AudioCodes Ltd. (AUDC) Q1 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the AudioCodes First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Chris Harrison, Investor Relations. Thank you, Mr. Harrison. You may now begin.

Thank you, Rob. I would like to welcome everyone to the AudioCodes first quarter 2015 earnings conference call. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer; Ofer Segev, Vice President, Finance and Chief Financial Officer; and Niran Baruch, Vice President of Finance and Chief Accounting Officer. Before beginning, we would like to remind you that the information provided during this call may contain forward-looking statements related to AudioCodes' business outlook, future economic performance, product introduction and plans and objectives related thereto and statements concerning assumptions made or expectations as to any future event, 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, uncertainties and other factors that could cause actual results to differ material from those stated in such statements. These risks and uncertainties and factors include, but are not limited to, the effect of current global economic conditions and conditions in general and in AudioCodes' industry and target markets in particular, shifts in supply and demand, market acceptance of new products and the demand for existing products, the impacts of competitive product and pricing on AudioCodes and its customers' products and markets, timely product and technology developments, upgrade and the ability to manage changes in market conditions as needed, possible need for additional financing, the ability to satisfy covenants in the company's loan agreements, possible disruptions from acquisitions, the ability of AudioCodes to successfully integrate the products and operations from acquired companies into AudioCodes' business and other factors detailed in AudioCodes' filings with the SEC, United States Securities and Exchange Commission. AudioCodes assumes no obligation to update information. In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share. AudioCodes has provided a reconciliation of non-GAAP net income and net income per share to its net income and net income per share according to GAAP in its press release and on its Web site. Before I turn the call over to management, I would like to remind everyone this call is being recorded and an archived webcast will be made available on the Investor Relations section of the company's Web site at the conclusion of this call. The call will also be archived in our new Investor Relations app, which is available for free from the iTunes app store and the Google Play Market. With that said, I would now like to turn the call over to Shabtai Adlersberg. Shabtai, please go ahead.

Thank you, Chris. Good morning and good afternoon everybody. I would like to welcome all to our first quarter 2015 conference call. With me this morning are Ofer Segev, Chief Financial Officer and Vice President of Finance and Niran Baruch, Chief Accounting Officer and Vice President of Finance. Niran will start off by presenting a financial overview of the quarter and an updated annual guidance for 2015. 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?

Thank you, Shabtai and hello everyone. As usual we will be referring to both GAAP and non-GAAP numbers on the call. The non-GAAP P&L metrics exclude recurring non-cash items. Today's earnings press release contains a reconciliation of supplemental non-GAAP financial information. Revenues for the first quarter were $37.5 million up 4.3% year-over-year. Approximately 15% of our revenues in the first quarter were denominated in euro. As the euro, U.S. dollar exchange rate decline more than 11% in Q1 2015, sales in the euro zone were impacted and resulted in a decline of $0.5 million to $1 million from our original target plan. Revenues from networking product and services were up 7.3% year-over-year accounting for 88% of revenues for the first quarter. Revenues from our legacy technology products which we model to decline 10% on an annual basis declined 14.5% over the year ago quarter. Services revenues were up 20.2% over the year ago quarter accounting for 23.7% of total revenues. Revenue by geographical region for the quarter were split as follows; Americas 52%, EMEA 33% and Asia Pacific 15%. Our top 15 customers in aggregate represented 51% of revenues in the quarter of which 32% are our six largest distributors. Non-GAAP gross margin for the quarter was 59.7% up 20 basis points from the year ago quarter. Operating income for the quarter was $1.1 million up from $157,000 in Q1 2014. On a non-GAAP basis quarterly operating income was $2.1 million or 5.5% of revenue up from 3.1% of revenues a year ago. Net loss for the quarter was $378,000 or loss of $0.01 per share. On a non-GAAP basis quarterly net income was $2 million or $0.05 per share up from $1.1 million or $0.03 per share for Q1 2014. Our balance sheet remains strong. At the end of March cash, cash equivalents and marketable securities were $84.1 million, day sales outstanding as of March 31 was 76 days compared with 69 days at the same time a year prior. Operating cash flow was $4.7 million for the quarter. We bought shares for $5.2 million in the quarter and we continued to buy shares under the approved buyback plan. Now to provide an update on our guidance. As a result of the lower euro to U.S. dollar exchange rate in 2015 compared to 2014 and based on our working assumption that the euro will remain at its current level in the short-term, we are updating our guidance for 2015 as follows. We now expect revenues for 2015 to be in the range of $158 million to $162 million compared with the prior forecast of range of $162 million to $167 million. We are now forecasting non-GAAP net income the diluted share to be in the range of $0.24 to $0.28 compared with a prior forecast of $0.26 to $0.30. Thank you. I will now turn the call back over to Shabtai.

