AudioCodes Ltd. (AUDC) on Q1 2021 Results - Earnings Call Transcript
Operator: Hello and welcome to the AudioCodes's First Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder this conference is being recorded. It’s now my pleasure to turn the call over to Roger Chuchen. Please go ahead sir.
Roger Chuchen : Thank you. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer; and Niran Baruch, Vice President of Finance and Chief Financial Officer. Before we begin, I would like to remind you that the information provided during this call may contain forward-looking statements relating to AudioCodes' business outlook, future economic performance, product introductions, plans and objectives related thereto, and statements concerning assumptions made or expectations as to any future events, conditions, performance, or other matters are forward-looking statements as the term is defined under U.S. Federal Securities Laws. Forward-looking statements are subject to various risks and uncertainties and other factors that could cause actual results to differ materially from those stated in such statements.
Shabtai Adlersberg: Thank you, Roger. Good morning and good afternoon everybody. I would like to welcome all for our first quarter 2021 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance at AudioCodes. Niran will start off by presenting a financial overview of the quarter; I will then review the business highlights and summary for the quarter, and then discuss trends and developments in our business and industry. We will then turn it into the Q&A session. Niran?
Niran Baruch: Thank you, Shabtai, and hello everyone. As usual, on today's call, we will be referring to both GAAP and non-GAAP financial results. The earnings press release that we issued earlier this morning contains a reconciliation of the supplemental non-GAAP financial information that I will be discussing on this call.
Shabtai Adlersberg: Thank you, Niran. We are very pleased to report strong first quarter 2021 financial results ahead of our internal budget and continued progress in our business. Most important, we have been strong in the markets. We have seen a strong market for three main growth engines namely, Microsoft business, Contact Centers and Conversational AI. In the Microsoft business, Team’s and Skype for Business, business grew above 20%. However, most notably, our U.S. market showing increased activity in view of the decline in pandemic. We saw better environment for new creative accounts and businesses. Very stronger book-to-bill trend which strong put – presents growth ahead.
Operator: Our first question today is coming from Samad Samana from Jefferies. Your line is now live.
Samad Samana : Hi. Good morning and congrats on the strong results. It’s good to see you could figure off with strong numbers. So, Shabtai, maybe first, Team’s growth continues to be very exciting and I know you dug into it – about the quarter somewhat in your prepared remarks. But when you think about the go to market motion, are you guys hiring more sales reps to sell into that Microsoft installed base to drive voice into Team’s or maybe what’s AudioCodes is doing as an organization to address that opportunity from a go to market perspective?
Shabtai Adlersberg: Thank you, Samad. I am really glad you brought that up. I didn’t mention headcount and headcounts really changed dramatically. We grew 6% over the last year. So we added another 45 employees to the 745 employees we had then. A majority of these positions are with our sales and services organization and as you can expect, because we see lot of growth in the U.S., most of it is really occurring in the U.S. So yes, and that contributed just in the past two weeks we have approved between 10 and 15 new positions for the sales and services organization. There is a lot of activity and we are going to support that.
Samad Samana : Great. And maybe on the pipeline again, your confidence in the environment, definitely ran through on the prepared remarks, but when you think about how you measure it in terms of either a client inbound request or sign-ups for demos, anything that maybe kind of tangibly that AudioCodes measures that points to what the pipeline looks like or how healthy the pipeline for Team’s related deals is?
Shabtai Adlersberg: Yes, we are. We definitely track that internally. We have analytics. Each of this gives, actually moving more and more into recurring revenues. We are measuring the pipeline. We are measuring the contract’s value that is accumulated and we measure the – obviously, the execution how much was deployed, how much – you need also to – by the way to simulate that. Every organization it’s tough to move into AudioCodes live and our managed services really deploying only a very small portion of its operation initially. So, it will be very natural for an organization to start with just few hundreds, right. The proof-of-concept may start with 100 or 200. But at the end of the day, this organization is about 300 or above. So, what we basically tell you is that, and I have driven in terms of total contract value. We have not counted the thousands, we have counted only the hundreds. So there is a lot of accumulated potential there. And as we continue to deliver well on our promises with the growth as I have mentioned tens of millions of contract value that is what’s developing within the scope of the year now. So, a lot of activity.
