AudioCodes Ltd. Q4 2007 Earnings Call Transcript

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 |  About: AudioCodes Ltd. (AUDC)
by: SA Transcripts

AudioCodes Ltd.(NASDAQ:AUDC)

Q4 2007 Earnings Call

February 05, 2008 9:00 am ET

Executives

Andrea Costa - Global Consulting Group

Shabtai Adlersberg - Chairman, President and CEO

Nachum Falek - VP, Finance and CFO

Ben Rabinowitz - VP and GM of Session Border Controllers andMedia Server Business Lines

Analysts

Carter Driscoll - Stanford Group

Ittai Kidron – Oppenheimer

Dan Sherwin - Merrill Lynch

Irit Jakoby - Susquehanna Financial Group

Troy Jensen - Piper Jaffray and Co.

Ted Jackson - Cantor Fitzgerald

Eric Kainer – ThinkEquity

Jonathan Kreizman - Oscar Gruss

Operator

Greetings and welcome to the AudioCodes fourth quarter 2007 EarningsCall. (Operator Instructions).

It is now my pleasure to introduce your host, Ms. AndreaCosta of Global Consulting Group. Thank you. You may begin.

Andrea Costa

Thank you. I'd like to welcome everyone to the AudioCodesfourth quarter and full year 2007 Earnings Call. Let me begin the call todaywith a brief Safe Harbor statementconcerning AudioCodes business outlook or future economic performance, productintroductions and plans and objectives related thereto and statementsconcerning assumptions made or expectations as to any future events,conditions, performance or other matters.

These are forward-looking statements as that term is definedunder U.S. Federal Securities Law. Forward-looking statements are subject tovarious risks, uncertainties and other factors that could cause actual resultsto differ materially from those stated in such statements.

These risks, uncertainties and factors include, but are notlimited to, the effect of global economic conditions in general and conditionsin AudioCodes industry and target markets in particular, shifts in supply anddemand, market acceptance of new products and continuing product demand, theimpact of competitive products and pricing on AudioCodes and its customers,products, and markets, timely product and technology development, upgrades andthe ability to manage changes in the market conditions as needed, possibledisruption from acquisitions, the ability of AudioCodes to successfullyintegrate the products and operations of acquired companies and to AudioCodes'business and other factors detailed in AudioCodes filings with the Securitiesand Exchange Commission. AudioCodes assumes no obligation to update thatinformation.

In addition during the call we will refer to non-GAAP netincome. We have provided a reconciliation of non-GAAP net income to our netincome according to GAAP in our press release and on our website.

Joining us today from AudioCodes we have Shabtai Adlersberg,Chairman, President and Chief Executive Officer; Nachum Falek, Vice President,Finance and Chief Financial Officer; and Ben Rabinowitz, Vice President andGeneral Manager of Session Border Controllers and Media Server Business Lines.

I would now like to turn the call over to ShabtaiAdlersberg. Mr. Adlersberg, please go ahead.

Shabtai Adlersberg

Thank you, Andrea. Good morning and good afternooneverybody. I would like to welcome all to our fourth quarter 2007 conferencecall. With me this morning are Nachum Falek, Vice President, Finance and ChiefFinancial Officer and Ben Rabinowitz, Vice President and General Manager ofSession Border Controllers business.

Nachum will start by presenting a financial overview of thequarter, I will then review the business highlights for the third quarter andthen turn it to Ben to cover the trends in the Voice over IP market anddevelopments in our business. We will then turn it into the Q&A session.Nachum?

Nachum Falek

Thank you, Shabtai, and good morning everyone. Beforebeginning the financial overview of the quarter, I would like to note that thefollowing discussion will include GAAP numbers and pro forma numbers.

Our fourth quarter pro forma results reflect adjustments forthe following two non-cash items; Stock-based compensation expenses whichtotaled $1.8 million in the fourth quarter of 2007 and amortization expensesrelating to the acquisition of Nuera, Netrake and CTI, which totaled $600,000net of taxes in the reported quarter.

Full reconciliation of the pro forma results discussed onthis call to GAAP results is currently available for review on our website andin the press release issued yesterday.

Getting to our quarterly results. In the fourth quarter,revenues were $42.8 million which represent 6% increase from the last quarter.As a percentage of our revenues, sales in Americaaccounted for 55%, Europe 25%, Asia Pacific 13% and Israel 7%. We had one customerabove 10%. Our top 15 customers accounted for 49% of our revenues compared to51% in the previous quarter.

