Greetings and welcome to the AudioCodes’ First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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, Elizabeth Parker, with KCSA. Thank you. You may begin.

Thank you, Melissa. I would like to welcome everyone to the AudioCodes first quarter 2017 earnings conference call. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer; and Niran Baruch, Vice President, Finance and Chief Financial Officer. Before beginning, we’d 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, 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 Law. Forward-looking statements are subject to various risks, uncertainties, and other factors that could cause actual results to differ materially from those stated in such statements. These risks, uncertainties and factors include but are not limited to the effects 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 impact of competitive products 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 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, the U.S. 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 website. Before I turn the call over to management, I would like to remind everyone that this call is being recorded and an archived webcast will be made available on the Investor Relations section of the Company’s website at the conclusion of this call. The call will also be archived on our 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, Operator. Good morning and good afternoon, everybody. I would like to welcome all to our first quarter 2017 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance for AudioCodes. Niran will start off by presenting a financial overview of the quarter. I will then review the business highlights and summary for the first quarter, discuss trends and developments in our business in industry and the outlook for the rest of the year. We will then turn meeting to 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 $37.4 million, down 1% from the prior quarter and up 7.5% compared to the first quarter in 2016. Services revenue for the first quarter were $11.4 million, accounting for 30.4% of total revenues. Deferred revenues balance as of March 31, 2017 was $33.1 million compared to $31.8 million as of December 31, 2016. Revenues by geographical regions for the quarter were split as follows: North America 46%; Central and Latin America 8%; EMEA 30%; and Asia Pacific 16%. Our top 15 customers in aggregate represented 59% of revenues in the quarter of which 54% are attributed to our 13 largest distributors. Gross margin for the quarter was 62.4% compared to 60.3% in Q1 2016. Non-GAAP gross margin for the quarter was 62.9% compared to 61.3% in Q1 2016. Operating income for the quarter was $2 million compared to an operating income of $0.9 million in Q1 2016. On a non-GAAP basis, quarterly operating income was $2.7 million or 7.3% of revenues compared to an operating income of $2 million in Q1 2016. Net income for the quarter was $1.3 million or $0.04 per share compared to net loss of $0.2 million or a loss of $0.01 per share in Q1 2016. On a non-GAAP basis, quarterly net income was $2.5 million or $0.07 per share compared to net income of $1.6 million or $0.04 per share in Q1 2016. Our balance sheet remains strong. At the end of March 2017 cash, cash equivalents and marketable securities totaled $62.8 million. Days sales outstanding as…

Thank you, Niran. We are very pleased to report solid financial results and continued business momentum for the first quarter of 2017. As reported, first quarter revenues came better than expected and earnings results were at the high range of the guidance provided for the full year, which supports the confidence in our ability to meet the growth expectations in coming quarters. As such, first quarter results provide strong indication that our business momentum over the past two years remains intact and that we should expect solid execution and growth of our business in coming years. Most important, the two key business lines in the Company UC-SIP and gateways, which together comprise above 90% of our revenues, continued to exhibit very healthy business trends and thus provide us, management, with a strong confidence level that allows us to continue to make our investment going forward in these areas. In UC-SIP, we grew about 18% year-over-year and we continue to successfully execute on our strategy to grow the business in market segments related to unified communication -- unified communications facilities, contact centers and SIP tracking, all of which keep expanding on a multiyear basis. Supporting growth in UC-SIP is our nice growth of revenues in several of our business lines including the session border controllers, the phone business and products related to sales in the Microsoft Skype for Business market. As for the gateways line, the consistent growing pace of migration to all-IP networks in North America and Western Europe continues to drive success in sales of gateways and SBCs in TDM to IP and IP to IP connectivity applications. As mentioned in our press release earlier this morning, we see a major change in the direction of sales for our gateway line. While declining in revenues for six consecutive quarters…

Thank you. [Operator Instructions] Our first question comes from the line of Dmitry Netis with William Blair. Please proceed with your question.

Good morning, guys.

Hi. Good morning.

Okay, great. Couple of questions. I just want to revisit each of the segments and just make sure I understand kind of the guidance as far as the growth rates are concerned. Your gateway business, you mentioned grew sequentially for three consecutive quarters. You had guided previously for 8 to 10% decline. It looks like you may be guiding for a flat to maybe up, some growth this year in gateways. So, just want to confirm that is the case. In UC-SIP, I think the guidance previously was 20%. So, is it -- I think in the press release I’ve seen something to the order of 15 to 20. So, just want to make sure you’re still guiding to 20% for UC-SIP. And also, if you could recap the Microsoft Skype for Business segment and whether you’re on track there to complete the year at 25% growth. I think that’s the number I have here, and that is relative to I think what you said was 45% growth in the Q1. So, if all my numbers are correct or incorrect, I’d love you to rehash all of those three segments. Thank you.

