AudioCodes Ltd. Form 20-F Summary
Business context and reporting period
AudioCodes designs and sells voice-over-IP, unified communications, session border controller, media gateway, IP phone, networking, software and professional services products for service providers, enterprises, OEMs, distributors and system integrators. The filing covers the fiscal year ended December 31, 2014, with audited comparisons for 2012 and 2013. The audited financial statements are prepared under U.S. GAAP, notwithstanding an inconsistent accounting-basis checkbox in the filing cover page.
AudioCodes reported 42.4 million ordinary shares outstanding at December 31, 2014. Its shares trade on NASDAQ and the Tel Aviv Stock Exchange.
Key financial metrics
| U.S. dollars in thousands, except per-share data | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $151,579 | $137,232 | +10.5% |
| Product revenue | $118,561 | $111,750 | +6.1% |
| Services revenue | $33,018 | $25,482 | +29.6% |
| Gross profit | $88,987 | $78,668 | +13.1% |
| Gross margin | 58.7% | 57.3% | +1.4 percentage points |
| Operating income | $3,501 | $2,739 | +27.8% |
| Operating margin | 2.3% | 2.0% | +0.3 percentage points |
| Net income (loss) | $(86) | $4,218 | Returned to a small loss |
| Basic and diluted EPS | $(0.00) | $0.11 | Declined |
| Cash provided by operating activities | $5,957 | $14,088 | Down $8,131 |
| Capital expenditures | $2,539 | $1,586 | +60.1% |
Revenue growth was driven primarily by networking products, especially session border controllers, and by support and professional services. Networking revenue increased to $131.9 million from $115.2 million, while technology revenue declined to $19.7 million from $22.0 million.
Operating expenses increased to $85.5 million from $75.9 million. Research and development increased to $32.3 million, selling and marketing increased to $45.5 million, and general and administrative expense declined to $7.7 million. The 2014 net loss primarily reflected a $3.4 million income-tax expense, compared with a $1.4 million tax benefit in 2013, despite operating income.
Liquidity, cash flow and capital structure
- Cash and cash equivalents were $14.8 million at year-end, compared with $30.8 million in 2013.
- Total cash, marketable securities and bank deposits were $85.7 million, up from $62.2 million; approximately $11.1 million was restricted or otherwise unavailable for general use.
- Working capital was $37.5 million, down from $64.9 million.
- Bank debt totaled $9.8 million, including $4.7 million of current maturities and $5.1 million of long-term debt. The remaining $353,000 of senior convertible notes was repurchased in 2014.
- Operating cash flow declined to $6.0 million, partly because trade receivables increased by $4.7 million and other receivables and prepaid expenses increased by $2.2 million.
- Investing activities used $43.4 million, principally for purchases of marketable securities. Financing activities provided $21.5 million, including $29.7 million of net proceeds from a March 2014 equity offering, partly offset by debt repayment and $5.3 million of share repurchases.
- Management stated that working capital was sufficient for operating requirements and scheduled debt payments for at least the next twelve months.
Material changes versus the prior comparable period
- Revenue increased 10.5%, with services growing substantially faster than products and services rising to approximately 22% of revenue from 19%.
- Gross margin improved to 58.7% from 57.3%, supported by product and service mix and higher margins in both categories.
- Operating income improved modestly, but higher research and development and selling and marketing spending limited operating leverage.
- The company moved from 2013 net income of $4.2 million to a 2014 net loss of $86,000, primarily because of the reversal of a 2013 tax benefit and recognition of 2014 tax expense.
- Operating cash flow fell materially despite higher revenue, reflecting working-capital investment.
- AudioCodes completed a $29.7 million net equity offering, repurchased 1.05 million shares for approximately $5.3 million and eliminated its senior convertible note balance.
- Employees increased to 661 from 617, primarily due to product development and sales-force expansion.
Guidance, outlook, commentary and risks
The filing does not provide formal quarterly or annual revenue or earnings guidance. Management expects operating expenses to remain a material use of cash and states that existing working capital should support operations for at least twelve months. The company intends to continue investing in cloud computing, unified communications, Microsoft Lync and Office 365 solutions, hosted services, network-function virtualization, session border controllers, IP phones and related software.
- Management expects the shift from traditional circuit-switched networks to IP networks to support demand for session border controllers, IP phones and network-management products, but acknowledged that the same transition may reduce demand for legacy media gateways.
- The company depends on a limited number of large customers. Its top three customers represented approximately 27.7% of 2014 revenue; ScanSource represented 14.9% and Westcon 10.5%.
- Microsoft, BroadSoft, Avaya and Genesys relationships are strategically important. Changes in partner strategies, certifications or solution adoption could adversely affect results.
- Competition is intense, product life cycles are short, and technological changes may result in obsolete inventory or lower pricing and margins.
- The company relies on third-party manufacturers and certain sole-source suppliers, including suppliers of key signal-processing and network processors. Non-cancellable inventory purchase commitments were approximately $13.4 million.
- Foreign-exchange exposure is significant because many expenses are denominated in Israeli shekels while much revenue is denominated in U.S. dollars. The filing estimates that, without hedging, a 10% decrease in the U.S. dollar exchange rate would reduce 2014 net income by approximately $5 million.
- Bank loan agreements contain financial covenants relating to equity, cash, bank liabilities and operating income. The company reported compliance at year-end.
- Contingent royalty obligations to Israel’s Office of the Chief Scientist were approximately $39.6 million at year-end and are payable based on sales of supported products. OCS funding also imposes restrictions on manufacturing and technology transfers.
- Legal contingencies included a former executive’s Israeli labor claim of approximately $625,000 and a Brazilian former-employee claim of approximately $600,000. Management stated that it has valid defenses.
- The company does not pay cash dividends and does not expect to do so in the near future.
Most important facts for investors to verify
- Reconcile the filing’s inconsistent accounting-basis checkbox with the audited U.S. GAAP financial statements.
- Assess whether the sharp increase in services revenue and networking products is sustainable and whether technology-product declines continue.
- Review the quality of earnings, particularly the effect of the $3.4 million tax expense, deferred tax assets and available tax-loss carryforwards.
- Monitor operating cash conversion, receivables growth, restricted cash and the concentration of marketable securities.
- Confirm compliance with bank covenants and the timing of the remaining $9.8 million bank-loan repayments.
- Evaluate customer concentration, partner dependence and exposure to sole-source suppliers and inventory commitments.
- Assess the potential financial and operational impact of the $39.6 million OCS royalty obligation, related manufacturing restrictions and pending employment claims.