Samad Samana : And great, maybe just one last one for me, for either of you, but the profitability continue to be nicely above our expectations. And so, I saw that that AudioCodes repurchased $10 million worth of shares in the quarter. Maybe how should we think about the rest of what’s left in terms of that $30 million buyback? And if there is any appetite to maybe expand the buyback level given the current valuation?
Shabtai Adlersberg: Right. So, right now, I mean, by we are taking a position where we need to relaunch a new purchasing effort every six months. So the current one basically adds like $25 million in total, out of which we already executed some $10 million. So, we are left with about $14 million for the rest of the six months that will end somewhere in July. Again, based on the situation there, based on what makes sense for us, I think that we see lot of value in this buyback, because we definitely want to invest where we believe the investment makes sense. And right now, that is what’s happening.
Samad Samana : Great. I’ll turn it over. But congrats again on the quarter and thanks for taking my questions.
Shabtai Adlersberg: Sure. Thank you, Samad.
Operator: Thank you. Our next question today is coming from Raimo Lenschow from Barclays. Your line is now live.
Raimo Lenschow : Hey. Thanks for taking the question and congrats from me, as well. Can you talk a little bit about the strength in the call center market, like, how much of that do you think is that you figure is kind of more like pandemic, kind of one-off emergency versus really strategic changes to what’s going on in the industry?
Shabtai Adlersberg: I think pandemic really puts lot of weight on the issue of moving the agents from the facilities into working from home, right? There was no other choice. So, - but, during that process I think many of the vendor – at the end-users actually found out that the cost of using agents at home is substantially lower than the cost of maintaining data protection on-prem, on facilities. So, there is a natural saving when that force is sitting at home. So, obviously, that is a driver that’s going to stay. Beyond that, the production of the cognitive services technology and industry I think help moving from human agents operations. This was a 100% two years ago. 80% now and according to research, people believe that in three years from today, only about 30% of the agents will remain human. So, it’s really the evolution of the technology completely works – to the pandemic that is driving that shift. Beyond that, there is the shift from the premises to cloud which makes sense usually for a smaller company, but then provides a lot of efficiency for the vendor. So, not all of it. I think it’s mainly the work from home. It’s the WebRTC, quality monitoring end-to-end over the internet, those are technologies that evolved due to the pandemic, but they are going to stay with us.
Raimo Lenschow : Okay. Okay, perfect. And then, if you think about your ongoing migration like towards more software way from hardware, can you talk a little bit about, like, are there any more active steps you need to do as an organization to kind of cheat that or do you think it’s just a natural evolution?
Shabtai Adlersberg: It’s an evolution. I mean, we have started that journey like, three years ago. We’ve done great steps. We are improving quarter-to-quarter and I believe that today, there is no single application that’s developed internally that does not rely on cloud communications – built in cloud communication. So, everything that needs to take into account DevOps, Software-as-a-Service, automation tools, et cetera, analytics, all of that is being developed as we go into 2021. So, I assume that in less than two years we will be fully cloud-based.
Raimo Lenschow : Okay, perfect. Thank you.
Shabtai Adlersberg: Sure.
Operator: Thank you. Our next question is coming from Greg Burns with Sidoti & Company. Your line is now live.
Greg Burns: Morning. You gave the relative growth rates between Team’s and Skype for Business. But can you just give us the mix of revenue like, how much revenue from Microsoft is still for Skype for Business?
Shabtai Adlersberg: Yes, I can tell you from the pro forma, so, all in all, I think revenues topped $25 million or above. Out of that, Skype for Business accounted for, give or take about $8 million and the rest of it came from Team’s.
Greg Burns: Okay. Great. Thanks. And then, when you look at the Team’s market in terms of voice penetration within the user base, can you just give us an update on where that stands? And have you seen any change in the trajectory or the pace of voice adoption within the Team’s user base?
Shabtai Adlersberg: Yes. I think we are seeing in 2021 greater emphasis on voice. It may relate to competition coming from other companies making voice more important this year. Also, if you want to play on the top-line of the vendors of UCaaS, you really need to have all of the different components. And this drives some other companies to invest a lot in voice. I would mention also by the way, this did not came up during the discussion that we have made some very nice steps in selling also into the Zoom environment. The Zoom phone which was less visible in our operation last year, started to pick up end of last year. First quarter was really strong, above more than double the business we had in the fourth quarter. So I guess that, greater emphasis by all of the other players, - RingCentral and now seeing services that combine their offering with Team’s. I think all in all, the voice space is getting more importance these days.