Thank you, Niran. We are pleased to report continued momentum and improved business activity for the first quarter of 2015. During the first quarter, we saw continued strong demand across our business lines. In all of the different market segments we serve primarily the unified communications market, contact centers and business services. We are seeing healthy business and customer activity and growing demand for product and services. Several key trends support the strength of business activity we see in our markets. The first one is the growing momentum of replacing legacy and prior telephony networks with richer and more efficient unified communication solutions. Unified communication solution support better multi-model communications across the enterprise are key in driving enhanced productivity and improve interaction with customers and partners. Then towards the growing focus of service provider worldwide and moving more rapidly towards SIP tracking and SIP based business communication and away from the traditional TDM services which are generally planned to be shutdown in about next five to seven years. Lastly, the very consistent trend of moving gradually from on-prem networking to hybrid and pure cloud-centric architecture and operations, of these strong and robust trends, help to generate more demand and opportunities for product solutions and services. In view of these global trends and understanding that the loin share of these new deployments will be dominated by industry application leaders such as Microsoft, Genesis, BroadSoft and likes. Our strategy of partnering and complementing [this newest] [ph] applications, solutions and architecture is a key driver in our success. We continue to invest, adopt our products and build our partnerships with enterprise communication application market leaders and we saw more success in new developments in this area in the first quarter of 2015. And so healthy market evolution and strong partnership support continued expansion for our business in coming years. And first quarter of 2015 has been a milestone in that path of growth of success. In the first quarter of 2015, our networking business grew 7.3% over the year ago quarter. And now that substantial indication to the strength of our business is the uptake in two distinct areas of activities. One is our new products category which grew about 15% over the previous quarter and more than 60% over the prior quarter a year ago. That group of product that we call new products combines Session Border Controllers, IP phones, Market Service Business Routers and related management facilities. And then the second are of nice growth is the services; services activity grew close to 20% over the year ago quarter, so very steady performance in growth in all of our key investments. Both of those areas, new products and services help to validate and represent that to the success of investment we made in recent years. And still based on current business outlook, we believe 2015 will exhibit nice growth on the heels of previous two years, delivering the third year in a row of networking business growth. Before I move on to provide more detailed review of our operation in the quarter, I would like to stress again that [not including] [ph] in all that strategy is the emphasis we make in shifting our focus from a best of breed product company to a solution selling company accompanied by product and services. For us, providing an end-to-end comprehensive high-performance voice network solution and attaching to it a comprehensive portfolio of services which help our end users to better use and manage their networks that is key to our success and prove superior to competition strategy of best of breed product approach. Now let me touch on some of the financial significant data points some of which are non-GAAP numbers. Quarterly revenues as indicated by Niran increased 4.3% year-over-year to $37.5 million and declined 4.2% sequentially, which is lower than our stated goal of decline of up to minus 3%. This larger decline is attributed mainly to lower revenues from the EMEA region mostly as a result of a much weaker and fast deteriorating euro, U.S. dollar exchange rate in the quarter. In the first quarter of 2015, the rate was 1.1 compared to 1.24 in Q4 of 2014 and 1.37 in Q1 of 2015. So it is 11.3% down from the previous quarter and above the 20% from a year ago quarter. As stated by Niran, this accounts for a loss of about $0.5 million to $1 million in the first quarter, and I will touch that later when I discuss our updated guidance. Now back to the key business lines. I have mentioned that networking product and services grew 7.3% over the year ago to $33.1 million. At the same time, we saw continued erosion of our technology – client technology revenues declined 17.7 year-over-year. On the more bright side of things, service revenues increased 20.2% year-over-year to $8.9 million from $7.4 million a year ago. New products rose 18% sequentially and 63% year-over-year, again, that combines revenues from selling SBCs, IP phones, MSBR and now we are glad to know that new products are above 30% of our networking revenues. I would also like to mention that gateway sales were kind of flat and we do not see any erosion in that. Now, let me touch some other key financial indicators, gross margins improved to 59.7. We had good OpEx control. We ended the quarter with operating expenses at $20,300,000 flat year-over-year and we believe that we will be able to keep right a very manageable OpEx throughout 2015. So we will probably not be much beyond the OpEx [flood] [ph] in 2015. So we will grow on revenues, we will almost not grow on OpEx. Headcount grew four positions to 665 employees, operating income increased close to 100%. We ended up at $2.1 million from $1.1 million a year ago. Net income was $2 million compared to $1.1 million in the prior year period. Most important, we are generating cash. Net cash provided by operating activities grew to $4.7 million from $1.9 million in the prior year a very strong cash flow. Now to some of our business activities. In the first quarter of 2015, we grew again in the markets of Lync environment. We could have grown more we did above 15%; we would have grown about 20%, if we would not have suffered from the euro meltdown. One of the key regions for us for Lync is EMEA, we have seen very nice up tick in [indiscernible] a sub-region in EMEA, record quarter large project and high visibility, high-profiled customers. We have seen One Book 365 catching momentum continuing the momentum we had in the previous two quarters. We have announced in the quarter of two new family appliances that will help increase the capacity of One Book 365 and allow it to be used by our [transition] [ph] that have more than 500 – up to 5000 employees. We are seeing very large potential for Lync IP phone sales, we count now what we couldn't have not count last year and before project that contain 10s of 1000s plus IP phones with very large companies. All-in-all, I would later on touch on our IP phone managed solution, but I will just say that we are witnessing very strong demand for the combined solution which is very efficient and very unique compared to other competition. We had a nice list of new wins in the quarter both in the U.S. and other areas. I would like to mention especially EMEA and Asia Pacific. Asia Pacific has been less successful for us in previous year, this year we see growing opportunities in the Asia Pacific market. One key area for our success in strategies are continued focus on transition to selling more complete solutions and attach services to it. Key in that strategy is our partnerships with large application players. We have mentioned few names so far, I'm glad to inform that in the first quarter of 2015, we have developed further growing relationship with two partners, which we did not add any meaningful in our relationship previously. So our strategy of trying to work with the majority of the unified communication and contact centers and business services playing partners is growing and that would translate into increased revenues we believe already in 2015. Now to some of our business lines, Session Border Controller activity continued to show success. We ended up growing more than 60% of the quarter a year ago, so very nice up tick and developments into new application in that area. Just to remind us all, we are among the top three providers in that market and we believe that again, that the fact we provide complete solution for the enterprise market helps us manage competition well selling into that space. Getting back to our IP phone activity, we have introduced in the quarter a new managed IP phone solution that is unique and designed to deliver unprecedented efficient, reliable and high-quality voice network management experience for highly distributed enterprise voice networks. We have been selling it for a while and we already got good feedback from new customers. IP phone activity sales grew in the quarter. We again working with several partners ecosystems, all-in-all, we grew sales of IP phone in the quarter more than 70% compared to the quarter a year ago. We are ramping right now in two partners, ecosystems, we are investing more efforts on a few more ecosystems, so we believe that end of this year, we will support those two ecosystems with another three search new ones. We have seen also a very nice pick-up in our sales of the Multi-Service Business Router. We basically will see increase in sales of that product line this year which was not planned initially at the beginning of the year. Now to our updated guidance. As Niran as mentioned, we need to update our guidance as a result of the recent change in the euro to U.S. dollar exchange rate. We now expect revenues for 2015 to be in the range of $158 million to $162 million compared with prior forecast of $162 million to $167 million. Earnings we now forecast non-GAAP net income per diluted share to be in the range of 0$.24 to $0.28 compared to the prior forecast of $0.26 to $0.30. To remind us all, we did $0.16 in 2014, so the new earnings midpoint guidance is still about 50% increase over last year. And another point to know is that we are profitable for a long time in a thing that is a bit unique in some form, communication within vendor community Now to give you more background on the decision to lower guidance, here are some data points. In 2015, we sold about $19 million worth of product in euro. 19 million in U.S. dollars was denominated in euro. The plan for 2015 is about $25 million. So there will be an increase in revenues coming from the euro zone. Now let's go to rates. In 2015, the average rate was 1.32, to quote the number for the four quarters in 2015 has been 1.37, 1.37, 1.3 and 1.24. However, Q1 2015 rate was 1.1 that represents 11.3% decline of the euro from Q4 and 20% down from the year-ago quarter. So take 15% to 20% rate reduction on $25 million, we expect for the full year that gives you a reduction of about $4 million to $5 million on the revenue guidance. That has been the source for updating our guidance, there are no other business reasons, and I think that one needs to be very clear because our business strength show some very good momentum. Obviously, if you go down in revenue that will affect our earnings and it will – also our gross margin, so while initially we had a target 60% on gross margin we now believe it's going to be more on 59.5% and we have already talked about the profit. Now to our share buyback program. That program has been announced in August last year when we heard from our Board of Directors to buy up to 3 million of ordinary shares. In November 2014, we received a court approval to purchase up to additional 15 million which we are in the middle of execution. Now for the first quarter of 2015, we have acquired 1.04 million shares in that quarter for approximately consideration of $5.2 million. At the end of March 2015, AudioCodes has acquired an aggregate number of 2.1 – about 2.1 million shares under this firm for an aggregate consideration of approximately $10.5 million. In March 2015, the company Board of Directors approved purchase – the repurchase of up to an addition of 15 million of the company ordinary shares subject to the receipt of court approval in Israel an application for approval has been submitted to the court. Now to our announcement about nominating a new Chief Accounting Officer. As of May 1, Niran Baruch will be our Chief Accounting Officer. Niran joined us back in 2005 initially as a Director of Finance then as a Vice President of Finance. And he is responsible for the management of the finance department. He has more than 15 years of experience in NASDAQ traded companies and he is a Certified Public Accountant with a BA in Business Management and Accounting. And we welcome Niran to our management team and Niran will assume responsibility for our financials, he will be the Principal Financial Officer and together with me he will help me to assume executive management of AudioCodes' finance department. Also I would like to thank Ofer Segev for joining us. Ofer who joined us about 6 months ago and we believe that we have the good fortune of having a strong and capable finance team. And we are confident that Ofer and Niran will help execute a very smooth transition. So we wish him for a good luck in future endeavors. Thank you, Ofer. And with that basically I have concluded my preview for the quarter and I will give the call back to the operator.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is coming from the line of Ittai Kidron with Oppenheimer. Please proceed with your question.