Sure, Dmitry. So, let’s touch them one by one. UC-SIP, we guided for 20%; we still guide for that. In the first quarter, we grew 18%, which we believe we are on track to do the 20%. So, nothing has changed here. On the gateway side, as I’ve mentioned before, we witnessed some very nice growth over the last three quarters. As a matter of fact, already in the beginning of this quarter, we see further growth. So, on a long-term basis, in the past, we guided for an average decline of 7% for the gateway business in 2017, 2018 and 2019. We could be surprised. My feeling is that this year, 2017, we will not see the decline. And as a matter of fact, I do believe that we have good chance of reversing that. Would we just stabilize or go down 1% or 2% or grow 1% to 5%, that is still [indiscernible] I mean it’s -- we just did one quarter, we still have three left. But all-in-all, substantially better environment supported by the transition to all-IP. Finally, to a Microsoft, indeed the first quarter did provide huge increase over the first quarter. You know our plans for the year. We have about 20% growth in Microsoft. But, based on the first quarter, we may anticipate further growth that is supported mainly by better premises sales, the fact that Cloud PBX will allow by midyear coexistence of the cloud with be on-prem solution and the growth of our phone business. So, all-in-all, we maintain our guidance for Microsoft; and again, it will be unfold second quarter and going forward.

Okay, great. So, just to follow up again on Microsoft side of things. So, you said 20% with potential upside to do better than that as you go through the year?

Right.

What has changed or what is changing? It looks like, maybe Microsoft isn’t as religious about their Cloud PBX as they were in the past and are now enabling the customers…

That is correct. We see signs…

Go ahead.

That is correct. I mean, two years ago -- two years ago it looked more like black and white. I think in the past 12 months or more realization is that large enterprises would like to speak, certain part definitely, if not the majority of them would like to stick with an on-prem implementation. They definitely started trial with Cloud PBX, and I’m confident that three or five years into the process the mix between premises and cloud will move more to cloud. But in 2107, 2018 and as far as I can see now, the on-prem is -- I think this realization that the on-premise service solution is going to be supported driven forward and is going to be a hybrid mode that will prevail in the market. And we are definitely built for that. We introduced CloudBond 365 for combined premises and cloud operation more than 15 months ago. We also came with Cloud Connect Edition appliance and we follow much of the direction that Microsoft is charging. And we believe it’s all-in-all, our ability to provide a comprehensive solution that helps both premises, cloud and mixed environments to enjoy Skype for Business that will come into play.

Got it. So, they’re pushing hard on premise and maybe hybrid while they’re trying to figure out their Cloud PBX strategy, which will come in at the way of time, understood. Real quick on the Avaya impact. It sounds like you have been able to recognize the $645,000 worth of business that you booked or were about to book in Q4 that came in Q1. So, some of the upside you may have seen was due to that Avaya PO that you received previously in Q4, correct? Did I get that correctly?

Yes. That is correct. Yes. I think the fact that we got paid in the first quarter basically signals this -- it’s considered to be important supplier to the Avaya portion going forward, even under the Chapter 11 framework. We believe that we may now have more opportunities, simply because we may find more cooperation with Avaya as much as we can find with other partners in the market, trying to replace Avaya. So, all-in-all being the most advanced comprehensive supplier of CPE gear to the overall industry and that includes of the names you can think of, put aside Cisco. We will continue to enjoy surfing that environment. Avaya, everybody recalls was a top tier telephony vendor with huge installed base and the thing that being able to provide solution to that environment and operate to more advanced environment is a big advantage for us.

Do you have a number Shabtai for Avaya for the year that’s included in the guidance? I think it was…

We do have a number. Obviously, I cannot talk about it. But all I can say that Avaya started out the year -- became minor, few millions in 2016. But it’s still too early to talk about the impact on 2017 but give or take, a positive or negative impact, it cannot be substantial in 2017. I think that going forward in two or three quarters, we’ll know better the impact.

Okay. Very quickly, last question on the contact centre side. Do you have an opportunity to play into this new deployment that Amazon had introduced or Amazon Connect? Is there an opportunity to play there? Maybe I’m just trying to connect the dots as far as the good partner quote, unquote that you mentioned on the call, would that be Amazon by any chance?

Right. No, obviously, when Amazon entered into the UC space, was announced a few months ago when they’ve announced their partnership with Vonage and then later on when they announced contact center markets. Usually, as far as I understand and I maybe wrong, but we target substantially larger operations in our organizations. Okay. So, we usually target is our solution is the enterprise markets which is 10,000 employees and upward and/or the midmarket, which is few hundreds of employees and few thousands. I’m not sure that the Amazon offering relates to such big companies. And I would tend to think, I may prove wrong that the solution presented would be satisfactory and good for the micro business and/or the SMB I know that current reflects more this or sophisticated future. So, this is the way we see it, nothing embedded in that, but all-in-all we do not think at this stage that that will have an impact on our contact center operations.

Got it. Thank you, Shabtai. I appreciate these comments and I apologize for my colleagues on the line that I have taken maybe a little bit more time than usual. Thank you very much. I’ll take the rest offline.

Sure. Thank you.

Thank you. Our next question comes from the line of Rich Valera with Needham & Company. Please proceed with your question.

Thank you. Good morning, Shabtai. I wanted to follow-up with a couple of questions on the gateway business. First, can you say, what was the year-over-year performance of that business in the first quarter of this year? And then, can you give us the base revenue number for 2016 for the gateway business so we can get a sense of what a difference between being down 8% to 10% versus being flat might mean for your revenue for this year? Thank you.

