AudioCodes Ltd. 2016 Form 20-F Summary
Business context and reporting period
AudioCodes Ltd., an Israeli company listed on NASDAQ and the Tel Aviv Stock Exchange, designs and sells Voice-over-IP, unified communications, contact-center, networking and cloud-related products and services. The filing covers the fiscal year ended December 31, 2016, prepared under U.S. GAAP and audited by Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global. The filing is an annual report rather than a quarterly filing.
- Products include session border controllers, media gateways, multi-service business routers, IP phones, management applications and technology products such as chips and boards.
- Services represented approximately 29.7% of 2016 revenue, compared with 27.0% in 2015; products represented approximately 70.3%.
- Networking revenue was $131.9 million, while technology revenue was $13.6 million.
- As of December 31, 2016, the company had 700 employees and 32,411,296 ordinary shares outstanding, excluding treasury shares.
Financial performance and key metrics
| U.S. dollars in thousands, except per-share data | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $145,571 | $139,759 | 4.2% increase |
| Product revenue | $102,279 | $101,990 | 0.3% increase |
| Service revenue | $43,292 | $37,769 | 14.6% increase |
| Gross profit | $88,341 | $82,788 | 6.7% increase |
| Gross margin | 60.7% | 59.2% | 150 basis-point increase |
| Operating income | $7,754 | $2,706 | Increase |
| Operating margin | 5.3% | 2.0% | 330 basis-point increase |
| Income before taxes | $7,594 | $3,148 | Increase |
| Net income | $16,238 | $366 | Significant increase |
| Diluted earnings per share | $0.45 | $0.01 | Increase |
| Cash flow from operating activities | $18,342 | $17,563 | 4.4% increase |
| Capital expenditures | $1,477 | $1,976 | Decrease |
Operating expenses were $80.6 million, compared with $80.1 million in 2015. Research and development expense increased to $29.1 million, selling and marketing expense increased to $45.1 million, and general and administrative expense declined to $6.4 million. The company recognized $7.3 million of NATI research and development grants in 2016, compared with $5.4 million in 2015.
The 2016 net income included an $8.6 million net income tax benefit. The benefit primarily reflected recognition of deferred tax assets, including approximately $11.6 million of deferred tax assets at year-end, and was not representative of recurring operating profitability. Excluding the tax benefit, the filing does not present a non-GAAP adjusted net income measure.
Liquidity, cash flow and capital structure
- Cash and cash equivalents were $24.3 million at December 31, 2016, compared with $18.9 million at year-end 2015.
- Total cash, marketable securities and bank deposits were $69.5 million, down from $80.4 million in 2015. Approximately $8.8 million was restricted or otherwise unavailable under loan, lease and derivative arrangements.
- Working capital was $35.0 million, compared with $30.4 million in 2015.
- Total bank loans were $11.9 million at year-end, including $3.5 million due within one year. The company borrowed an additional $6.0 million in December 2016.
- Loan agreements contain covenants concerning shareholders’ equity, cash balances, bank liabilities and operating income. The company stated that it was in compliance with all covenants at December 31, 2016.
- Investing activities provided $14.1 million, principally from sales and maturities of marketable securities and changes in bank deposits.
- Financing activities used $27.0 million, including $29.4 million for share repurchases and $5.4 million for loan repayments, partially offset by $6.0 million of new borrowings and $2.0 million from option exercises.
- Management stated that existing working capital was sufficient for operating requirements and scheduled debt payments for at least the following twelve months, but additional financing could be required for acquisitions or expansion.
Material changes versus the prior comparable period
- Revenue growth resumed after the 7.8% decline reported in 2015. Growth was driven primarily by UC-SIP networking products and services, while technology product revenue continued to decline.
- Services grew substantially faster than products, increasing their share of revenue and contributing to the higher gross margin.
- Operating income nearly tripled, supported by gross-profit growth and lower general and administrative expense.
- General and administrative expense benefited from a $1.7 million reversal of the estimated earn-out liability related to the Active Communications Europe acquisition.
- Inventory write-offs increased materially to $2.2 million from $724,000 in 2015.
- The company repurchased 6,198,363 shares for approximately $29.4 million, including 3.0 million shares purchased in a July 2016 self-tender offer. Treasury shares increased to 23.4 million at year-end.
- Deferred revenue increased to $15.0 million from $12.9 million, consistent with higher service revenue and support activity.
- The company continued expanding cloud, virtualization, NFV and Microsoft Skype for Business offerings, and received approval for a new 2016–2018 NATI-funded R&D program of approximately NIS107 million.
Guidance, outlook, commentary and risks
The filing does not provide specific numerical revenue or earnings guidance. Management expects operating expenses to remain a material use of cash and identified continued investment in R&D, cloud technologies, virtualization, unified communications, contact centers and professional services.
- Management expects continued migration from legacy TDM networks to all-IP and growth in hosted and cloud communications, but noted that cloud adoption could reduce demand for on-premises products or affect the timing of revenue recognition.
- Technology product demand is declining as some customers migrate from enabling components to integrated solutions.
- The business has limited backlog, long sales cycles and low visibility into customer demand. A significant portion of sales occurs late in each quarter.
- Customer concentration is significant: the top three customers represented 31.2% of 2016 revenue; ScanSource represented 16.7% and Westcon represented 11.9%.
- The company depends on Microsoft and other strategic partners, including Genesys, Avaya and BroadSoft, for platform compatibility, certifications and market access.
- Texas Instruments supplies all signal-processor chips, while Motorola and Cavium Networks supply communications and network processors. The company has no long-term or alternative-source agreements for certain key components.
- Foreign exchange remains a material risk because substantial expenses are denominated in Israeli shekels while much of revenue is denominated in U.S. dollars. The company estimated that, without hedging, a 10% decrease in applicable U.S. dollar exchange rates would reduce annual net income by approximately $5 million.
- As of year-end, the company reported a contingent NATI royalty obligation of approximately $52.7 million and an approximately $1.0 million disputed claim for allegedly underpaid royalties.
- Other commitments included $38.7 million of net lease commitments and $15.9 million of non-cancelable inventory purchase obligations.
- A patent-infringement complaint was filed in January 2017 against a U.S. subsidiary and a customer; no monetary demand had been made and the outcome was not predictable.
- The company does not anticipate paying cash dividends in the near future.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2016, and the audit opinion was unqualified.
Important facts for investors to verify
- Whether the $8.6 million tax benefit and newly recognized deferred tax assets are realizable and recurring.
- The sustainability of service-led revenue growth and the 60.7% gross margin as the product mix and cloud delivery model evolve.
- The effect of customer concentration, limited backlog and long sales cycles on quarterly revenue volatility.
- Compliance with bank-loan covenants, restricted cash requirements and repayment schedules.
- The potential cash impact of NATI royalties, the disputed royalty assessment, lease commitments, inventory purchase obligations and acquisition-related payments.
- Whether inventory write-offs remain elevated and whether declining technology-product demand requires further restructuring or impairment charges.
- The outcome and potential exposure from the 2017 patent-infringement complaint and the status of the Israeli labor claim settlement.
- The impact of share repurchases, treasury shares and outstanding options on future share count and per-share results.
- Future adoption effects from revenue-recognition, lease and credit-loss accounting standards identified in the filing.