AudioCodes Ltd. 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, cloud, networking and media-processing products and services. The filing is an audited annual report for the fiscal year ended December 31, 2018, prepared under U.S. GAAP. The source provides annual results rather than standalone fourth-quarter results.
Key offerings include session border controllers, media gateways, multi-service business routers, IP phones, Microsoft Skype for Business and Teams solutions, cloud and virtualization products, voice-recognition applications, call-recording products and professional services.
Financial performance and position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $176.2 million | $156.7 million | Up 12.4% |
| Product revenue | $119.9 million | $107.5 million | Up 11.5% |
| Service revenue | $56.3 million | $49.3 million | Up 14.4% |
| Gross profit | $110.6 million | $97.8 million | Up 13.0% |
| Gross margin | 62.8% | 62.4% | Up 0.4 percentage points |
| Operating income | $16.4 million | $9.7 million | Up 69.5% |
| Operating margin | 9.3% | 6.1% | Up 3.2 percentage points |
| Net income | $13.5 million | $4.0 million | Up 234.6% |
| Diluted EPS | $0.45 | $0.13 | Up $0.32 |
| Cash from operating activities | $25.6 million | $17.8 million | Up $7.8 million |
Services represented 32.0% of revenue, compared with 31.4% in 2017, and carried a higher average margin than products. Service gross margin was 75.6%, down from 76.8%.
Research and development expense increased 14.2% to $34.7 million, primarily because IIA research grants declined to $5.7 million from $8.3 million. Selling and marketing expense increased 0.8% to $49.3 million, while its revenue ratio declined to 28.0% from 31.2%. General and administrative expense rose 15.3% to $10.3 million.
At December 31, 2018, cash and cash equivalents were $31.5 million. Cash, marketable securities and bank deposits totaled approximately $65.4 million, including approximately $9.2 million restricted by loan, lease and derivative arrangements. Working capital was $59.3 million, compared with $32.0 million in 2017.
Total bank loans were $6.2 million, consisting of $2.5 million current maturities and $3.7 million long-term debt. The company was in compliance with its loan covenants. Total shareholders’ equity was $94.5 million, compared with $92.4 million at year-end 2017.
Investing activities used $1.1 million, including $1.3 million of capital expenditures. Financing activities used $17.2 million, including $14.3 million for share repurchases, $5.8 million for dividends and $2.5 million for debt repayment, partly offset by $5.5 million from option exercises.
Material changes versus the prior comparable period
- Revenue growth accelerated, led by higher adoption of SIP trunking, unified communications and collaboration solutions, migration from TDM to IP networks, and growth in technical support and professional services.
- Gross margin improved modestly because of a larger service mix, favorable product mix and better absorption of fixed overhead.
- Operating profitability improved substantially as revenue grew faster than operating expenses.
- Net income increased sharply, while the prior-year result included a substantially higher tax expense. The 2018 tax expense was $3.1 million versus $5.6 million in 2017.
- Operating cash flow increased to $25.6 million, supported by higher net income and a $9.4 million increase in deferred revenue, partly offset by a $6.3 million inventory increase.
- Inventory increased to $22.6 million from $16.6 million. Inventory write-offs remained material at $1.9 million in 2018.
- The company repurchased 1,795,814 shares for approximately $14.3 million and paid its first cash dividend, $0.20 per share, totaling $5.8 million.
- AudioCodes adopted ASC 606 using the modified retrospective method, recording a $180,000 opening retained-earnings adjustment. Deferred revenue increased to $23.7 million from $16.4 million.
Guidance, outlook, 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 filing does not provide a specific 2019 revenue or earnings forecast and states that the company generally does not provide quarterly forecasts.
Management’s strategy emphasizes growth in enterprise unified communications, contact centers, SIP trunking, hosted services, cloud and network-function virtualization, software-based products, professional services and strategic partnerships, particularly with Microsoft, Genesys and BroadSoft, which was acquired by Cisco.
- The transition from on-premises solutions to cloud-based and hybrid deployments may reduce demand for certain hardware products and may change the timing and pattern of revenue recognition.
- Media gateway revenue faces long-term pressure from the migration of legacy TDM networks to all-IP networks. Technology-product revenue declined to $13.4 million from $13.6 million.
- Microsoft, Genesys and Cisco/BroadSoft partner strategies, certifications and product changes could materially affect demand for AudioCodes products.
- Customer concentration is significant: ScanSource represented 17.8% of 2018 revenue, Westcon represented 11.1%, and the top five customers represented 38.7%.
- The company depends on single-source or limited-source suppliers, including Texas Instruments for signal-processing chips and Motorola and Cavium for certain processors. Non-cancelable inventory purchase commitments were approximately $19.5 million.
- IIA grants recognized in 2018 were $5.7 million, and the 2016–2018 grant program was reduced by approximately NIS 21 million for 2018. Contingent IIA royalty obligations were approximately $66.1 million at year-end.
- Foreign-exchange exposure is concentrated in Israeli shekel-denominated costs. The company estimates that, without hedging, a 10% decrease in relevant dollar exchange rates would reduce 2018 net income by approximately $5.7 million.
- The company had $29.9 million of net lease commitments, $19.5 million of inventory purchase commitments and $6.2 million of bank debt. It also expects adoption of the new lease standard in 2019 to add approximately $30 million to $35 million of right-of-use assets and lease liabilities.
- A patent-infringement complaint was filed against the U.S. subsidiary in March 2019; no monetary demand had been made and the outcome could not yet be predicted. The filing separately states that no material provision for legal proceedings was recorded at December 31, 2018.
- The company completed its accounting for the U.S. Tax Cuts and Jobs Act but noted that subsequent tax authority guidance or legislative changes could affect tax liabilities and results.
The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018.
Most important facts for investors to verify
- Confirm that reported annual growth is being sustained in subsequent quarterly filings, particularly in services, UC-SIP products, cloud offerings and professional services.
- Monitor customer concentration, distributor purchasing patterns and the effect of any reduction in ScanSource or Westcon orders.
- Assess the pace of migration from on-premises hardware to cloud and hybrid solutions and its effect on product mix, margins and revenue timing.
- Track IIA funding, royalty obligations, manufacturing restrictions and the potential impact of reduced or discontinued grants.
- Review inventory growth, recurring inventory write-offs and the company’s $19.5 million of non-cancelable inventory commitments.
- Reconcile liquidity after dividends, share repurchases, debt repayments, restricted cash and the expected 2019 lease-accounting additions.
- Evaluate foreign-exchange sensitivity, hedging effectiveness and exposure to Israeli shekel costs, tariffs and international supply-chain disruption.
- Follow the March 2019 patent litigation, tax audits, partner developments and any changes to debt covenants or financing needs.