In terms of revenues by business groups, in the fourthquarter, our technology business group accounted for 32% of revenues comparedto 35% in the previous quarter, and our networking business group accounted for68% of revenues compared to 65% in the previous quarter.

In the fourth quarter of 2007, pro forma gross margin was58.1% similar to the third quarter pro forma gross margin. On a GAAP basis,gross margin was 56.4%.

Our total pro forma operating expenses increased from thethird quarter levels to approximately $21.4 million in the fourth quarter of2007. On a GAAP basis, operating expenses for the fourth quarter were $23.4million. Headcount increased this quarter by 11 employees, which brings us to atotal of 688 employees.

Pro forma net income for the fourth quarter was $3.6 millionor $0.08 per share. GAAP net income for the fourth quarter was $1.4 million or$0.03 per share. Short-term and long-term cash balances were $143 millioncompared to $134 million last quarter.

The increase in cash balances is attributed mainly to apositive cash flow from operations and financing activities which were offsetby a negative cash flow related to investment activities. DSO came in at 64days compared to last quarter DSO of 68 days.

Our guidance for 2008 is as follows. On an annual basis, weforecast revenues for 2008 to be in the range of $180 million $185 million andnon-GAAP earnings per share of $0.34 to $0.37. We also estimate our GAAPearnings per share to be in the range of $0.12 to $0.15.

I will now transfer the call to Shabtai.

Shabtai Adlersberg

Thank you, Nachum. We're very pleased to report recordquarterly and annual revenues. In addition this quarter of consecutive growthin revenues represents return to an earnings level that stock approaching ourlong-term financial model.

Let me touch shortly on some of the fourth quarter 2007financial highlights. On a quarter-by-quarter basis, revenues grew 6%, and netincome grew about 30%. Our networking business, which is our key business,reached the level of 68% of sales in the fourth quarter of 2007, growing about10% quarter-over-quarter.

Operating income grew nicely to a level of 8% compared to a6.4% in the third quarter of 2007. We had good execution on OpEx control.Operating expenses grew only 2.7% to $21.4 million, which is $20.9 million inthe third quarter of 2007. We had witnessed strong cash flow from operationalactivities. All in all, we had a $9 million cash balance as Nachum mentionedgrew to $143 million. We've been able to keep account growth to only 1.6%.

Now to the full year. In 2007, our networking business salescrossed for the first time $100 million mark. Just to remind everybody that westarted that networking business back in 2002 where we have recorded less than$2 million. So in less than six years, we have grown to $100 million inbusiness. This is the third year in row that our networking business is employingmore than 30%, reflecting a steady growth.

With the Voice over IP market exhibiting nice growingprospects of between 20% to 25% in 2008 and beyond, we are confident in ourbusiness continue to grow the networking business around the same level of 30%.

At the same time we have witnessed decline of 20% in ourtechnology business in 2007, which brought overall company revenue growth tojust 7.4%. We are confident that that will change in 2008.

Most of the technology business decline was in the first andsecond quarter of 2007, and as the middle of 2007 technology business is nowstabilized and is right now showing the fourth quarter above 30% of sales.

We are confident that we should be able to maintain a verysimilar behavior in 2008. Therefore we do believe that decline in technology businesswill not have further major effect in 2008 compared to 2007.

As to the 2008 plan, as Nachum mentioned we planned revenuegrowth would be around 15%. Earnings should approximately double and we intendto grow our market share and expense work on planning the network business. AllI all, just to give you a very rough idea about the plan, assuming networkingwill continue to grow 25% to 30% consistent with our central core business, wedo believe that technology business will be a little flat or will be very closeto flat.

In terms of the market to support that type of growth, whilethe overall telecom market is changing dramatically, we do see a decline in growthof wireless network. We do see some issues for the large NEP to grow thebusiness, we do see applications taking over infrastructure because that haslimited effect.

We believe that that environment and that dynamics of themarket does create opportunities for small specialized companies that willdeliver products due to system integrators deploying network.

All in all the Voice over IP market is very healthy. Thesedays it's about $2.5 billion to $3 billion a year and grows about 25% annuallyin coming years and beyond. Just to remind everybody, Voice over IP, which iscentered primarily around Media Gateways and Media Gateways, you can see dropto 50% of the overall market.

Trends in the market that do support our growth or we do seeimproved trends in deploying next generation network and going into Class 5replacement which means voice over broadband, fixed mobile convergence, allthose applications do push more trade, and need to be included. Hence, the chunkof consolidation in the market among the large players and the among thesmaller ones. All in all that creates for us what I think is a very comfortableor competitive landscape.

