AudioCodes Ltd. 2012 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 and converged voice/data networking products and services. Its offerings include media gateways, enterprise session border controllers, multi-service business routers, IP phones, mobile VoIP clients, media servers, software and professional services. The filing covers the fiscal year ended December 31, 2012, and the audited financial statements are prepared under U.S. GAAP.
Network products and services increasingly focus on enterprise unified communications, Microsoft Lync deployments, SIP trunking, hosted services, cloud environments and professional services. The company operated as one reportable segment.
Financial Performance and Key Metrics
| U.S. dollars in thousands, except per-share data | 2011 | 2012 | Change |
|---|---|---|---|
| Total revenue | $155,827 | $127,490 | Down 18.2% |
| Product revenue | $135,802 | $103,651 | Down 24.0% |
| Services revenue | $20,025 | $23,839 | Up 19.0% |
| Gross profit | $91,682 | $73,196 | Down 20.2% |
| Gross margin | 58.8% | 57.4% | Down 1.4 percentage points |
| Operating income (loss) | $7,256 | $(3,735) | Declined to a loss |
| Net income (loss) | $7,164 | $(4,177) | Declined to a loss |
| Basic and diluted EPS | $0.17 | $(0.11) | Declined to a loss |
| Net cash from operating activities | $(1,285) | $2,996 | Improved by $4,281 |
- Operating expenses were $76.9 million, or 60.3% of revenue, compared with $84.4 million, or 54.2%, in 2011. R&D declined to $28.7 million, selling and marketing to $40.0 million, and general and administrative expenses to $8.2 million.
- Services increased to approximately 18.7% of revenue from 12.9%, partially offsetting the product revenue decline. Services gross margin decreased to 75% from 79%.
- Cash and cash equivalents were $15.2 million at year-end. Total cash, marketable securities and bank deposits were $58.5 million, down from $75.2 million, with approximately $19.6 million restricted or otherwise unavailable for general use.
- Working capital was $46.6 million, compared with $55.1 million at year-end 2011. Total assets were $166.0 million and total equity was $98.3 million.
- Aggregate bank debt was $22.9 million, plus $353,000 of senior convertible notes. Bank debt is secured by liens on company assets and bears interest generally linked to LIBOR.
- Cash provided by operations was supported by reductions in receivables and inventory. Cash used in financing was $17.4 million, including $10.2 million of bank-loan repayments and $6.9 million of share repurchases.
Material Changes Versus the Prior Comparable Period
- Revenue fell primarily because of weaker North American product sales, a decline in OEM business and lower-than-anticipated government sales. The company also reported decreasing demand for technology products as customers shifted toward integrated solutions.
- Services revenue grew because of increased support and professional-services activity, particularly in North America.
- The company moved from operating and net income in 2011 to operating and net losses in 2012. The filing attributes the deterioration primarily to lower revenue and the inability to reduce indirect operating costs proportionately.
- Management implemented a restructuring and cost-reduction plan in 2012, reducing total employees from 634 to 579, including a reduction in R&D personnel from 266 to 225.
- The company repurchased approximately 2.76 million shares for $6.7 million in 2012. The authorized 4-million-share repurchase program was completed in October 2012, and treasury shares increased to approximately 11.36 million.
- Inventory write-offs increased to $2.3 million from $644,000 in 2011, reflecting risks from slow-moving, excess and technologically obsolete products.
- No goodwill or intangible-asset impairment was recorded in 2012. Goodwill remained approximately $32.1 million, while net intangible assets declined to $2.9 million from $4.0 million.
- Foreign-currency hedging produced a $1.5 million unrealized gain in other comprehensive income in 2012, compared with a $1.1 million unrealized loss in 2011.
Guidance, Outlook, Risks and Unusual Items
- Management does not generally provide quarterly forecasts. It expected 2013 R&D and selling and marketing expenses to be lower than in 2012 as a result of the restructuring plan, while general and administrative expenses were expected to remain approximately unchanged.
- Management stated that existing working capital was sufficient to meet operating requirements and scheduled bank-loan payments for at least the next twelve months, but noted that additional debt or equity financing could be required for acquisitions or expansion.
- The company could not assure a return to profitability in 2013. Its limited backlog, long six-to-twelve-month sales cycles and low visibility into customer demand increase quarterly volatility.
- Customer concentration is significant: the top three customers accounted for approximately 25.3% of 2012 revenue, and the largest customer accounted for approximately 13.7% to 13.9% according to different sections of the filing. The filing should be consulted to reconcile this discrepancy.
- Bank-loan covenants were not met during 2012, but lenders granted waivers subject to revised covenants, higher interest on one loan and increased compensating balances. The company stated that it was compliant with the revised covenants at December 31, 2012. Future noncompliance could permit lenders to demand accelerated repayment.
- The company was exposed to NIS appreciation against the U.S. dollar because many Israeli operating costs are NIS-denominated. Without the mitigating effect of hedges, management estimated that a 10% decrease in relevant U.S. dollar exchange rates would reduce annual net income by approximately $4 million.
- Contingent obligations included approximately $29.4 million of potential royalties to Israel’s Office of the Chief Scientist, payable only as qualifying products generate sales, and approximately $25.5 million of net future minimum lease payments.
- Material contingencies included an arbitration dispute with an Israeli landlord, involving a counterclaim of approximately NIS 14 million, or about $3.75 million at year-end exchange rates; pending patent litigation; and a 2013 former-executive demand of approximately $1 million. Management recorded no provision for these matters based on its assessment of the claims.
- In April 2013, AudioCodes agreed to acquire substantially all of MailVision’s assets for $233,000 payable after closing, potential earn-out payments, forgiveness of outstanding MailVision loans and assumption of approximately $1.3 million of specified liabilities. Closing was expected in May 2013.
- The company does not anticipate paying cash dividends in the near future. Its loan agreements also restrict dividend payments.
- Independent auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of December 31, 2012.
Investor Verification Checklist
- Reconcile the filing’s inconsistent disclosures regarding the largest customer’s 2012 revenue share, reported as both 13.7% and 13.9%.
- Review bank-loan maturity schedules, revised covenant requirements, waiver terms and the amount of restricted compensating deposits.
- Assess whether the restructuring sufficiently reduces the fixed-cost base to restore operating profitability amid continued revenue volatility.
- Evaluate product mix trends, particularly the decline in technology products and growth in networking services, and their effect on gross margins.
- Monitor customer concentration, OEM demand, government sales and the company’s limited backlog.
- Assess potential cash requirements for the MailVision transaction, lease commitments, OCS royalties, litigation and future acquisitions.
- Review foreign-exchange exposure to the NIS and the effectiveness and maturity profile of the company’s hedging program.
- Confirm the status and outcome of the landlord arbitration, patent proceedings and other contingencies disclosed after year-end.