AudioCodes Ltd. (AUDC) Q1 2020 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, thank you for standing by. Welcome to the AudioCodes First Quarter 2020 Earnings Conference call. At this time, all participants will be in listen-only mode, and a question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. At this time, I’ll hand the conference over to Brett Maas with Hayden IR. Brett, you may begin.

Thank you. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer; and Niran Baruch, Vice President of Finance and Chief Financial Officer. Before we begin, I’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, plans and objectives related thereto, and statements concerning assumptions made or expectations as to any future events, 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 and 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 effect of global economic conditions in general and conditions 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 development upgrades and the ability to manage changes in the 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 of acquired companies into AudioCodes’ business, possible adverse impact of the COVID-19 pandemic on our business and results of operations and other factors detailed in AudioCodes’ filings with the U.S. Securities and Exchange Commission. AudioCodes assumes no obligation to update this information. In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share. AudioCodes has provided a full reconciliation of the non-GAAP net income and net income per share to its net income and net income per share according to GAAP in the press release that is posted on its website. Before I turn the call over to management, I’d like to remind everyone, this call is being recorded. An archived webcast will be made available on the Investor Relations section of the company’s website at the conclusion of the call. With all that said, I’d like to turn the call over to Shabtai. Shabtai, please go ahead.

Thank you, Brett. Good morning and good afternoon, everybody. I would like to welcome all to our first quarter conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance of AudioCodes. Niran will start off by presenting a financial overview of the quarter. I will then review the business highlights and summary for the quarter and then discuss trends and developments in our business in the industry. We will then turn it into the Q&A session. Niran?

Thank you, Shabtai, and hello, everyone. As usual, on today’s call, we will be referring to both GAAP and non-GAAP financial results. The earnings press release that we issued earlier this morning contains a reconciliation of the supplemental non-GAAP financial information that I will be discussing on this call. Revenues for the first quarter were $52 million, an increase of 11.7% compared to the first quarter last year. Services revenues for the first quarter were $17.7 million, accounting for 34% of total revenues. The amount of deferred revenue as of March 31, 2020 was $64.2 million, compared to $52 million as of March 31, 2019. Revenues by geographical region for the quarter were split as follows: North America, 41%; Central and Latin America, 10%; EMEA, 34%; and Asia-Pacific, 15%. Our top-15 customers in aggregate represented 63% of revenues in the quarter, of which 50% are attributed to our 11 largest distributors. Gross margin for the quarter was 65.9%, compared to 62.8% in Q1 2019. Non-GAAP gross margin for the quarter was 66.1%, compared to 53% in Q1 2019. Operating income for the quarter was $6.2 million, compared to an operating income of $4.5 million in Q1 2019. On a non-GAAP basis, quarterly operating income was $7.9 million, or 15.2% of revenues, compared to an operating income of $5.5 million in Q1 2019. Net income for the quarter was $5.3 million, or $0.17 per share, compared to net income of $3 million, or $0.10 per share in Q1 2019. On a non-GAAP basis, quarterly net income was $7.8 million, or $0.25 per share, compared to net income of $5.5 million, or $0.18 per share in Q1 2019. Our balance sheet remains strong at the end of March 2020. Cash, cash equivalents and bank deposits totaled $74.2 million. Day sales outstanding as of March 31, 2020 was 50 days. Operating cash flow generated during the quarter was $6.8 million. On February 4, 2020, we declared a semi-annual dividend of $0.13 per share. The dividend in aggregate amount of $3.9 million was paid on March 4, 2020. Now to providing an update on our guidance. We reiterate our guidance for revenues for 2020 to be in the range of $214 million to $222 million. We’re now raising our guidance for non-GAAP diluted earnings per share to be in the range of $1.09 to $1.13, compared to the original range of $1.08 to $1.12. I will now turn the call over back to Shabtai.

