GILT - Dividend Challengers Review: AudioCodes

2023-08-12 03:17:03 ET

Summary

• AudioCodes Ltd is a newcomer on the Dividend Challengers list with 5 years of consecutive dividend growth, but its dividend has remained stagnant since early 2022.
• The company has seen steady revenue growth and has virtually no long-term debt, but its free cash flow has dropped.
• AudioCodes has performed poorly in terms of stock price compared to its peers, but its revenue and earnings growth have been favorable.

Overview

I'm restarting a series of articles that reviews Dividend Challenger stocks. I began the series last year before I took a break from writing and in each article, I would select a Dividend Challenger stock and determine whether it was a solid long-term buy option for investors based on a number of criteria related to performance, financial strength, valuation, dividend strength, etc.

For the first few articles of this reboot, I will be looking back at my original articles, judging the results, and reviewing the current stock performance, financials, recent news, valuation, and dividend strength of each stock.

In the first article of this reboot, I re-reviewed the Dividend Challenger stock ACCO Brands (ACCO) and determined it to be a hold for current shareholders and as a stock that should be avoided by other long-term investors. That article can be found here .

Dividend Challengers are stocks that have increased their dividends every year for at least five consecutive years. This list is maintained with the Dividend Champions (25+ years) and Dividend Contenders (10+ years). More information on these lists can be found here .

For this article, I will be looking back at my original article from November 22nd of last year and reviewing AudioCodes Ltd. (AUDC) based on both information from that article as well as new information based on its performance over the past nine months.

AudioCodes Ltd provides communications software, products, and productivity solutions for the global digital workplace. AudioCodes Ltd. was incorporated in 1992 and is headquartered in Lod, Israel.

Dividend

AudioCodes Ltd is a newcomer on the Dividend Challengers with a minimum number of 5 years of consecutive dividend growth. Looking at the chart below, you can see that AudioCodes' dividend growth saw steady growth from 2019 to 2022 but has remained stagnant since then.

I mentioned in my article from last year that AudioCodes' semi-annual dividends in 2022 did not increase, with both of them being $0.18 per share. Even though AudioCodes Ltd has averaged more than double-digit yearly revenue growth over the past five years the fact that it has not increased its dividend since early 2022 is a concern.

In my prior article, the payout ratio of AudioCodes was on an upward trend but still in good shape at just under 42%. Looking at the chart below, you can see that AUDC's payout ratio has nearly doubled and is currently at just under 83%. This is above its historical average, which could explain why there hasn't been a dividend increase this year.

With three consecutive semi-annual dividends without a rate increase, AUDC is in serious danger of dropping off the Dividend Contenders list.

AudioCodes Ltd has a current dividend yield of 1.62%. And looking at the chart below you can see that this is within the average yield of its dividend over the past five years, which as you can also see from the chart below has correlated strongly with the price increases and decreases of AUDC during this time.

Financials

AudioCodes Ltd has seen fairly steady revenue growth over the past several years and while its earnings growth has seen ups and downs it has been a net positive during this time. Looking at the chart below you can see that its revenue growth has outpaced its earnings growth over the past five years.

While the drop in AudioCodes' free cash flow is concerning, its virtually non-existent long term debt is impressive.

Valuation and Performance

AudioCodes Ltd currently has a forward PE ratio of 17.22, which is higher than the value of 14.85 in November of last year. Looking at the chart below, you can see that this is still in line compared to its recent historical average.

A similar trend can be seen when looking at AUDC's recent price-to-book value with its current value at the low end of its recent historical average.

Part of the reason for AUDC's lower valuation compared to its recent historical average is the price performance of the stock. Looking at the chart below you can see that AUDC has dropped significantly in price over the past three years while the S&P 500 is up over 30% during the same time period.

Since my article original article was published last year, AUDC has seen a 42% drop in price.

Peer Comparison

A few stocks in the same industry with similar market caps to AudioCodes Ltd include Aviat Networks, Inc. ( AVNW ), NETGEAR, Inc. ( NTGR ), Applied Optoelectronics, Inc. ( AAOI ), Gilat Satellite Networks Ltd. ( GILT ), and Comtech Telecommunications Corp. ( CMTL ).

