AudioCodes Ltd. 2015 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, session border controller, media gateway, IP phone, networking and related professional services solutions. The filing is an audited annual report for the fiscal year ended December 31, 2015, prepared under U.S. GAAP; it is not a quarterly filing. The company operated as one reportable segment.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $139.8 million | $151.6 million |
| Product revenue | $102.0 million | $118.6 million |
| Service revenue | $37.8 million | $33.0 million |
| Gross profit | $82.8 million | $89.0 million |
| Gross margin | 59.2% | 58.7% |
| Operating income | $2.7 million | $3.5 million |
| Net income (loss) | $0.4 million | $(0.1) million |
| Diluted EPS | $0.01 | $(0.00) |
| Cash flow from operations | $17.6 million | $6.0 million |
| Capital expenditures | $2.0 million | $2.5 million |
| Cash, deposits and marketable securities | $80.4 million | $85.7 million |
| Working capital | $30.4 million | $34.2 million |
| Bank loans | $11.4 million | $9.8 million |
Product-line revenue was $123.8 million from networking products and $16.0 million from technology products. Services represented approximately 27% of total revenue, compared with 22% in 2014. Revenue outside the Americas and Israel represented approximately 44% of total revenue.
Material changes versus the prior comparable period
- Total revenue declined 7.8%, primarily because of weakness in Central and Latin America and certain European markets.
- Product revenue declined 14.0%, while service revenue increased 14.4%, driven by support and professional services.
- Gross profit declined 7.0% in dollars, but gross margin improved by 50 basis points because the product mix shifted toward services and product gross margin remained broadly stable.
- Net research and development expense declined to $28.0 million from $32.3 million, largely because OCS grants increased to $5.4 million from $3.9 million. Selling and marketing expense declined to $43.4 million, while general and administrative expense increased to $8.7 million, partly because of higher doubtful-account and other provisions.
- Operating income decreased to $2.7 million from $3.5 million. The company returned to a small profit after a net loss in 2014, but profitability remained minimal.
- Operating cash flow increased to $17.6 million, aided by lower trade receivables and higher deferred revenue, partially offset by increased inventories and lower trade payables.
- The company repurchased 4.76 million shares for approximately $19.5 million, reducing outstanding shares to 37.84 million at year-end and contributing to the decline in total equity to $117.5 million from $133.7 million.
- On December 31, 2015, AudioCodes acquired Active Communications Europe, a Microsoft Silver Partner, for a preliminary purchase price of $4.1 million, including $2.0 million in cash, a $2.1 million estimated earn-out and additional potential deferred payments.
Liquidity, debt and commitments
Management stated that working capital was sufficient for operating requirements and scheduled bank-loan payments for at least the next twelve months. Approximately $8.4 million of cash was restricted by loan covenants, a lease agreement and foreign-exchange derivative arrangements. Bank loans totaled $11.4 million, including $5.3 million due within one year, and the company was in compliance with all loan covenants at December 31, 2015.
Significant contractual obligations included approximately $46.0 million of net lease commitments, $12.7 million of non-cancelable inventory purchase obligations, $45.6 million of contingent OCS royalty obligations, and $3.1 million of payments related to the ACS acquisition. The company had no reported off-balance-sheet arrangements and did not expect to pay cash dividends in the foreseeable future.
Outlook, commentary, risks and unusual items
- No formal revenue or earnings guidance is provided in the filing. Management generally does not provide quarterly forecasts, but expects operating expenses to remain a material use of cash and believes existing liquidity is adequate for at least twelve months.
- Management continued investing in Microsoft Skype for Business, cloud and hybrid unified communications, Network Function Virtualization, software-based SBCs, IP phones, CloudBond 365 and professional services. The company recognized the industry shift toward cloud-based delivery as both an opportunity and a risk because revenue remained primarily tied to on-premise deployments.
- Customer concentration is significant: ScanSource represented 15.0% of 2015 revenue, Westcon represented 12.6%, and the top three customers represented 31.4%. The company has limited backlog and long sales cycles, making quarterly revenue timing difficult to predict.
- The company depends on Microsoft and other strategic partners, including Genesys, Avaya and BroadSoft, and on several sole-source or limited-source suppliers. Changes in partner strategies, supplier interruptions, product obsolescence or pricing pressure could materially affect results.
- OCS grants reduced reported R&D expense but carry royalty, manufacturing-location and technology-transfer restrictions. On March 27, 2016, the OCS notified the company of an alleged $1.0 million underpayment of royalties. The company disputed the finding, indicated it may appeal and recorded no provision.
- Other disclosed contingencies included an appeal of a Brazilian employment claim of approximately $0.6 million and a claim by the Manufacturers Association of Israel for alleged unpaid handling charges. The company believed it had valid defenses and recorded no provision for these matters.
- Foreign-exchange exposure is material because revenue is primarily dollar-denominated while significant costs are incurred in Israeli shekels. Without hedging, management estimated that a 10% decrease in the relevant U.S. dollar exchange rates would reduce annual net income by approximately $5 million.
- Inventory write-offs increased to $0.7 million from $0.1 million in 2014. Stock-based compensation expense was $2.4 million, with approximately $2.9 million of unrecognized expense remaining at year-end.
- The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that internal controls were effective as of December 31, 2015.
Most important facts for an investor to verify
- Whether product demand stabilizes and whether the growing services mix can offset declining product revenue.
- The sustainability of the 59.2% gross margin and the effect of customer, geographic and product mix changes.
- Progress and profitability of the ACS acquisition, including earn-out and deferred-payment obligations.
- Compliance with bank covenants and the availability of restricted versus unrestricted liquidity.
- The outcome of the OCS royalty dispute and the potential $45.6 million contingent royalty obligation.
- Exposure to major distributors and strategic partners, particularly Microsoft, ScanSource and Westcon.
- Inventory levels, supplier concentration and future write-off risk as the company transitions toward cloud and software offerings.
- Foreign-exchange sensitivity, tax-asset utilization and the company’s continuing ability to generate operating cash despite limited net profitability.