AudioCodes Ltd. 2019 Form 20-F Summary
Business context and reporting period
AudioCodes designs and sells Voice-over-IP, unified communications, contact-center, cloud, networking and media-processing products and services for enterprises and service providers. Key offerings include session border controllers, media gateways, IP phones, multi-service business routers, management software, Voice.AI solutions and professional and managed services. The filing covers the fiscal year ended December 31, 2019, prepared under U.S. GAAP. It is an annual report; the filing text does not provide separate fourth-quarter financial statements.
AudioCodes operates globally, with headquarters and major research and development activities in Israel, and sells through direct channels, distributors, OEMs, network equipment providers and system integrators. Approximately 41% of 2019 revenue came from the United States. The company had 728 employees at year-end and 29,569,083 ordinary shares outstanding.
Financial results and key metrics
| U.S. dollars in thousands, except per-share data | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $200,287 | $176,223 | +13.7% |
| Product revenue | $135,646 | $119,887 | +13.1% |
| Service revenue | $64,641 | $56,336 | +14.7% |
| Gross profit | $94,958 | $110,606 | -14.1% |
| Gross margin | 47.4% | 62.8% | -15.4 points |
| Operating income (loss) | $(9,554) | $16,359 | Declined to loss |
| Net income | $3,977 | $13,493 | -70.5% |
| Diluted EPS | $0.13 | $0.45 | Declined |
| Cash flow from operations | $23,169 | $25,580 | -9.4% |
| Capital expenditures | $1,949 | $1,340 | Increased |
Research and development expense increased to $41.2 million from $34.7 million, while selling and marketing expense increased to $51.5 million from $49.3 million. General and administrative expense increased to $11.8 million from $10.3 million. Services generated a 78.1% gross margin in 2019, compared with 75.6% in 2018.
At December 31, 2019, cash and cash equivalents were $64.8 million, and cash, cash equivalents and bank deposits totaled approximately $71.9 million. Working capital was $45.9 million. Total assets were $244.3 million and shareholders’ equity was $92.5 million.
Total bank loans were $3.7 million, including $2.5 million of current maturities. The company was in compliance with its loan covenants. Approximately $7.0 million of cash was restricted by loan agreements, lease arrangements and foreign-exchange derivative transactions.
Material changes versus the prior comparable period
- Revenue increased $24.1 million, driven by adoption of SIP trunking, unified communications and collaboration solutions, all-IP network migration, contact-center migration and higher support and professional-services demand.
- The company recorded a $32.2 million expense related to an agreement with the Israel Innovation Authority to settle approximately $49.0 million of contingent royalty obligations. The expense materially reduced gross profit and operating income in 2019. Future royalty obligations related to the covered grants were eliminated.
- Gross margin fell primarily because of the royalty buyout expense. Excluding this unusual item, the filing indicates that service mix, product mix and operating leverage supported gross-profit performance.
- Net income benefited from a $15.3 million income-tax benefit, compared with $3.1 million of tax expense in 2018. The benefit primarily reflected recognition of a deferred tax asset.
- Cash from operations declined despite revenue growth, partly because of increased inventories and trade receivables. Deferred revenue increased by $12.3 million.
- Investing activities provided $29.6 million, primarily from marketable-security redemptions and reductions in bank deposits. Financing activities used $14.5 million, including $8.0 million for share repurchases, $6.7 million for dividends and $2.5 million for debt repayment.
- The company adopted the new lease accounting standard in 2019, recognizing approximately $33.1 million of right-of-use assets and lease liabilities at adoption. The filing states that the adoption did not materially affect operating expenses.
- Technology-product revenue declined to $8.6 million from $13.4 million, while networking-product revenue increased to $191.7 million from $162.8 million.
Outlook, management commentary, risks and unusual items
Management expects operating expenses to remain a material use of cash but believes existing working capital is sufficient for operating requirements and scheduled debt payments for at least the next twelve months. The company may require additional debt or equity financing for acquisitions or expansion. The filing does not provide quantified revenue or earnings guidance and states that it generally does not provide quarterly forecasts.
Strategic priorities include expanding software-based and cloud-native products, virtualized session border controllers, Microsoft Teams solutions, IP phones, Voice.AI, meeting-room products, lifecycle-management applications and professional services. Management identifies continuing migration from legacy TDM networks to all-IP networks as a demand driver, while noting that cloud adoption may reduce demand for hardware products and affect short-term revenue recognition under subscription models.
- Royalty settlement: Three annual installments totaling $32.2 million were agreed with the IIA; the first installment of approximately $10.7 million was paid in November 2019. A further contingent royalty obligation of approximately $16.5 million remained for other Israeli subsidiaries.
- Supply-chain exposure: The company relies on third-party manufacturers and certain sole-source suppliers, including suppliers of digital signal processors and network processors. Non-cancelable inventory purchase commitments were approximately $23.0 million at year-end.
- Inventory risk: Inventory write-offs increased to $4.5 million in 2019 from $1.9 million in 2018.
- Customer concentration: ScanSource represented 16.0% of revenue and Westcon represented 13.5%; the five largest customers represented 41.5% of revenue.
- Partner dependence: Results depend significantly on Microsoft, Genesys, Avaya and Cisco/BroadSoft ecosystems and their continued support for compatible solutions.
- Geopolitical and operating risks: The filing highlights Israel-related risks, U.S.-China tariffs, foreign-exchange exposure, China supply-chain disruption and the emerging coronavirus outbreak identified in December 2019.
- Currency risk: A 10% decrease in the dollar exchange rates applicable to 2019, before hedging effects, would have reduced net income by approximately $6.3 million. A 100-basis-point increase in borrowing rates was estimated to increase annual interest expense by approximately $24,400.
- Tax and legal contingencies: The company recorded a $20.5 million deferred tax asset and was undergoing an income-tax audit for 2016-2018. No material legal-proceeding provision was recorded at year-end; a patent matter was settled for $21,000.
- Capital returns: The company repurchased 559,848 shares for approximately $8.0 million and paid $6.7 million of dividends in 2019. A $3.9 million dividend was declared in February 2020.
Most important facts for investors to verify
- Reconcile reported 2019 profitability with the $32.2 million IIA royalty buyout expense and assess the expected normalized gross margin after the settlement.
- Evaluate whether the $15.3 million tax benefit and $20.5 million deferred tax asset are realizable given the company’s recent operating loss.
- Monitor customer concentration, distributor dependence and the sustainability of Microsoft Teams, cloud, UCaaS and contact-center growth.
- Review inventory levels, the $4.5 million inventory write-off and the $23.0 million non-cancelable inventory purchase commitments.
- Assess liquidity after restricted cash, IIA installment payments, lease obligations, dividends, repurchases and potential acquisitions.
- Track remaining IIA contingent royalty obligations, foreign-exchange exposure, China-related supply risks and the effects of tariffs and the coronavirus outbreak.
- Confirm the audited financial statements and unqualified auditor opinions, including the conclusion that internal control over financial reporting was effective as of December 31, 2019.