Thank you, Niran. We are pleased to report strong financial results for the first quarter 2020. As stated earlier in our financial release, we enjoyed good business momentum in the quarter, both in the enterprise space and the service provider space. We experienced growth in all of the major market segments in which we participate, including the UC-as-a-Service market, the Contact Center market and the service provider all-IP migration market. Underlying our success in the first quarter of 2020 is the financial performance. Let me touch each of the main points. Revenue growth, we continued our double-digit growth of past two years and delivered 11.7% growth year-over-year. Gross margin expansion, we kept the steady progress in improving gross margin. In the first quarter, gross margin was 66.1%, compared with 53% in the first quarter of 2019 and 65.1% in fourth quarter 2019. Operating margin improved substantially from 11.9% in the first quarter a year ago to 15.2% in the first quarter of 2020. We expect continued growth in gross margin in the second quarter in the second-half of 2020 as a result of lower expenses anticipated in certain budget items, resulting from the COVID-19 pandemic impact. Net income growth, we saw nice increase in earnings in the first quarter 2020, delivering net income of $7.8 million, compared to $5.5 million in first quarter 2019, an increase of 41.8%. Cash flow, we kept producing cash from operating activities, delivering $6.8 million, in line with our plan for the whole year. Finally, deferred revenues continue to grow and amounted to $64.2 million, an increase of 23.4% over first quarter 2019. I’d like to stress and note here that with revenue growing steadily in the past several quarters and deferred revenues growing in a similar trend all along, our ability to meet the top line target of every new quarter we’re stepping in – is improved. Hence the momentum and the confidence in achieving the revenue target in coming quarters. Now to an update as to the impact of the coronavirus pandemic in the first quarter of 2020 and projections for second quarter and the full-year. Around the middle of the first quarter, we experienced difficulties in the manufacturing for hardware products in China. Since China resumed in business activity partially in second-half of February and more so in March, we were able to quickly recover from the associated delays and were able to ship all of the products as planned during the quarter. Then, in compliance with the Israeli regulation meant to cope with the COVID-19 crisis, we have moved on March 16 the majority of our headquarter employees, about 85% of them to a work from home basis. Similar such transitions took place in our U.S. facilities and elsewhere in the world. The transition went smoothly, including our research and development team, sales and marketing. Our only mask carry on-premise activities such as warehouse, final testing and QA, which have to use on-prem equipment, continue to be carried in our facilities. I’m glad to report now that so far, none of our employees was diagnosed positive with regards to the coronavirus. Now to a pleasant surprise related to working remotely using collaboration tools. As I’ve mentioned before, we moved to working from home on March 16. Since then, I can report that productivity has substantially improved. The improved productivity was confirmed across the company very seamlessly. Prior to the crisis, we were using Skype for Business on-premise in office, which did great for a net collaboration. However, now remotely, where communication and collaboration is your only savior, nothing gets done unless it is well communicated, documented, followed, et cetera. Currently, communication and collaboration is much more crucial when you’re not in the office. So we see now great future for collaboration and net productivity, mainly with large enterprises. To a large extent and for several use cases, work from home in a well-managed and coordinated work environment, seems to provide similar, if not superior productivity compared to working on-prem. This phenomena deserves a longer discussion. I’ll leave it at that. But this phenomenon also points to the ability of businesses to lower operating expenses in certain areas going forward. Now to some of the top highlights of the first quarter. Our main market is UC-as-a-service and as we all have seen use of UC-as-a-Service exploded in the first quarter. So the world is going digital and the transformation to a digital and remote workplace is in full power these days. In recent years, we have funneled most of our investment and efforts towards the unified communication and collaboration market. In 2019, we derived above 55% of our $200 million annual revenue from this market. Sales into the market of Skpe for Business and Teams market provided around $80 million of this revenue. In previous calls, we highlighted the fact that the UCaaS market is growing for the past 10 years and that we see it continuing this growth for the foreseeable future. According to a forecast from early 2019, this market has shown compound annual growth rate of about 18% and would grow transaction to about 25% in North America and 7% globally. Obviously, this market offers a lot of room for expansion and growth for a voice infrastructure vendor like us. In the first quarter of 2020, we saw acceleration in the transition to UCaaS compared to previous years. This is attributed mainly to the explosive growth of several hundred percent to more than 600 million users worldwide using communication collaboration and web video conferencing as a result of the coronavirus pandemic and the associated move to working remotely and work from home. As reported by leading companies such as Microsoft, Cisco, and Zoom, UCaaS usage has