With the advance of IT networks, we do see the need forSession Border Controllers and we do believe that with our leadership in theVoice-over-IP and the Gateway market in our last acquisition of the SessionBorder Controller company, we should be able to combine it and be among leadersin that market.

All in all, when we look more deeply into details into ourmarket, we do focus in the market into two segments. One is the Mid-densitymedia gateways that’s about $320 million in 2007. In that market we have beenranked number four, by leading [research] company such as Synergy andInfonetics. We do capture these days, close to 11% in third quarter of 2007.That is substantial growths from just 6.6% about a year ago.

We do play also in the Low density media gateway market,which totals about a $160 million in 2007, we captured three in the rankings.We are right up to two in low density, and we do capture around 14%.

Our progress in 2007 and 2008 has been primarily on theaccess metrics and are on the CPE devices. We do have a balanced business,which serve both to our enterprise and in the service provider market.

We have a balanced go to market approach. We do sell in theenterprise market both direct and through distribution channels. We havementioned that during 2007 our collaboration with companies such as Microsoft,and a few more OEMs that we cannot mention as yet. At the same time, we haveexpanded this because it is the one market and growing direct on a global base.

We are working in 2007 and 2008 to expand our efforts inVoice-over-IP by a bolder by virtues of display, by taking advantage of ourleading Voice-over-IP, we adding a functional suite and I will mention that ina moment.

So the focus for us in 2008 would be CPE advance on SessionBorder Controllers in our mid-density media gateways. One key activity would beto integrate the Session Border Controller functionality in to our CPE andmedia gateways product line. We do intend to add multi service capability suchas handling security, handling data, switching, routing, video and to enablegrowth of the applications.

In terms of our technology focus, we will give priority toIP-to-IP connectivity, we will invest substantially in building security inthis Voice-over-IP metrics and we will invest also in license coding. We dobelieve that bringing high quality, high performance voice and quality into themetric will improve the user fees being substantial. At the same time, we wouldcontinue to invest in current technology, working on such as VoIP mediagateways, transcoding, video and others.

In terms of our activity in the fourth quarter, we have seengood momentum in the service provider market in the second and fourth yearmarket. As the same time, we have been working in very closely in DS5 with fewleading OEM's and few solution partners.

All in all 2008 should be a good year for us because we arepositioned both in terms of strong demand in the market, which is growing atleast 20% on market share. We have a very comfortable, competitive position. Weknow to deal with more of that, we found that with larger ones.

We have mature leading competitive products and technology.We have developed very strong brand, all because the gateway brand is now hasvery strong demand also it provides. And in the enterprise phase, we havedeveloped partnerships with leading OEM's and with solutions partner with muchbetter level of sales and for full coverage we’ve added more sales officers in Latin America, in Asia Pacific. We also made somerestructuring to our North America sales forcethat we believe will be much more effective there. And we have increased our distributionnetwork in 2007.

All in all coupling that with our proven strong executiontrack record we believe that 2008 should be a very strong year and with thatI'll turn it over to Ben.

Ben Rabinowitz

Okay, thanks Shabtai. And good morning and good afternoon toeveryone on the call. As Shabtai said we continue to see positive trends asVoice over IP continues to enjoy growth rates of 20% year-over-year and willcontinue to gain market share. In our go-to-market execution, we are expandingour partnerships with system integrators to help tier two and tier threeservice providers despite incumbents.

We have Network Equipment Providers or NEP integratesolutions into tier one service providers and enterprise customers. We’vedeveloped new partnerships with large application companies such as Microsoftthat are taking more leading role in telecom and we've established a strongdistribution model which we emphasized. All of these go to market achievementsand trends worked well for us.

Synergy Research forecast, carry able with the achievable ofgrowth 21% year-over-year and within this market rose to mid density mediagateway will also grow at a 21% year-over-year. Our synergy in revenue,AudioCodes nearly doubled this market share in mid density media gateways in2007.

Imports, which is a good indicators since some like otherplayers we do not sell direct but rather through NEP's and local systemsintegrator. Our market share in imports also more than doubled in 2007.

Infonetics also reports that Voice over IP equipment maygrow 20% year-over-year in 2008 and ranked AudioCodes number one in sports andnumber two revenue from mid density gateways.

SBCs are obviously are taking share of the overall Voiceover IP equipment market and with our continued investment in SBC both asstandalone and within our planned [converts] platforms, we expect these marginsproducts to contribute to our long-term growth objectives.

