AudioCodes: Positioned To Become Over-The-Top In An Over-The-Top World

By Josh Franklin :

AudioCodes ( AUDC ) is an Over-the-Top investment in an Over-the-Top ((OTT)) world. However, it is being misinterpreted as a slow grower in the Unified Communications (UC) VoIP market and overlooked as an OTT mobility play. This couldn't be farther from the truth. AudioCodes needs to be recognized for its OTT ambitions and for its OTT opportunities that it has firmly in place. Since Facebook ( FB ) acquired WhatsApp the OTT world has been turned upside down on the service provider side of the equation. Here again, is why I believe investors, both retail and institutional need to stop and listen to my bullish stance on AudioCodes becoming an OTT solutions pure play in the near future. This opportunity, if played out by AudioCodes will make my $1.50 initiation to $9.12 high look like child's play.

Over-the-Top as described by Wikipedia refers to the delivery of video, audio and other media over the Internet without a multiple system operator (service provider) being involved in the control or distribution of the content.

In May 2013, AudioCodes acquired the remaining interest in MailVision, a company that was designed to assist service providers in opening new markets via Wi-Fi and VoIP. Since that acquisition, AudioCodes has placed a heavy foot on spending R&D dollars into the OTT mobility space. In February 2014 at the Mobile World Congress it introduced its first cloud based OTT solution called Mobility Plus Business Edition for the enterprise.

This system is parallel to the VMAS solution it already has installed at dozens of carriers in Europe and Latin America for consumers mostly on a trial basis (as we don't hear much from the company on the platform). AudioCodes, on the last conference call, spoke for the first time of its excitement on OTT mobility. This management team is a conservative, close to the vest type of group that in my opinion, wouldn't be talking up mobility unless something has changed dramatically.

Here's what's changed dramatically; last month, Comcast ( CMCSA ) announced that it had placed 1 million hot spots into its wireless Wi-Fi network to date. A milestone that got my attention, as I believe Comcast is or should be working with AudioCodes. Remember, Comcast was a big investor and user of AudioCodes acquisition Nuera Communications, so the relationship could still be in place. Comcast didn't stop there; it followed the 1 million hot spots with an astonishing goal of reaching 8 million hot spots by year end. This helped me see the full picture on how fast and how serious Comcast was to building out a Wi-Fi wireless network. Solidifying Comcast's commitment to its Wi-Fi network, this week it announced that it signed a partnership with two Asian carriers, KDDI and Taiwan Mobile, to allow them to access its Wi-Fi network when in the States to avoid roaming charges. This partnership will allow KDDI and Taiwan Mobile subscribers to install an app on their phone that allows them to place Wi-Fi calls when in the states. The app will be branded for KDDI and Taiwan Mobile, but open up much like a Viber or WhatsApp.

There's more. Last month in the Netherlands, UPC and Ziggo simultaneously launched mobile Wi-Fi. This is important as Liberty Global Inc. ( LBTYA ) is the parent company of both companies and is merging the two together. Liberty has been just as vocal as Comcast in the past few months talking about building 4 to 5 million hot spots and its own wireless network. It is also testing a MVNO/Wi-Fi network for its users. It would work like this, from Liberty's CTO Balan Nair :

Lastly, British Telecom ( BT ) announced that it's building out its own Wi-Fi wireless network. BT, which has been out of the mobile market for the last 10 years when it spun off its mobile division O2, is looking to make a comeback by converting its customers' 5 million broadband routers into a nationwide wireless Wi-Fi network. BT Broadband customers will be able to automatically access the BT Wi-Fi network when out of their homes and close to a hotspot. BT plans to expand its network overseas utilizing its 7 million Broadband customers overseas.

Comcast, Liberty Media and BT are the companies at the forefront of answering customers' needs for Wi-Fi all the time. The growth in Wi-Fi usage is increasing dramatically as more and more people are using Wi-Fi to download movies, log on to the internet and text or Skype. They also want Wi-Fi so that they can talk using OTT applications. Looking at this trend it is becoming increasingly more apparent that all telecoms and cable providers are going to be forced to set up their own Wi-Fi networks or partner in building networks that their customers can use. I believe that this will be a tremendous opportunity for AudioCodes as we see the likes of AT&T (T), Verizon (VZ), Sprint (S) and others add Wi-Fi networks.