skyrocketed in the first quarter of 2020, a phenomena, which contributed to increased sales across the Board in this space. As a result, revenues related to UC-as-a-Service in the first quarter grew to more than 60% of our business. This growth related mainly to sales in the markets of Teams market. We will provide more details on this later on. This is not a passing trend. We saw continued strength in April and believe we will see continued substantial growth of UC-as-a-service in coming years. I believe that it is now realized by most leading businesses worldwide, it’s an advanced and efficient communication and collaboration application is key to increased level of productivity across the enterprise and also key in the new emerging work from home trend. Now to review some of the business lines in which we are focusing on. Our networking business kept growing 12% year-over-year and has reached a level of $49.9 million, accounting now for 96% of our business. Technology line remains at 4% only. The networking business comprises of two key business lines, the UC-SIP and the Gateway business line. The UC-SIP business line grew nicely in the quarter, I’ll touch that in a moment. We saw decline in our Gateway business. UC-SIP business line grew substantially above 20% in the first quarter and provides now to above 60% of our business revenue in the quarter due to the growth where increased sales in three of our leading product lines, including the Session Border Controller line, our centralized network management software and our advanced routing management solution. Noteworthy is the fact that revenue in the UC-SIP business lines were substantially above this 15% to 20% annual rate in previous years. Gross margin emergence for this business line increased and is now above 65%, mainly due to the increased sales of software products, transition to cloud communication, a nice level of service sales, all these combined contributed nicely to the company overall gross margin of 66.1%. So, in summary of the review and current trends so far, I would say that based on the momentum in our business activity during the first quarter of 2020, in recent few weeks, coupled with good productivity in our operations, we believe with our ability to meet the original target performance trend for the second quarter and full-year is in place. Also, I’d like to add that currently, we have no plans for layoffs. Also, as a matter of fact, the company expect to keep select hiring worldwide for new jobs this year. Recap of our operations in the Microsoft space, so revenues grew more than 20% compared to the year ago quarter. That was a very strong quarter revenue-wise. Also from the standpoint of creating new opportunities, newly created opportunities in the first quarter more than doubled compared to the year ago quarter. We see continued accelerated trend of new opportunities created in recent weeks in April. As for Microsoft Teams, Microsoft reported massive demands for the cloud services and keeps adoption as part of what happened due to the corona crisis. They have reported 44 million daily active users before the end of March. So one can expect that would keep growing up in April. So they’ve reported in mid-March 44 million, compared to only 20 million in November. I will just say that those are business customers put aside consumer who use our video conferencing. One major comment that I need to make here is that, the majority of the Teams deployment these days are mainly used for collaboration purposes, meaning the functionality of presence and chat are the key functionality being used. And most of the time, voice channels are not added. According to some estimates, we believe that only about 5%, maybe less than 10% includes voice. That means a lot for us. Understanding that, since voice – since daily active users will grow to 100 million and above, that leaves for us a huge area to grow once we will see more emphasis put on the voice side of things. And we believe that we should see that coming in the second-half of 2020. We have seen in the quarter accelerating number of opportunities with Microsoft Teams. We’ve seen also in the space a lot of activity in meeting devices. We’ve seen gradual progress developing in market awareness through our partnership with Dolby and our conference room devices, the RX Suite. We have announced few weeks ago AudioCodes Live for Microsoft Teams. We have a plan to release the product towards the end of April. AudioCodes Live for Microsoft Teams provides a managed service to fully voice-enable Teams. The core services include Teams Direct Route, Microsoft tenant management, user lifecycle management, moves, add and changes of personnel and SaaS integration with on-premise IT and legacy voice communication. All in all, it allows businesses to move fast between relying on AudioCodes products and expertise in deploying projects in a very fast manner. Let me just mention – give some color as to some notable deals. We have won a deal with one of the world largest chemical company with over 100,000 employees, as they have selected Microsoft Teams and decided to work with AudioCodes for our networking solution. We’re primarily selected, thanks to our basic capabilities to run on Microsoft Azure and implementing Microsoft media-to-media optimization functionality. For their remote branches, they selected the AudioCodes Mediant 800 of managed applications – client sessions, sorry. This means that AudioCodes is monitoring and managing the Mediant 800 from our network operations center. This account, again, demonstrates how AudioCodes cloud and premise portfolio are working together to meet the needs of giant companies. And when combined with our professional services, we have a very compelling solution. Another example is a huge