Okay. The first question, I don’t have the exact number here, but I believe that we were up more than 10% on the gateway side comparing first quarter 17 to first quarter of ‘16. I’m sorry. I missed the second part of the question.

What the total gateway revenue number was for 2016?

Oh, okay. I believe the number was between $60 million and $70 million.

$60 million to $70 million? Okay.

Yes.

Got it. And then, I think you kind of covered this, but Skype for Business was very strong I guess 45% up year-over-year. And it sounds like the bulk of that growth was from the on-prem part of your Skype for Business. Is that correct?

Yes.

Okay. So, It’s kind of Microsoft somewhat changing strategy, it sounds like where they’re more willing to entertain on-prem or hybrid deployments than maybe they were a year ago?

I think it’s a bit difficult to read into it, simply because let’s not forget, there is one basic phenomenon that we think many people do tend to ignore. When people talk about Skype for Business, usually they talk about the licenses and the must use functionalities when activating those licenses would usually be presence into messaging and collaboration over PC clients. In many ways, if you will ask and we know about the majority of the large enterprises we work with, deployment of voice Skype for Business has never reached a level that’s higher than 10 to 20% in those large enterprises. Simply, it means that any large enterprise that has got tens or even hundreds of locations, the deployment is gradual and it means it spans over several years. So, what we have seen in the Skype for Business market in first quarter was really a combination of two elements, two components. One, which was expand of the old design wins we had in prior years, could in 2016, 2015, 2014 and 2013, and then, I believe a smaller percentage of new wins in the enterprise market. So all-in-all, we’re enjoying the fact lately and Infonetics Research charge that puts Microsoft with 57% market share. So Microsoft is a large power in that market, commanding about 50% market share. We are the most advanced successful voice leader there. So, as the markets keep expanding, we will expand and that’s what has happened in the first quarter. And when Cloud PBX will kick in, I believe that we will again expand our solution into that too. But we’re glad to say, as said in the presentation that we’re seeing -- the enterprise market seems to be making a comeback after there was some false assumption that it will move quicker to cloud operation.

Got it. That’s helpful clarification. And then, just wanted to revisit your longer term thoughts on the gateway business. I guess going back maybe a year or year and a half, this business declined pretty sharply and you kind of looked at it as a long-term, as you said, declining business as maybe 8 to 10% per year. And now, we’ve had a few good quarters. And we’re talking about it being a long, potentially being a long-term flat or maybe even growth business. And I am wondering what kind of gives you the confidence to make that projection longer-term. It seems like potentially what we’re seeing here is a lot of volatility and tough to perhaps draw longer term trends off of this volatility. I just wanted to get your thoughts on that. I guess particularly maybe the distinction between service provider gateways and enterprise because looking at some of your competitors, it doesn’t look like there has been any change in the long-term decline in the service provider gateway market but maybe enterprise has different characteristics. So, a lot there, but just wanted to get your thoughts on kind of the longer term view of the gateway market. Thanks.

Sure. So, yes, Rich, actually, you are right on the point with the latter part of your question. Indeed, one need is to make a big distinction between service providers and enterprises. Let’s touch enterprise. The market for enterprise gateways is solid. We just saw again in other report few days ago, again from Infonetics which puts the enterprise gateway market fairly solid, also declining a bit, few percent a year, I wound tend to think about maybe 2% or 3%. But all-in-all, it’s very solid. On the service provider market, you need to differentiate between applications. So, what’s going down really is more the peering, the international connection, those type of installations. Those have basically grown to maturity and now declined. But when you talk about the move to all-IP and you talk mainly about the small businesses, the micro businesses that our -- penetration of Voice-over-IP [ph] to those small businesses has never occurred. And the over-the-top guys by the way do represent that. And as you can see them growing very fast, it tells you that there is much need for gateways in that market. Actually you can think about growth of gateways connected or related somewhat to the over-the-top growth. And we just talked about the small business. But when you think about the midmarket, this is a thing where AudioCodes will shine simply because the deployment gets to be much more complex; you’re talking about companies of hundreds of employees with location and facilities all over the nation or global. And this is where -- very comprehensive, lot of gateways, and SBC will come into play. So, I think the all-IP process, and the SMB [indiscernible] market. And let’s not forget, it’s only North America at this stage and maybe Germany. And you have still more than 120, 150 countries. So, the solid basis to believe that demand will be good. And when we look into charts from our internal database, we see for the past so many quarters an increase in North America, more than three quarters actually in North America. And so, this allows us to believe that we will enjoy growth in several years going forward. That is the change from what used to be until a year-ago.

Thank you. Mr. Adlersberg, there are no further questions. I would like to turn the floor back to you for any final comments.

Thank you, Operator. I would like to thank everyone who attended our conference call today. Relying on good business momentum and execution on our plans in the first quarter of 2017, we believe we are on track to achieve another year of growth and continue to build a growing profitable business for coming years. We look forward to have you and participate in our next quarterly conference call. Thank you very much. Have a nice day.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.