Hi, Shabtai. Few questions for me, first on the exchange rate, you reported your December results on January 27, if I remember correctly, that was a fourth month were the exchange rate was well below previous year and in fact that they reported I think it was 1.10 already. So I'm kind of a little bit confused why the change in exchange rate which frankly from the time of hope your conference call till the day hasn't changed all that much why was that – why wasn't this adjustment already made a quarter ago?

Well, if you – I don't recall the exact date, but as I recall, the decline in the euro was very frantic, sporadic, and fast moving. And I don't think we can – all planning for 2015 has been done during the month of since November and December and January. And a changing currency in the 1 to 3 days before the call is not something that could have taken into account to change a whole year forecast. So that I would assume was the process and what happened.

Now from your comments, can I understand that you have no intensions of hiring a CFO, is this the new structure of management then?

Yes. At this stage, all financial and accounting issues will be handled by Niran, which [indiscernible] has been doing that so many years. All Investor relationship will move over from Ofer to myself and together with Lior Aldema, our COO. Niran Baruch and Shirley Orgad Nakar, we will have that mission. So yes, at this stage we do not plan on hiring a new CFO.

Okay. And then regarding new products, you gave us some color on SBCs and phones, can you talk a little bit about routers, which you haven't mentioned. And also the box solution, which is very interesting, the One Box, where does that fit in your product characterization, is that basically a combination of routers and IP phones, how do I think about that in the way characterization where that product falls?

Okay. So let's take one at a time. Referring to the router, it's actually I have referred to it in my preview we call that Multi-Service Business Router, MSBR. It's being growing in the core and we have good pipeline developing. The reason for it is very simple, if I go back to my initial remarks on the call, there is a very evident, very strong trend of shutting down the PSN and TDM networks by 2020 or maybe two, three years after that. And there is a very strong activity taken by all the major service provider to move their solution into IP networks. Basically that means that for a telephony on-prem it has to move rather quickly from TDM to IP. If you want to communicate voice-over-IP from the premises, the use of Multi-Service Business Router will grow. So we anticipate growth in that type of product in coming years. And that's I believe is a source for a transitioning and growing that line. So instead of gateways which help to connect IP-PBXs to PSN, you will see growth of routers which connect IP networks like networks. So that from that side. As to One Box; One Box is part of our portfolio for One Voice for Lync and now One Voice for Skype for business solution. Primarily it is a Lync related product that helps to connect to Office 365 in the cloud and basically acts as a PBX replacement on-prem and allowing to add communication capabilities on top of the usual office capabilities. The nice thing about it is that is – wholly contained unit which is – a substantially the ability to deploy it with not going into complex projects. So right now and we have seen already such projects, one we offer a complete solution and complete voice network architecture to our end users, we use One Box more and more lately with connection to the cloud and to IP network rather than the gateway that used to connect to the PSN for a survivability. So that's One Box.

Okay. Now just to clarifying my questions, what did routers grow year-over-year and then the One Box, did you include that in the gateway revenues or that will be part of new products, go for it.

No, no. It's separate. Okay. MSBR is separate. Last year just to give you a sense, last year I think we had – it's a new line for us. Though last year, I think we sold around 7 million. We already seen in the first quarter of this year that product ramping almost 100% over the year ago quarter. So we believe we will grow more than 30% or 40% this year. And this new and this is just coming from several accounts, we do believe that we will be able to deploy it more. One very important point is that that product is supported by embedded SBC and then by management tools like our Element Management System, EMS and SAM which provides further value to that product.

Got you. Thank you. Good luck.

Thank you, Ittai.

Our next question is from the line of Rich Valera with Needham & Company. Please go ahead with your question.

Thank you. First, just wanted to clarify a couple of growth numbers Shabtai. Did you say new products grew 63% year-over-year?

Yes.

And Lync grew 15%, is that right?

About 15%.

Okay. And so just curious, I thought there was quite a bit of overlap between these two product categories, can you give us a sense of what drove the huge differential in growth for new products about Lync like what specific product was driving that?

Yes. Two products basically help growth a new product to a degree. One is, which was just mentioned with my question with Ittai is the MSBR. So MSBR grew almost 100% over the year ago quarter. Second is the IP phones category, there we definitely see very nice pick-up, just to give you some more background, IP phones are surely integrated in highly featured devices. However, in order to make them work in specific partner ecosystem, there is a huge amount of work to customize to add features into work and to certify within the partner environment. So deploying an IP phone in each new ecosystems takes a lot of time, could take 12 to 18 months, what drove our increased sales of IP phone is the fact that in two such ecosystems we passed all off the – but the stage is needed to start selling it and we start to sell it. Second most important factor is the fact that we have – we announced a very unique solution which we believe does not exists in the market today with any other IP phone supplier. And that these are IP phone managed solution. In that solution, we combine IP phones with Element Management System and a voice quality solution. One needs to acknowledge that when you deploy unified communication solution over a wide network and that wide network would be either national or [international] [ph] level. The ability to control the switch to add to the late device is from the network on a global basis is basically very costly if you do that without a good management solution. This is what we brought to the market this quarter. This is part of the success we start seeing in that market. So IP phones and MSBR help to increase the new product category.

Great. And then with the revenue in the quarter, you missed out top line estimate by $1.3 million and it sounds like $0.5 million to a $1 million that was due to the currency. So was there something else that was weaker than expected during the quarter other than the currency hit?

There is nothing specific in things I can put my finger on. I will just tell you that the first quarter has been thoroughly difficult to close this year compared to previous years. And we have seen that with other companies reporting their revenues for the quarter. So I think we did fairly well in that environment.

All right. And then last couple of years, you have seen about 4% to 5% quarter-over-quarter sequential improvement in the second quarter versus the first quarter, any reason we shouldn't expect that historical seasonality this year?

That would be our plan. I don't foresee any change to that. We are making all efforts we need to make this year, net growth year. Yes.

Okay. And finally, just wanted to get any update on your relationship with BroadSoft, business activity levels of BroadSoft, and how that's going?

All I can tell you that is that we have got very close working relationship and I think we are trying to help each other in making our business successful.

Okay. That's great. Thanks very much.

Sure.

[Operator Instructions] The next question is from the line of Mike Latimore with Northland Capital. Please proceed with your question.

Yes. Great. Thanks a lot. On Microsoft Lync, I think just heard you talked about that growing 30% or so, I guess were there some, I don't know delayed around the relaunching of Lync Skype for business or any thoughts on kind of the Lync growth rate there?

Right. Well, it's still early in the year, so indeed we grew above 15% that indeed the annual growth is expected to grow 30%. Q1 is usually either flat or lower, so that is not the big surprise. But, to your comments yes, I think I have heard from at least two sources in our company that for some reason that some maybe hesitation and/or a delay in the market. People relate it to the announcement of Skype for business that could be the case; it's a bit more a new architecture which puts more emphasis on connecting to the cloud to IP network rather than connecting to the PSN. So that could have happened and at least I have got two such indications from internal – internally.

All right. And then I was just trying to think some of the numbers up here, you talked about new products growing 63%, but then when you talk about the individual categories you had SBC at 60% to 70% and MBSR at 100%. So is there some other category that was below the 60% that was for the total category down to 60% there?

Yes. We combined here some other products, new products such as the management tools and they basically not – the growth is not that big there.

Okay. And then just to be clear on One Box 365, does that go into the new products category or Lync or both?

No. It's not counted within new product category, its product Lync, yes.

It would be product Lync. Okay. Got it. And then for the year, what kind of growth rate are you expecting out of your SBC category?

We are roughly plan to grow more than 40%.

Okay. All right. Thanks very much.

Sure.

The next question is from the line of Dmitry Netis with William Blair. Please proceed with your question.

Great. Thank you, gentlemen. Just couple of quick one for me, I just wanted to know how you think about this kind of Lync or Skype for business transition as it being brought on to the market. And how carriers react to that? Are you seeing greater propensities, is it another way from Lync as Lync or Skype for business is bringing this voice capability on board. And also specific to this One Box's offering that you have as the PBX replacement. How does that change your choice on the market with Skype for business – Lync online now having voice capability as well?

