AudioCodes Ltd. — FY2020 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2020. The filing is an annual Form 20-F, not a quarterly filing; separate Q4 results are not clearly provided. Financial statements are prepared under U.S. GAAP in U.S. dollars.
Business context and reporting period
AudioCodes provides communications software, cloud platforms, session border controllers, media gateways, routers, IP phones, voice applications, professional services and managed services for enterprises and service providers. Strategy is increasingly focused on Microsoft Teams, cloud and hosted communications, all-IP migration, contact-center solutions, conversational AI and recurring managed services.
COVID-19 accelerated work-from-home adoption, cloud unified communications and remote contact-center requirements. AudioCodes reported increased demand for related products and services, while office IP-phone purchases were delayed and supply-chain disruptions affected manufacturing in China.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $220.8 million | $200.3 million | +10.2% |
| Product revenue | $145.3 million | $135.6 million | +7.1% |
| Services revenue | $75.4 million | $64.6 million | +16.7% |
| Gross profit | $149.8 million | $95.0 million | +57.8% |
| Gross margin | 67.9% | 47.4% | +20.5 percentage points |
| Operating income | $38.4 million | $(9.6) million | Improved by $47.9 million |
| Operating margin | 17.4% | (4.8%) | Improved by 22.2 percentage points |
| Net income | $27.2 million | $4.0 million | +584.9% |
| Diluted EPS | $0.83 | $0.13 | +538.5% |
| Operating cash flow | $38.5 million | $23.2 million | +66.1% |
Revenue mix shifted toward services: services represented 34.2% of revenue versus 32.3% in 2019. The improvement in gross margin primarily reflects the absence of the $32.2 million Israel Innovation Authority royalty-buyout expense recorded in 2019, elimination of related future royalty obligations, higher-margin software and services growth, and operating leverage. The 2020 results therefore are not fully comparable with 2019.
Liquidity, capital structure and cash flow
- Cash and cash equivalents were $40.9 million at December 31, 2020.
- Total cash, bank deposits and marketable securities were approximately $186.3 million, including approximately $6.0 million subject to restrictions.
- Working capital was $108.9 million and total assets were $358.1 million.
- Bank debt was $1.2 million, down from $3.7 million; the company was in compliance with its loan covenants.
- Operating cash flow was $38.5 million. Investing activities used $139.3 million, principally for marketable securities and bank deposits. Financing activities provided $77.1 million.
- In June 2020, AudioCodes issued 2.6 million ordinary shares at $35 per share and received net proceeds of approximately $85.4 million.
- The company paid $8.4 million of dividends in 2020 and repurchased no shares during the year. A February 2021 dividend totaled approximately $5.3 million.
Material changes versus the prior comparable period
- Revenue increased 10.2%, driven by Microsoft Teams and unified communications adoption, all-IP network migration, session border controller growth, contact-center work-from-home solutions and higher services demand.
- Services revenue grew faster than product revenue, supported by technical support renewals, professional services and larger managed-services contracts.
- Research and development expense increased 11.8% to $46.1 million, partly due to higher staffing, share-based compensation and lower IIA grants.
- Selling and marketing expense decreased slightly to $51.2 million as COVID-19 reduced travel, conferences and exhibitions.
- General and administrative expense increased 20.4% to $14.2 million, primarily due to higher share-based compensation.
- Net tax expense was $9.4 million in 2020 versus a $15.3 million tax benefit in 2019, mainly reflecting utilization and reduction of deferred tax assets.
- Share-based compensation increased to $8.8 million from $5.3 million.
- Inventory write-offs were $4.2 million, compared with $4.5 million in 2019.
Guidance, outlook, commentary and risks
The filing does not provide a specific quantitative revenue or earnings forecast. Management expects continued migration to cloud-based unified communications, Microsoft Teams, all-IP networks, contact-center automation and managed services. It also expects software-based offerings to grow, although cloud adoption may reduce revenue from hardware-based products and may affect short-term revenue recognition under subscription models.
- COVID-19 and supply chain: Potential further disruptions to suppliers, manufacturing, shipments, customers and employees; most products are manufactured in China and key components may be sourced from limited suppliers.
- Partner concentration: Microsoft, Genesys, Avaya and other strategic partners materially influence product demand, certifications and market access. Changes in partner strategy or promotion of competitors could adversely affect results.
- Customer concentration: ScanSource represented 13.5% and Westcon 13.0% of 2020 revenue; the top five customers represented 37.7%.
- Technology transition: Cloud migration may pressure on-premises products, while increasing IP-network adoption may reduce demand for media gateways.
- Currency exposure: A significant portion of costs is denominated in NIS. Management estimated that, without hedging, a 10% decrease in relevant dollar exchange rates would reduce 2020 net income by approximately $6.3 million.
- IIA obligations: Other Israeli subsidiaries had a contingent royalty obligation of approximately $18.1 million at year-end. The remaining installment under the prior royalty buyout agreement was approximately $11.7 million.
- Commitments and litigation: Non-cancelable inventory purchase obligations were approximately $14.0 million. A patent-infringement complaint was filed against a U.S. subsidiary in January 2021; no monetary demand had been made and no reserve was recorded.
- Other risks: Intense competition, intellectual-property claims, data-security and privacy requirements, Israeli geopolitical conditions, regulatory changes and reliance on key personnel.
Most important facts for investors to verify
- Whether growth in Microsoft Teams, managed services and other cloud offerings is translating into durable recurring revenue and margin expansion.
- The extent to which 2020 margin improvement reflects the nonrecurring 2019 IIA royalty-buyout expense rather than sustainable operating gains.
- Customer concentration, renewal rates, deferred revenue and remaining performance obligations of $49.1 million at December 31, 2020.
- Availability and liquidity of the $186.3 million investment and deposit balance, including restricted amounts and investment maturities.
- Future effects of COVID-19, component shortages, China manufacturing exposure and single-source suppliers.
- Potential cash payments for IIA royalties, inventory commitments, leases and the January 2021 patent matter.
- Future dividends, share repurchases and dilution from outstanding options and restricted share units.