energy company, our device strategy continued to gain ground with large scale done with one of the world’s largest oil and energy manufacturers. This company is rolling out Microsoft Teams and has selected our flagship C450 color touchscreen phone for their office workers. Over time, and as they grow their deployments, we expect about 1 million in desk phone devices and mixed room devices. We were awarded this project, thanks to our portfolio of devices and excellent sound quality, a centralized management that we demonstrated throughout the evaluation process. In other accounts, in the unified communication market, Zoom, we have – growing the number of the Zoom opportunities, which is the first quarter of such growth. We’ve seen tens of opportunity often within an amount potential of few millions. We have been – those opportunities are mainly in North America, but some come from EMEA and APAC and in all opportunities, it’s mainly the SBC and the IP phone, which was certified by Zoom for our key offering. Also, AWS, we went live with a very efficient service of our Session Border Controller, which is a pay-as-you-go SBC, on AWS Marketplace end of January. We have generated more than 30 customers in February and March. We have a first public case study, a company called EMC Insurance, 2,400 employees, 19 U.S. locations using AWS Chime SIP trunk. Going to our Session Border Controllers, with a record quarter, we grew more than 30% year-over-year. Most of the revenue came from enterprise accounts, about 70% of revenue. In terms of geo split, it was mainly even between North America and West Europe. It’s contributing about 36%. We also saw a stepping up in the new created opportunity number. To give you an – some perspective on the line, that line has been – annually, that line has been about $16 million in 2015. We should end up 2020 with more than $70 million, so nice growth. Also on the quarterly basis, we keep growing both product and services, so all in all, one of our most important business line, which – it is very competitive. We’re winning many wins against competitors, I mentioned previously, one such thing. So I mentioned the products, the new products we have. So I have mentioned the pay-as-you-go offering in AWS Marketplace. Aligning with our AWS – we aligned our offering with how AWS charges, which are in both connector, as I’ve mentioned, we have more than 30 customers. Also today, we’ve announced cooperation with Google, the Google One-Click program. This is a true Software-as-a-Service offering that connect Google’s Dialogflow virtual agents to telephony, a new brand portal, where our customers can purchase phone numbers in the U.S. and UK in a moment and connect them to Dialogflow virtual agents. In the future, we intend to connect Dialogflow to our Voice.ai Gateway, which will provide better telephony access. Coming to talk a bit about the work at home, the global COVID-19 crisis is closing companies all over the world to move all over a significant process of the workforce to remote working in order to ensure our business continuity. This is what is driving Teams and Zoom usage. AudioCodes announced three work at home offerings. We have announced AudioCodes Live for Microsoft Teams, I discussed that already. We also offer a connectivity solution for work at home contact center agents. This is an highly efficient web, RX50-based cellphone, which ensures high voice quality solution for work at home contact centers. Two examples, a large North American health benefits company, which is moving all of their agents who work from home. Basically, they have determined that agents working from home are more proactive, it is easier to find and retain talent, employee satisfaction is higher and improved – provides business agility. AudioCodes was selected to design and deploy our complete One Voice solution, include Opus-enabled Session Border Controllers, IP phones in our management One Voice operation center. This project is expected to gradually expand to support more than 15,000 agents who work at home. Last, just to mention that another company from Australia, another contact center company has adopted WebRTC as their solution for agents at home. We think the rapid growth of different retail chains that for which work at home, technology can help much. This company was in an urgent need to expand their customer service capacity to take order via phone calls and work at home agents and leveraging our WebRTC capability exposure for our Session Border Controller. We also won, and this is a very notable win, we won one of the leading UC market providers worldwide. They are expanding their service and operations to specific countries in APAC and CALA, in need for right and needed a high capacity Session Border Controller platform due to regulatory requirements. We were selected out of seven SBC contenders, thanks to our flexible SBC capabilities alongside with our OVOC lifecycle management suite and primarily real-time voice quality monitoring. And with that, I’ve basically came through the end of the review of our business line activity. I’ll just get back to few more words about guidance. Based on the activity in the first quarter, we believe that we should be able to meet our original performance targets for the second quarter and full-year. And so we do not change the guidance provided earlier for the revenue range of $214 million to $222 million. We are confident as to earnings. We are confident in our ability to continue the growth in our earnings. As a result of the success to grow on it in the first quarter above the original plan, we are now updating our earnings guidance and increased the earnings range to $1.09 to $1.13. With that, I have completed my presentation and we can move the call to the Q&A session. Operator?