Indeed, we believe when selling to contact centers, largeenterprises, small and medium businesses and tier 2 and tier 3 service providers,a portfolio of standalone and featured converted solution will give us an edgein serving our customers, very top and off the size requirement.

In the enterprise space, Synergy research is forecasting IPtelephony to grow 34% in 2008, with media gateways growing 20% year-over-year.We expect further penetration of that degree of deployment of fit trunking andfit application such as Unified Communications.

Of course the big news on Unified Communication this pastquarter was Microsoft’s launch of OCS, which benefit us as a partner bysupplying our CPE and media gateway. The value chain that we serve is becomingmore complex with ISPs, distributors, local and global system integrators, NEPsand VARs, all having a role. Partnering within this value chain to serve theenterprises and service providers on a global basis is something that takes ayear to establish and create barriers of entry.

Indeed, we have an effective distribution channel and ourrecent channel conference in Israelattracted completely growth systems from around the world including customersand partners such as Freenet, the number two ISP in Germany, Swisscom, Vodafone,StarHub and Google. We were also seeing NEPs reduced their product developmentthat is focused on Voice over IP infrastructure.

Many NEPs will no longer invest in new Media Gatewayplatforms or continue their DSP investment as they focused more of theirR&D in applications, LTE, Wi-Max and management systems and focused their OpExon bulking up for system integration opportunities. We're also seeing them lessand less in the tier two and tier three and a competitive server providerspace.

We are expanding our relationships with NEP on theenterprise side providing solutions for small and medium businesses, largeenterprises and institution and government agencies including the military. Interms of fixed mobile convergence, it seems to be taking longer than originallyhoped, although we saw nice progress last year with two more handsetsdeployment and a key enterprise win with the wireless NEP. So with the momentum [up untilstill placed], we expect that most of the FMC market will remain in the trialphase in 2008.

We do believe FMC represents an important long-termopportunity with players like Apple with iPhone, Google with Android andVerizon opening up its World Card on cell phones. We anticipate a lot moreinnovation that will drive the need for security, the packet inspection, morereal-time interactive IP-IP connections, more IP connectivity to legacy MFPsand PBXs which will mean in the future more sales of media gateways, securitygateways and CPE and FPCs.

Our growth opportunities in current sales are also nicelydistributed. Remember we report numbers based on channels not end users. Wehave achieved a nice balance globally to protect us from the ups and downs ofany particular market.

In addition some markets like Southeast Asia are just now deploying Voice over IP so the growthopportunities remain promising.

In conclusion with our technology CPE, media gateway, mediaserver, SBCs and security gateway products, we are addressing our channel andcustomer challenges securing key design wins and gaining market share in agrowing markets.

And now I will turn the call back to the operator forQ&A.

Question-and-AnswerSession

Operator

Ladies and gentlemen, we'll now be conducting aquestion-and-answer session. Thank you. (Operator Instructions) Our firstquestion from Carter Driscoll with Stanford Group. Please state your question.

Carter Driscoll -Stanford Group

Good afternoon gentleman. Thanks for taking my call. Myfirst question results from the Microsoft relationship. Have you seen anyacceleration in the deployment of the Exchange Server. You talked most recentlyabout, really the impact more heavily in 2009 and 2008, and then I have acouple of follow-ups.

Ben Rabinowitz

Driscoll, at this point, we are definitely getting deployedand by the few verticals. But it's still very early in terms to speak of aramp-up. So, it looks very promising. It's nicely distributed in terms of thetypes of customers and the size of the customers. But again this is definitelymore in 2008 than 2009 story as we said before.

Carter Driscoll -Stanford Group

Can you talk generally about what you are seeing? I mean youmentioned one thing that the March quarter seems to be getting off to a goodstart, specifically the enterprise side you have seen weakness from some of theother equipment and component vendors. What gives you confidence that you aregoing to continue to buck the trend in that? You are not going to face some ofbudgets squeezes that might be coming down the pipe?

Ben Rabinowitz

Yeah I mean we haven't seen weakness and we are comfortableand since our discussions with their customers and what their needs are. Sowe're not seeing this.

Carter Driscoll -Stanford Group

Could you talk about the progress in the cable market andwhat your relationship with Nortel, if that has changed materially since lastquarter?

Ben Rabinowitz

No the relationship with Nortel is very good. With the cablecompanies, we are obviously with our gateways a part of their solution, that weare selling through the MSO’s and the relationship both directly with the MSO'sas well as working side by side with Nortel remains as it was last quarter andit's a good relationship.

