: “Overall, we like AudioCodes’ market position and broad product portfolio […] We believe recent acquisitions (Nuera, Netrake, CTI) have positioned the company in key growth markets.” But it’s too soon to tell if those operating costs can really be brought in line:

On the cost side, management guided to more operating expenses reductions in 2H07 and expects to keep a short leash on investments. […] While we see this as the right strategy, cost control remains key to bottom line recovery. With integration of recent acquisitions still largely works in progress, associate expenses remain a risk.

Nevertheless, Kidron is raising his estimates for this year and next, to profit of 15 cents and 30 cents per share this year and next, respectively, from 13 cents and 26 cents previously. On a GAAP basis, which includes the cost of stock options grants and such, he’s modeling an 11 cents loss this fiscal year and a profit per share of 16 cents next year, with the company getting into the black in the first quarter of next year, ending March.

AUDC 1-yr chart: