AudioCodes Ltd. Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual Form 20-F and does not provide a clear standalone fourth-quarter income statement or cash-flow presentation; the figures below are full-year amounts unless stated otherwise. Financial statements are prepared under U.S. GAAP, despite an inconsistent cover-page indication referencing IFRS.
Business Context
AudioCodes designs, develops and sells voice, data and video-over-IP products and services for service providers, enterprises, OEMs, network equipment providers, distributors and systems integrators. Products include media gateways, session border controllers, multi-service business routers, IP phones, media servers, mobile VoIP solutions and related software and professional services. The company focused in 2013 on Microsoft Lync and unified communications, hosted services, cloud connectivity, enterprise mobility and software-based session border controllers.
Network products generated approximately 66% of 2013 revenue, technology products approximately 15% of product revenue, and services approximately 19% of total revenue. Approximately 42% of revenue was generated outside the Americas and Israel.
Financial Performance and Position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $137.2 million | $127.5 million | Up 7.6% |
| Product revenue | $111.8 million | $103.7 million | Up 7.8% |
| Service revenue | $25.5 million | $23.8 million | Up 6.9% |
| Gross profit | $78.7 million | $73.2 million | Up 7.5% |
| Gross margin | 57.3% | 57.4% | Down 0.1 percentage point |
| Operating income (loss) | $2.7 million | $(3.7) million | Improved by $6.5 million |
| Net income (loss) | $4.2 million | $(4.2) million | Improved by $8.4 million |
| Basic and diluted EPS | $0.11 | $(0.11) | Returned to profitability |
| Cash flow from operations | $14.1 million | $3.0 million | Improved by $11.1 million |
| Capital expenditures | $1.6 million | $2.0 million | Down $0.4 million |
Research and development expense declined to $28.2 million from $28.7 million, while selling and marketing expense declined to $39.3 million from $40.0 million. General and administrative expense increased to $8.5 million from $8.2 million. The 2013 net tax benefit was $1.4 million, including a $1.8 million benefit related to recognized net operating loss carryforwards and tax-rate changes. Without the tax benefit, reported net income would have been lower.
At December 31, 2013, cash and cash equivalents were $30.8 million, compared with $15.2 million at December 31, 2012. Total cash, marketable securities and bank deposits were $62.2 million, up from $58.5 million. Approximately $13.7 million of cash was restricted or otherwise unavailable under loan, lease and foreign-exchange arrangements. Working capital was $64.9 million, compared with $46.6 million.
Total assets were $174.3 million and shareholders’ equity was $104.8 million at year-end. Bank loans totaled $14.5 million, including $4.7 million classified as current and $9.8 million classified as long term. Only $353,000 of senior convertible notes remained outstanding at year-end; the notes were subsequently reduced by a $300,000 repurchase in January 2014.
Material Changes Versus 2012
- Revenue growth was driven primarily by networking products, particularly session border controllers, and demand related to unified communications.
- The company returned to operating and net profitability after a loss in 2012.
- Gross margin was essentially stable, but services gross margin declined to approximately 74% from 75%.
- Operating expense ratios improved following the 2012 cost-reduction plan. Management expected research and development, sales and marketing expenses to increase in 2014 due to planned hiring and higher marketing activity.
- Operating cash flow increased substantially, supported by net income, lower inventories, higher deferred revenue and increased accrued liabilities.
- Inventory declined to $13.8 million from $16.8 million, although the company recorded $1.7 million of inventory write-offs in 2013.
- AudioCodes acquired certain MailVision assets in May 2013. Consideration was estimated at $3.4 million, including assumed liabilities, waived loans, deferred consideration and contingent amounts. MailVision’s results were included from the acquisition date and were deemed immaterial on a pro forma basis.
- The company received $2.8 million of Israeli Office of the Chief Scientist research-and-development grants, compared with $2.7 million in 2012.
Guidance, Outlook, Risks and Unusual Items
Management stated that working capital was sufficient to meet operating requirements and scheduled bank-loan payments for at least the next twelve months. The company expected 2014 research and development and selling and marketing expenses to increase. It generally did not provide quarterly forecasts.
In March 2014, after year-end, AudioCodes completed a public offering of 4.025 million ordinary shares at $8.00 per share, generating approximately $29.7 million of net proceeds. This materially strengthened post-year-end liquidity but also increased the share count.
- Customer concentration is significant: the largest customer represented 17.8% of 2013 revenue, and the top three customers represented approximately 27.8%.
- The company depends on Microsoft Lync-related demand and partner relationships; changes in Microsoft’s strategy or adoption of Lync could materially affect results.
- Rapid technological change, intense competition, migration from legacy networks to pure IP, and declining demand for certain technology products could pressure revenue and margins.
- AudioCodes relies on third-party manufacturers and sole-source suppliers, including Texas Instruments for signal-processing chips and Motorola and Cavium Networks for certain processors. No long-term supply agreements were in place.
- Foreign-exchange exposure is material because many Israeli costs are denominated in NIS while most revenue is denominated in U.S. dollars. Management estimated that, absent hedging, a 10% decrease in relevant U.S. dollar exchange rates would reduce 2013 net income by approximately $5 million.
- The company had previously breached certain bank covenants in 2012, received waivers and was in compliance at December 31, 2013. Future covenant violations could permit lenders to accelerate repayment.
- Contingent obligations included approximately $34.0 million of potential royalties to the Israeli Office of the Chief Scientist, payable from sales of products developed with funded research.
- Contractual obligations included approximately $68.0 million of net lease commitments, $14.4 million of non-cancellable inventory purchase commitments and $14.5 million of bank-loan principal outstanding.
- Pending or potential legal matters included employment claims, patent litigation and customer indemnification demands. The filing states that outcomes could not be predicted for several matters.
- No goodwill or intangible-asset impairment was identified in 2013. Stock-based compensation expense was $1.7 million, with approximately $3.4 million of unrecognized expense remaining at year-end.
Investor Verification Checklist
- Verify the reconciliation between the annual filing’s cover-page accounting-basis checkbox and the financial statements, which clearly state U.S. GAAP.
- Confirm that 2013 profitability was not substantially dependent on the $1.4 million tax benefit and assess the realizability of recognized deferred tax assets.
- Review customer concentration, distributor exposure and the sustainability of Microsoft Lync, hosted-services and session-border-controller growth.
- Reconcile unrestricted liquidity with restricted deposits, compensating balances, debt maturities and lease commitments.
- Assess the potential economic impact of the approximately $34.0 million OCS royalty obligation and restrictions on OCS-funded technology and manufacturing.
- Review the effect of the March 2014 equity offering on dilution, liquidity and capital allocation.
- Evaluate inventory aging, the $1.7 million 2013 write-off and exposure to product obsolescence and sole-source suppliers.
- Review pending patent, employment, customer indemnification and other legal matters for developments after the filing date.