Carter Driscoll -Stanford Group

And just one question for Nachum. Were expenses affectedmaterially by the exchange rate at all?

Nachum Falek

It will be on the fourth quarter but we are using hedging,so at this point it wasn't affective, at least not on the fourth quarter.

Carter Driscoll -Stanford Group

Okay Thanks very much and best of luck.

Shabtai Adlersberg

Thanks.

Operator

Our next question comes from Ittai Kidron with Oppenheimer.Please state your question

Ittai Kidron -Oppenheimer

Hi guys and congratulations on a good quarter. Nachum canyou give us a little more color on your '08 guidance? What are yourexpectations for gross margin in the year.

Nachum Falek

Yes without getting in to details regarding the forecast, asI mentioned in terms of the revenues we are expecting to do an increase of 15%to 17% which will bring up 180 to 185 in revenues. Gross margin should be atcurrent level, but will probably, we are taking in to account that they mightbe a little bit down by a few basis points. And then again as I mentioned interms of EPS, that is $0.34 to $0.37.

Ittai Kidron -Oppenheimer

Okay. Well I am just trying to reconcile that those commentswith how your OpEx spending to grow and Shabtai you've mentioneda lot of plans for development and investment in R&D for the year. How do you expect OpEx to grow and how manypeople you're planning on adding to your headcounts through the year?

Shabtai Adlersberg

Yeah, basically when we done our plans and budgets, end oflast year we put into accounts, we were basically studying some more financialtargets and basically planning all our investments in R&D and productdevelopment from the targets we were at, that we just took also. Everything iscurrently calculated into our budget and we do believe that we should be ableto do those continuing investment and our meets those targets.

Ittai Kidron -Oppenheimer

And lastly with regards to Session Border Controller, canyou give us a little bit more color of your expectations, you mentioned threeareas of where you expect this growth next year CP, Session Border Controllerand Mid-density with the SBC being integrated in those products as well. How much of business do you expect to getfrom that product as a standalone product versus an integrated feature intoyour other platforms?

Ben Rabinowitz

Yes, we don’t break our revenue by product. I mean, ourconfidence in our ability to grow the business year-over-year, we are investingin the business and we're looking to leverage the technology throughout ourproduct line. So I think if we do those things and execute it will become,basically important for our business going forward.

Ittai Kidron -Oppenheimer

Okay thank you. Good luck.

Shabtai Adlersberg

Thanks.

Operator

Our next question comes from Vivek Arya with Merrill Lynch.Please state your question.

Dan Sherwin - MerrillLynch

Good evening. This is actually [Dan Sherwin] calling in forVivek. My question is, last quarter I believe you gave guidance for operatingmargins of 10% by mid-2008. How far along are you in your cost reductioninitiatives? And do you still see 10% operating margins by mid-2008 as areasonable goal now that your operating margins I believe are up to 8%?

Nachum Falek

Yes, we got this quarter to 8%, we did target 10% as thetarget for the quarter, we didn't mention exactly in which quarter. Hopefully,we'll get there in 2008. It's very hard to say exactly in which quarter.

Dan Sherwin - MerrillLynch

Okay. And one more question. Technology segment revenuescontinue to decline, what are you guys doing to shore up the segment andhopefully grow market share?

Nachum Falek

Yeah. Basically we do believe that in the last two quartersof 2007, we have been able to stabilize the plan and we have new customerscontinuing to deploy our products. So based on inputs we have still now, we dobelieve that we should not feel anymore decline in 2008. When we combined ourblades and the chip business, we do believe that we should be either flatand/or we can slightly decline but not anything that should affect overallperformance.

Dan Sherwin - MerrillLynch

Okay. Thank you.

Shabtai Adlersberg

Thanks.

Operator

Our next question comes from Irit Jakoby with SusquehannaFinancial Group. Please state your question.

Irit Jakoby -Susquehanna Financial Group

Hi, thank you. Again congratulations on a good quarterShabtai, Nachum and Ben. I have a follow-up question. Shabtai, you mentionedthat you were seeing 30% or 40% growth in the network business. Is most of itattributable to the enterprise, or to second- and third-tier service providers?

Shabtai Adlersberg

Actually there is a nice split between the two. The growthcomes from CPE devices and low-end media gateways. We've made someinvestigations in the fourth quarter 2007. We think we are roughly at 60%service provider, 40% enterprise. So it is spread nicely among other twosegments.

