The phenomenon known as AudioCodes has still not percolated in depth to the consciousness of Israeli investors. They wonder how a company, which in the fourth quarter of 1999 posted peak revenues of $10 million and a $2.7 million operating profit, can be trading at a market value of $1.5 billion.
AudioCodes, founded in 1993 by Shabtai Edelsburg and Leon Bialik, develops and markets a software solution for problems, such as delay or loss of data packages, arising when voice and faxes have to be transmitted on data communications networks and Internet. AudioCodes specialises in voice compression, the technology that reduces the bandwidth taken up by that voice, while preserving a reasonable sound quality.
The company's customers are Internet telephony equipment manufacturers such as VocalTec and Clarent Corporation, which, in turn supply their equipment to telephony service companies such as Delta-3, Basis, and Net2phone.
An interesting point relates to the competition, which is being progressively 'swallowed up': the company's rivals in the field of DSP solutions (chips for converting analog signals, meaning voice, into digital signals, or data), are Telogy and Hothouse. The former was assimilated by Texas Instruments, which paid $485 million. The latter was acquired by Broadcom for $280 million.
In the field of communications cards (which enable up to 120 Internet telephony lines to be transmitted), AudioCodes competes with Analogic, Radisys, and Natural Systems (NMS), while another competitor, Dialogic, was swallowed up by Intel for $780 million.
AudioCodes general manager Shabtai Edelsburg displays a great deal of self-confidence, even though companies such as Intel and TI are ostensibly becoming rivals: "In the past half year, since the IPO, the market has recognised us as the technological leader. There is no doubt that the Internet telephony market is actually happening; and we, as suppliers to companies such as VocalTec and Clarent, which supply communications equipment to Internet telephony providers such as Delta-3 and Net2Phone, benefit from this positive trend".
"Globes": What do you mean?
"We are particularly strong in the field of complex high end products and we are sitting pretty because the industry's trend is firstly to work with ready-made solutions, thereby obtaining the advantage of being first, and secondly to acquire systems that provide performances of the highest possible quality. The reason is that a communications equipment provider wishing to set up a communications infrastructure in China must come up with a complete solution, and do it better and faster than the others. This plays into our hands, because that is precisely where our business focus is".
The Robertson Stephens reports notes that the acquisition of Telogy poses a risk to AudioCodes, since the acquiring company, Texas Instruments, is also a supplier of your DSP chips.
"Telogy doesn't exactly compete with us, but focuses on the field of chips for cables and for telephony systems for CPE corporations. Which is to say, they are active in the low end. In the past half year, we have been seeing considerably less of them in high end transactions".
The report notes that 'despite management's assurances that there is no problem, the acquisition of Telogy by Texas Instruments posed a threat to AudioCodes. That means that Robertson Stephens don't believe you.
"Look, this is an unsupported theory. Our relations with Texas Instruments are excellent. Moreover, the trend is that more chip manufacturers worldwide (Rockwell, Motorola) are coming out with DSP components, and therefore, our dependence on Texas Instruments is diminishing".
Intel and Texas Instruments are expected to compete against you, yet you are relaxed.
"AudioCodes is different from the competition. While they focus on the field of communications cards or chips, we do both, and a bit more in the grey area in between. That opens up an extensive market for us, and also explains why our value is significantly higher than theirs.
"AudioCodes today is undoubtedly, in terms of technological level, the number one company in the industry. Incidentally, Dialogic may be owned by Intel at present, but in the past half year it has been marking time and has not notched up any noticeable success".
the Robertson Stephens report speaks of the dependence of AudioCodes on Clarent as a principal customer.
"That is true, we certainly supply that company with 38% of our total sales. On the other hand, you are speaking of what is currently the leading company in Gateways, meaning Internet telephony networks access equipment.
"A survey conducted in November 1999 by a British research company found that Clarent holds 29% of the market, while Lucent and Cisco each hold 16%. In fourth place is another customer of ours, namely VocalTec, with 9%. This means that we sell at least to 38% of the market, so one the one hand, there is a risk, but on the other there is a reward".
How do you regard the future of the market?
"My assessment is that this market is only at the start of its road. In fact, we are constantly advancing toward a stronger market standing, and accordingly, we have the interest and the ability to develop new product lines and conquer significant customers".
You don't see a state of affairs in which AudioCodes is sold?
"Think about it: the call market on ADSL modems (which relay fast Internet communications on ordinary telephone wires) did not exist in 1999; but the 2001 market is estimated at billions of dollars. In this situation, we are seeing fine growth prospects.
"I always say that everything has its price, but the goal and the direction are toward growth. As a manager, and not as a shareholder, I see no reason to sell the company, because we are in a great position to build value for the shareholders".
The value at which the other companies were sold was not particularly impressive.
"On the one hand, that is true. On the other hand, however, these were share swap transactions, and in the worst case, the true transaction value was at least 50% higher due to the advance of the shares on the stock exchange in the past year. If so, then the reported transaction prices do not reflect the true return to the shareholders. Moreover, you noted that we are the leading company in technological terms, and that we deal in a wider range of fields than those companies that were acquired".
Published by Israel's Business Arena January 20, 2000