Both consumers and enterprises are very sensitive to roaming charges and the annual figures don't dispute that sensitivity. The consumer is more susceptible to roaming pricing than enterprises, but the right OTT network could influence both parties to attach themselves to a service provider's OTT Wi-Fi mobility app. The consumer and the enterprise will become more active users while saving money from not experiencing roaming charges. Informa Telecoms & Media reports; "In 2011, 28 billion roaming minutes were delivered a number that is anticipated to almost double to 58 billion by 2015." In addition, it reports that "annual global roaming revenues will grow 86 percent from 2010-2015 rising from $42 billion in 2011 to $66.8 billion in 2015, accounting for approximately 6.3 per cent of total mobile service revenues." These figures undoubtedly bring AudioCodes' voice engine and cloud based OTT mobility offering into play. I believe these data points could be the reason behind the upcoming big Wi-Fi networks rollouts which will be an opportunity for AudioCodes to service millions of subscribers as soon as year end. This business model is a revenue sharing model and it's one that flows straight to the bottom line, making it an extremely attractive asset for Audiocodes. Comcast's partnership mentioned above will allow it to generate new fees from a percentage of KDDI's and Taiwan Mobile's millions of subscribers, bringing added value to having a proper voice network with a superior voice engine.

Here's a table on the above analysis:

(click to enlarge)

AudioCodes knows codecs (the compression and decompression of a digital data stream, or signal handled by special algorithms we call codecs (COder-DECoder)), it knows voice packets and it is singularly focused on VoIP. That's a lot of engineers and man hours centrally focused on real time OTT mobility. I addressed AudioCodes' ambitions one year ago but it has remained very quiet until this past conference call. On the conference call when the CEO talked so bullishly about OTT mobility, it lit a fire under me much the same as I believe Facebook's OTT ambitions has lit that same fire under the Service Providers. The game has changed. I believe Facebook, Liberty Media, Comcast, BT and a host of others will all come to AudioCodes at some point in the next 6-9 months as they own the best voice engine and have the best engineers working on next generation solutions in the OTT space.

Benefits of AudioCodes' Mobility Plus

When the institutions come to visit AudioCodes, have one on one meetings and look at the market drivers in voice networks, they'll see that AudioCodes is in a high barrier to entry position and its OTT mobility has high operating leverage and high gross margins that could one day make this company a ten bagger from today's $5.75 per share, in the next 12-24 months. The mobility arm of AudioCodes is the most underestimated and overlooked aspect of AudioCodes' R&D efforts and its product portfolio. At these depressed valuations vs. its direct peer, it's no longer time to sit on your hands, it's time to recognize how important AudioCodes' voice engine is to Wi-Fi mobility and how immensely profitable its business model will be.

AudioCodes is trading at the same price level it was in November. It is sitting on $36 million more in cash, gross margins are at 2 year highs and inclined to break 60% next quarter; its quarterly revenues are $2 million higher and mobility is now being spoken of on a quantity level in the quarters to come. So what is the value of AudioCodes here vs. the opportunity? AudioCodes is trading at 1 times 2015 revenues less its net cash. Its chief competitor is trading at 2.2 times revenues less cash. In fairness, analysts see Sonus Networks (SONS) having a bigger SBC portfolio and a larger installed base at service providers and as such is deserving of a richer valuation. I believe buying AudioCodes on this recent selloff is the single best buying opportunity in my 2 years of recommending it, as the once thought about mobility play is here as per Comcast, Liberty Media and BT announcing its aggressive plans to build Wi-Fi networks. In buying the shares you're getting expanding margins, increasing revenues and a strong cash position to handle its core UC growth opportunities but you're also getting the upside of an exponential mobility opportunity.


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Looking at a longer term chart on AudioCodes we can see that this recent pullback has created a great buying opportunity and I will be looking for a reversal and a continuation of the W pattern. The next reversal, if it comes on the back of OTT mobility progress, should see the shares break out to new yearly highs and challenge multi-year highs.


The shares of AudioCodes have been in a tsunami of their own, but the company is preparing for a Jim Crameresque mobile tsunami that I believe is sure to get the attention of the most aggressive growth funds. The shares are selling off not because of bad performance, but because of a poorly handled secondary and a small cap correction. The business is doing extremely well, the R&D efforts are off the charts with a $20 million dollar grant by the Israeli office of the Chief Scientist (OCS) (they're not dumb people) and the company is priced incredibly cheap with the mobility solutions they command for any service provider that wants a mobile OTT application. Once one deal lands, the rest will follow, as Facebook's acquisition of WhatsApp has placed AudioCodes in an OTT position in what's looking to be an OTT world.

Disclosure: I am long AUDC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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