Irit Jakoby -Susquehanna Financial Group

And within the enterprise sector, are your revenuesconcentrated mostly in the U.S.,or is it fairly distributed?

Shabtai Adlersberg

Okay. So again we did some checking into that as well. Alsowe do report that in the first quarter we had 55% of sales into the Americas.Since we're selling into several OEMs which are located in the U.S. and/or Canada,we basically have gone into an analysis that shows that all in all we are above40% in the U.S.market and rest of the 60% is in fact from the international markets.

Irit Jakoby -Susquehanna Financial Group

Okay. And finally how cyclical do you feel that yourenterprise market is, I mean, do you feel that you would be in a discretionaryspending environment. How expose do you feel you are?

Shabtai Adlersberg

Again, we do sell through some strong leading companies inthe phase of the sale on the world wide basis not only in the U.S. So, we do feel that we've notseen today any change in demand and it's still pre-mature to determine whetherwe'll see such ones. We do not say at this phase that we kind of an exposure.It's not so hard ,so we have not concentrated in the specific segment such asfinancing or other. So, all in all I think being especially in internationalmarket, we do not think that we'll see a change, and how much of it we'll seein the US is still yet to be seen, but we have no signs of it yet.

Irit Jakoby -Susquehanna Financial Group

Okay, thank you.

Shabtai Adlersberg

Thanks.

Operator

Thank you. Our next question comes from Troy Jensen with PiperJaffray. Please state your question.

Troy Jensen - PiperJaffray and Co.

Congrats on the nice quarter gentleman. A couple of quickones here for Nachum. Linearity in the quarter, DSO has dropped 14 days, Iwondered if you could help us there with how the linearity looked?

Nachum Falek

Yeah, DSO went down and it was a good sign, good indicatorfor the quarter. In general I would say that we are expecting DSO to be alittle bit lower than 17 in any given quarter. This quarter, the quarter wasmore linear, meaning less back-ended than the others. So, obviously DSO, andyou can see it is well on the cash balance as well. So, we had a good quarterin terms of both cash and DSO.

Troy Jensen - PiperJaffray and Co.

Got it, and then you guys announced a $4 millionshare-buyback during the quarter. Kind of curious, your net cash position is$23 million excluding the convert. Would you guys be okay with returning of 4million shares and taking down the net balance, or is there any kind of netcash position you guys think is kind of trough kind of level?

Nachum Falek

If you are looking to thatquarter, you can see that we are generating cash on a quarterly basis whichright now at the level of above $4 million in the quarter. This quarter hasbeen much stronger but we do believe that should be able to maintain that goingforward. And we are again taking to account, share price, or our cash balancein order to generate cash. And I thinkwe should be able to perform that buyback consistent with all those parameters.

Troy Jensen - PiperJaffray and Co.

I got it. And Shabtai, just onelast follow-up. You talked lot about Mid-density gateways. I know in the pastyou guys have launched some High-density gateways. So what's traction been withyou guys in kind of tier one of the High-density market?

Shabtai Adlersberg

We basically took a decisionabout 12 months or 18 months ago that we will focus really more on theMid-density and we do not plan to participate in the High-density. Also, Ithink market dynamic is such that as the network gets more and moredistributed, the need for High-density still remains in only small part of thenetwork, it could be cable network also. But I mean all other parts of thenetwork using gateway is a nice portion. So we do not claim to go for theHigh-density space and we do believe that that would enable us to partner withlarger companies using our Mid-density gateways in their complete networkssolution.

Troy Jensen - PiperJaffray and Co.

Got it. Keep up the good workguys.

Shabtai Adlersberg

Thanks, Troy.

Operator

Our next question comes from TedJackson with Cantor Fitzgerald. Please state your question.

Ted Jackson - Cantor Fitzgerald

Thanks. Hi, Shabtai, Nachum, andBen.

Shabtai Adlersberg

Hi Ted.

Ted Jackson - Cantor Fitzgerald

Okay. Couple of questions, one isNachum, if you could just tell me what, not amortization and depreciation butjust straight depreciation was during the quarter?

Nachum Falek

Well, I mean, I don't have it infront of me, but as I remember it was a $100,000 amortization, obviously it'sin our record, so maybe we should take it off-line.

Ted Jackson - CantorFitzgerald

Okay. Next is, in the third quarter call, you all hadmentioned that you had some shipment delays in the networking business that Iwould imagine it come through and helped you a bit in the fourth quarter. Andso my question is, would there be any chance of maybe a little more pronouncedseasonality in your business in the first quarter of '08 as a result of maybe alittle more bump in the fourth quarter because of those delayed shipments?

Nachum Falek

Yes, we mentioned that in the third quarter and I think thatyou can see when you are looking at the cash balance and you are looking whatwe have sold that we began the fourth quarter, it was very strong, it was morelinear than usual. So you complete within the linearity in the quarter. All inall, we didn't give any specific guidance for the third quarter but so far weare feeling very good about it.

Ted Jackson - Cantor Fitzgerald

Well, I am wanting specific guidance, I am just curious ifthat, given that you might have had some unusual strengths in the fourthquarter because of those timing issues that perhaps the first quarter relativeto the fourth might be. I mean I don't want to use the word weaker, but mightnot show the same type of growth trends that you have historically shown?

Nachum Falek

Okay. So basically it's true that if you look back few yearsusually first correct answer be weaker than the rest of the quarter than theyear. This year we do not see any change in the backlog and the behavior ofsales in the first quarter, that is, changed from the fourth one. So we do havea very strong beginning of the first quarter in 2008. So also we may feel someseasonality, we don't thing that would be anything in our business.

Ted Jackson - CantorFitzgerald

Okay. And then going actually and touching back on to Ithink it was Carter Driscoll's question on exchange rates. So you were hedgedin the fourth quarter and haven't seen much of an impact. How long does yourhedging that you have in place go out to, is there any concern or anything thatwe should focus on as we look out more into 2008?

Nachum Falek

Well, we averaged into 2008 as well, obviously not for the entireyear and not for the entire Israeli Shekel exposure. But I can say that if youwouldn't notice any significant influence let's say between one quarter toanother, it won't more than 200,000 or 300,000 quarter-over-quarter. And as wealready mentioned, I mean we took that into account when we gave the guidanceon the EPS fund.

Ted Jackson - CantorFitzgerald

Okay. And then my last question has to do with the two newlarge enterprise OEMs that you had mentioned in the third quarter call. And Iknow you haven't announced them, but I wondered if you could give us somediscussion with regards to developments with those OEMs progress when we wouldexpect to perhaps see them start generating some revenue for you, things alongthose lines?

Shabtai Adlersberg

Yeah. So with one of them actually we went through some veryintensive market introduction phase and our product has been lately basicallyrecurred, so we do believe that we will see increasing revenues from thatfiscal year 2008. The other one since like our collaboration goes on very welland you are being presented was more into that OEM.

All I all I believe that at that time with such a companyhaving this go through to focus their strength and to focus no that relativelysmall for them, small segments, I think that they should look for OEMopportunity than -- over the sales down in the last few months. Some [approach]is far from clear that we have not seen it before but now are much more open towhat was more of a need for the network.

Ted Jackson - CantorFitzgerald Ted

Thanks and actually I missed one last question and that wasjust going in to the FMC market. A lot of your exposure in to UMA has beenthrough Motorola and I was curious if you can update on the Motorolarelationship and then also Motorola has been making a relatively aggressivepush in to WiMax, which in of itself, you could make a case represents an FMCopportunity. Do you have an exposure through Motorola and to their WiMaxefforts. Thanks.

Ben Rabinowitz

One in terms of our FMC play we are -- it's a distributedexposure so Motorola is not by far being the only player that we. Ourrelationship with them is good, we don't have any comment on specific programsthat we are working with Motorola but we are in various programs withinMotorola. Did that answer your question Ted or…

Ted Jackson - CantorFitzgerald Ted

No but I have a feeling it's all I am going to get there.Thanks.

Operator

Thank you (Operator Instructions). Our next question comesfrom Eric Kainer with ThinkEquity. Please state your question.

Eric Kainer -ThinkEquity

Thank you very much. First topic is really about theconverged SPC media gateway platform. Wonder if you can talk a little bit aboutthe timing where demand is coming from there and channels to market for thatproduct?

Ben Rabinowitz

Okay, so a couple of things, one is in terms of absolutetiming, we have to wait because eventually we will make some, a couple ofannouncements about that. But the demand is from various types of sectors, Imean certainly as you look at the lower end in the converging on capability forproducts that go into small medium businesses, obviously make sense. And thenwe have the convertibles, [market] of customers that are -- seeing some otherbenefits. So, we believe in this market you'll see both standalone and convergesolutions and we feel unique in that we'll be able to response to thoseestimates. Our customers can approve a lot, both converge and standalonedepending on their networks and their deployments.