Right. So it's really too early to call as to the fact and/or the trend of service provider with relation to Skype for business. All in all, I would assume it's a new architecture that is meant to be more efficient and capable. But, I think it will take time especially for enterprise large companies in mid-market. Companies to study, analyze and understand the implication of the new architecture over the previous one which advocated on-prem deployment. So it's still too early. And you can't refer to that. As to One Box 365 and comparing it to Lync online, One Box 365 is part of our Lync offering. Lync traditionally was targeting and still is targeting more large enterprises and mid-market and never been targeting the SMB market. It's too expensive solution. Lync is too expensive solution for the SMB. So a bit behind One Box 365 is two-fold. Allow to connect facilities small companies, small businesses to Office 365, so in that regard basically it helps enrich our portfolio for Lync. The other target we have is really bringing Lync or Skype for business capability to the SMB, which has never been the target initially but now with the very cost efficient solution of One Box 365 that is enabling SMB to get even. And I think we will be helping organizations to more adjust to use it. So it's not in any respect, it's not being perceived if they competitive product venue for the Lync solution.

Okay, great. And then just another question on Lync, I think you said you expect 30% annual growth in that business line. Are you seeing any large deals in the pipeline in home runs or you mentioned one in EMEA as far as the IP phones business network? So are there large deals primarily or do you think it will more kind of singles and doubles as you go after this business?

Well, judging from on internal data and our sales force and CRM, we are seeing large projects. We are seeing growing the number of larger companies, international companies with many facilities, cancer facilities studying to test to proof-of-concept and deploy Lync. We are confident Lync is a winning solution in the market. And I think we will definitely see some growing going forward.

Okay, great. Thank you. And then last one is on the OpEx side, I think you said on the top line 4% to 5% sequential improvement is reasonable, should we expect the OpEx to kind of remain flat as you sort of projected it through the year for the Q2, should we be expecting it flat and can you just comment quickly on the foreign exchange whether that's helping you and how much of the OpEx is potentially denominated in euros.

Okay. So at this stage we forecast OpEx to be ranging in the $20 million to $21 million in coming quarters. So all in all we believe that OpEx will be fairly managed and contain within what could be planned. With regards to currency, we can talk about two, we can talk about the U.S. dollars versus the New Israeli shekel then we can talk about the U.S. dollars versus the euro. So on the expense side, obviously, we are talking about the U.S. dollars to the New Israeli shekel; I think we are in a much better position than last year. We basically have hedged other foreign expenses for the year going forward and we believe that we have got great exchange rate for that. On the income side referring to the euro, we are now seeing it in the range of 1.1 to 1.08 obviously it's hard to predict its behavior. And in view of the large decline that we have witnessed so far, we are not sure on our strategy as to hedging that. So that's our position as to the currencies exchange rates.

Okay. Excellent. Thank you very much. Very helpful.

Sure.

Our next question is a follow-up from the line of Rich Valera with Needham & Company. Please go ahead with your question.

Thank you, Shabtai. Follow-up on Lync, can you give us a sense of the relative revenue that you would expect to see in a traditional prem-based Lync installation versus a relatively new sort of Skype for business cloud-based installation; do you guys potentially see the same amount of revenue, less revenue sort of how should we think about that?

Okay. That's very challenging question. Frankly, it's too early in the game to understand the evaluation and the pace of adoption and transition to Skype for business. So if I would have to predict, I would say that majority of our revenues probably north of 80% to 90%, this year will still come from mainly Lync on-prem. We understand that going into 2015 and beyond that will change. But, at this stage we still have no ability to forecast that.

Okay. Thank you.

Sure.

Thank you. At this time, I would like to turn the floor back to management for closing comments.

Okay. Thank you, operator. I would like to thank everyone who attended to our conference call today. We enjoyed good business momentum in an environmental Q1 2015. And we look forward to continuing our growth and momentum in the next coming quarters this year. We look forward to have you on our next quarterly conference call. Thank you very much. Have a good day. Thank you.