Greg Burns: Okay. Great. And then, in terms of live, can you maybe – what is embedded in that those ARR targets, the $10 million by mid-year, $10 million by the end of the year and also maybe the number of seats, the relative seismic counts and ARPUs?
Shabtai Adlersberg: Right. So, basically, we are talking about companies will – our target is mainly thousands of fits, but the projects do start with type of a hundreds. In terms of services we do provide the first more – most basic services Direct Route SBC. On top of that, we provide management, on top of that, we provide other routing services, call recording services in the future also some cognitive services. So, it’s a stack of the trajectory start to push it as Team’s Voice-as-a-Service. And when you are deploying voice like Team’s voice, you really need a stack of technologies to provide overall processing. So, it’s SBC, it’s routing, it’s management, it’s devices, it’s meetings, et cetera. And then, that’s what’s consist the Team’s Voice-as-a-Service. So, as we will discuss, call it before AudioCodes live.
Greg Burns: Okay. When you look at that stack of the unlocking technology stack required to stand up like a sea and then also these – some of these incremental applications you are talking about cross-selling or selling into that universe, where you think – where do you think ARPU to get to? Or where do you see it may be starting?
Shabtai Adlersberg: Okay. It’s – yes, it’s a great question. We can start as low as $1 when the service is the most basic one. But when you stack up all of the different capabilities, or when you need to connect to the lot of PBX or to provide more advanced services, the ARPU can go up to 4, 6, 7, et cetera. So, you can make the average. So, but, this is the range where, I would say, 1 to 7 is the range where we should on off.
Greg Burns: Okay. Great. And then, just lastly, how are you going to market with live? Do you have any like direct or internal sales force selling that? Or you just going all through the channel?
Shabtai Adlersberg: So, we are working with the channels. I mean, we have not changed anything in our go to market. We actually include our partners in the game. Obviously, we have them where the – like the knowledge and/or the expertise, but the go to market is indirect still for some very large customers who have hundreds of thousands of employees in some cases, we do have some direct touch. But the majority of the service is indirect.
Greg Burns: Okay. Thank you.
Shabtai Adlersberg: Sure.
Operator: Thank you. The next question today is coming from from Needham & Company. Your line is now live.
Unidentified Analyst: Thanks for the question and thanks for the color on the Microsoft ecosystem. Are you seeing the – within that area, are you seeing any shifts in the competitive landscape? Are you seeing new vendors get approved? And then, second question on the products side, are you seeing any shifts toward more of a SaaS model there? Or is it still more kind of a license approach? Thank you.
Shabtai Adlersberg: Sure. So, generally, there are not too many newcomers, right? We have seen announcements from companies like 8x8, RingCentral and Vonage offering services like that growth. Nothing more than that. So, all in all, in terms of providing a full technology stack for it seems, I think we do not see much competition at this stage. I am sorry, the second question related to, growing the SaaS?
Unidentified Analyst: Yes, changes in the product model. Are you seeing just more of a license model?
Shabtai Adlersberg: Yes, obviously, yes, it was that. Right, actually, we did deploy, actually that you mentioned is because, in the first quarter, if we have deployed the new service that would go live essential or Azure. This is a completely SaaS solution that we are going to offer management Solution-as-a-Service, et cetera. The trend again is indeed to move substantially more from services and managed services into SaaS solutions, yes.
Unidentified Analyst: Thanks so much.
Shabtai Adlersberg: Sure.
Operator: Thank you. We have reached the end of our question answer session. I would like to turn the floor back over to management for any further or closing comments.
Shabtai Adlersberg: Thank you, operator. I would like to thank everyone for attending our conference call today. With continued good business momentum and execution in the first quarter of 2021 and previous quarters, we believe we are on track to achieve another strong year of growth and expansion in 2021. We look forward to your participation in our next quarterly conference call. Thank you all. Have a nice day.
Operator: Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.