Eric Kainer -ThinkEquity

Okay, thanks Ben. Next question is really about the Wirelessspace. I wonder if you can tell us a little about the demand that you areseeing there versus cable one, Telco markets. Are you seeing relatively morepick-up there or is that kind of on par for where it has been last severalquarters?

Ben Rabinowitz

I mean, it is definitely starting to move in the rightdirection but it's a very slow moving ship, I guess, we can see about that’s --obviously the opportunities with Voice-over-IP and Wireless are immense andobviously positive things like EVD [or EVA] etcetera are being deployed whichenables Voice-over-IP to occur. So, the trends are good. We are in some goodprojects and we think as the years go ahead we'll see more and more IP in thewireless network.

Eric Kainer -ThinkEquity

Any view, as far as when or if that might be is important avertical for you or is important a market for you as any of the wired markets?

Ben Rabinowitz

Well, it will be long time until it matches on the revenueside Eric what we have in the wireline side, but we are in some very goodprojects that do generate revenue for us today. So it is moving in the rightdirection.

Eric Kainer -ThinkEquity

Okay. Last question from me is about China. Can you tell us what you seethere and how important that market is to your development?

Shabtai Adlersberg

Chinais not a big market for us for us. Traditionally, Asia Pacific has been about12%, 13% of our revenue. Chinais about a third of that. We do conduct business there but it's not a materialpart of our business. So all in all condition in debt markets are fairlyregular.

Eric Kainer -ThinkEquity

Thank you. Good luck.

Operator

Our next question comes from Ziv Tal with Oscar Gruss.Please state your question.

Jonathan Kreizman -Oscar Gruss

Hi guys. This is Jonathan Kreizman speaking on behalf of ZivTal. Great quarter. My question is more kind of an overview outlook question.Maybe if we could, if we're seeing the cable operators and the wireless progressingmaybe slower than the industry expected. Could you may be detail a little moreon what's the setbacks are for the ramp up of this segment? Thank you.

Ben Rabinowitz

Well, on the cable side, we don't see any setbacks, we'vebeen running in cable for especially when you include the Nuera acquisition interms of what they were able to do in cables, it's been a few years already ofdeployments that continue to go forward. So we certainly see it especially froma North American standpoint, good deployments and also globally set the cablecompanies supplying in voice-over-IP and general voice-over-broadband tends tooccur.

I think with wireless it's a much more complex network sinceyou are dealing with the radio spectrum and being able for voice-over-IP overit.

And when we talk about wireless, we're not talking about thebackbone side where there is some voice-over-IP in ATM. We're talking more onthe radio side and that will eventually occur a bit from our discussions withcustomers and again like I said we're already in projects there.

Jonathan Kreizman -Oscar Gruss

I see. Okay. Great thanks.

Operator

Our next question comes from Carter Driscoll with StanfordGroup. Please state your question.

Carter Driscoll -Stanford Group

Thanks gentlemen. Just a couple of follow-ups. One is, youtalked about kind of repositioning the CTI Squared applications. Can you giveme an update on that? And then I have a question more generally, have you guysever considered getting into kind of the residential gateway market especiallyas you are starting to see a lot of OEM interest on Femtocells orvoice-over-WiFi and whether that's an opportunity you would ever consider?

Shabtai Adlersberg

Right, so I will take the latter one first. Generally we dofocus on the enterprise sometimes also in the SMB market. It's true that ourtechnology and proficiency could be put to work to come up with residentialgateways. At this stage we've not made such a specific plan yet, but we do notrule that out. On one hand we are in a process that allows good reduction for adeviated platform, the very low number from accounts like two and four port.And at the same time we do have - that each amount of technology that has beendeveloped for the [logic one]. So we do not preclude the possibility that wewill do better, just say do not have any specific plan.

As the expense for the quarter, we have the company throughchanges its marketing and sales strategy, we do focus now on marketing a entryof low capacity product we do market that through our global sales force in tofirst tier service provider and we hope that in 2008 we'll see some change inthe level of our revenues there.

Carter Driscoll -Stanford Group

Thanks very much gentlemen.

Operator

Thank you. Ladies and gentlemen, there are no furtherquestions at this time, I will turn the conference back over to management forclosing comments.

Shabtai Adlersberg

Okay. Thank you, thank you for coming our conference calltoday. We look forward to see you in our on next conference call. Thank youall. Bye, bye.

Operator

Thank you. This concludes today's teleconference. You maydisconnect your lines at this time. Thank you all for your participation.

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