In terms of stock price, you can see that while only one stock, Applied Optoelectronics, has had an increase in price over the past year, AudioCodes Ltd has performed the worst out of the six stocks.

When extending the date range out to three years, three of the six stocks have positive price appreciation during this time, but AudioCodes Ltd is not one of them and once again has the worst performance out of the group.

Unlike stock price appreciation, when looking at revenue growth over the past five years, AudioCodes performs the best with its 51.05% increase during this time. Three of the stocks have negative revenue growth during this time.

When looking at earnings, only Aviat Networks has had higher earnings growth over the past five years. The other four stocks have all seen declines in earnings during this time period.

Recent News

At the beginning of the month, AudioCodes declared a $0.18 semi-annual dividend which is in line with its previous dividend. As mentioned earlier, this is important because the company's last dividend increase came in February of 2022. Before that, every semi-annual dividend had increased since 2019.

In its Q2 earnings report , AUDC beat its earnings estimate by $0.06 per share. It missed its revenue estimate with a decline of 12.2% year over year.

Reviewing the Q2 earnings transcript , there are several factors that will affect the future performance of AudioCodes including:

• Microsoft-related business in the quarter grew 12% year-over-year and 16% sequentially, with Microsoft Teams business up 18% year over year.
• Strong ongoing momentum of our AudioCodes Live managed services continued, with ARR exiting the quarter at $40 million, growing over 60% year-over-year
• Strong Live performance to date puts on track to achieve our target of $46-$50 million in 2023, representing approximately 50% year-over-year growth.
• Zoom related business grew over 20% year over year.

These factors along with previously announced cost savings actions that the company is implementing during its long-term transformation to software and services seem to be on the right track after significant challenges.

Conclusion

In my original article from last year, I stated that AudioCodes would provide long-term investors with solid returns moving forward. That hasn't happened yet due to the struggles it has faced with its stock price (down 42% since that article was published). The stock price has rebounded recently (up over 21% over the past three months) but still has a ways to go before getting back to its November 2022 level.

I still believe that AudioCodes is actually a stock worth looking at for long-term dividend growth investors. Looking at the stock performance over the past five years, it has performed poorly compared to its peers but when looking at its revenue and earnings growth during the same time period, it performs favorably compared to its peers.

I do think that AudioCodes is currently fairly valued with its significant price drop of over 50% over the past year. I do think the company is making the right steps in terms of turning things around. I like their strategy of moving completely to software and services, and the company continues to make moves to improve its OpEx.

The lack of recent dividend growth is a concern, but I was happy to read the following from its recent earnings press release:

This leads me to believe that a dividend increase could be coming soon especially since AUDC recently completed a $2.9 million share buyback in June. That being said, I would wait for the company's next dividend announcement before purchasing AudioCodes. If AUDC increases its dividend and remains on the Dividend Challengers list, I think it's worth considering as a long-term dividend investment. If they don't increase the dividend then I believe the risks associated with AudioCodes outweigh its dividend growth potential.

The biggest risk associated with AudioCodes is its poor price appreciation. This isn't a recent problem, but a problem that has continued for a long period of time with the stock down over 67% over the past three years.

If AudioCodes can continue to deliver on its OpEx improvements and continue its organic revenue growth then I believe it can return to the type of price appreciation it saw from 2018 through 2021 (as seen in the chart below).

Other risks associated with AudioCodes were discussed in its earnings transcript and include:

• The company's Microsoft business remains flat in the EMEA region
• Skype for Business was down 50% year-to-year
• Product segment saw a double-digit decline in growth compared to the prior quarter
• Services year-to-year growth rate declined to 2.7% compared to 10.8% in the prior quarter

AudioCodes is currently listed as a strong sell based on Quant ratings but I believe that AudioCodes has been oversold based on its revenue and earnings compared to several of its peers. Also, if AudioCodes can deliver on its transition to software and services then it limits the impact of some of the risks outlined above.

As mentioned above, I still like AudioCodes but have to consider it a hold at the moment instead of buy (which was my position in my original article) for long-term dividend growth investors at least until we see that the company will continue its dividend growth, which it should be capable of doing.

As always, I suggest individual investors perform their own research before making any investment decisions.

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