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Thank you. The first question is from the line of Rich Valera with Needham. Please proceed with your questions.

Thank you. Congratulations on the strong results in a challenging environment, Shabtai and team.

Thanks.

So you gave the growth for the Microsoft-related business and I think you said well over 20%. So I’m wondering if you could put a finer point on that in terms of how fast it grew? And then, I’m wondering if you could give us a sense of how fast you’re expecting that business to grow for all of 2020. I know historically, you’ve tended to bracket that in the range of 15% to 20%, but it sounds like you’re running ahead of that so far. And then, obviously, you reiterated your full-year guidance, and it sounds like actually, the Microsoft piece is running ahead of plan. So wondering if anything is running below plan. I know you mentioned your Gateway business was down for the quarter. Is that what you expected? And do you expect that business to be down for the year? So a lot there, but I’ll let you answer those things, Shabtai.

Okay. As for Microsoft, well, originally, as we all remember, 2019 has been a bit slow. But towards the end of 2019, I believe that many of the potential customer moved off the fence they were sitting on and decided to go with Teams. So that has driven initially in January and February a good portion of the business. Then as we all know the corona crisis really caused huge dramatic growth in usage of UC-as-a-Service, minutes of meetings, calls, conferences. So that has definitely helped to raise up interest in the solution, which for business purposes seems to be, at that moment, probably the best cloud-based solution. Then on top of that, I would say that we were expecting Voice to take part again in the second-half of the year. And I think, due to the fact that conferencing has been substantially more than initially planned, use of web conferencing drives the use of phones. I mean, if you watch Zoom Play, which went out initially with a conferencing solution and then follow that with the Zoom Phone, you would see similar such focus here. Conferencing function in Teams is very successful, very good, but that drive the usage of phone calls, et cetera. So all in all, I will tell you that it’s a bit premature for us to make a call for the full-year. We definitely see higher new opportunities in development rates. So at this stage, I would say with our $15 million to $20 million projection by May as well be that when we come to our next conference call, we may up that, so we need to wait. As to Gateways, yes, Gateways declined in the quarter more than 10%. Actually, we now can start to see that this is a trend. Fortunately enough, Gateways are being sold these days meant to service providers. And they are basically sold in two forms. One is, standalone Gateway, the other one is Gateways, which are embedding routing capability and DSL capability because of that type of product, MSBR, which stands for Multi-Service Business Router. Now all our sales in the service provider to market for the all-IP were almost as planned. There was no meaningful decline there. But the portion of MSBR sold was more than the Gateways sold. So that’s one explanation. I’ll tell you one more very important point is that when talking about revenues, we usually – we all know that we combine product revenues and sales revenues and. While service revenues remain at the same level or even grow a bit, the decline was mainly in the product. So that gives you some color as to what happened in the Gateway business.

Got it. And then I didn’t quite catch, you gave some numbers for SBC revenue for last year and I think projected this year. Could you just reiterate those numbers? I didn’t catch them. And then if you could say how much of that SBC revenue you think will – was software last year and how much you think might be software this year?

Okay. So roughly, the numbers, because I don’t have them here and we know those numbers are internal data and that’s really audited. But I would say that Session Border Controllers were sold for a bit above $60 million last year. This year, we look to grow this above 20% annually. As I’ve mentioned, in the first quarter, we grew above that target, we grew 30%. That’s roughly with regards to Session Border Controllers. As to the mix, by the way, the mix has been 25% software last year. I believe that we will see substantially higher growth this year in software simply because many of the new implementations are cloud-based, both in AWS and Azure.

Got it. That’s helpful. And then you mentioned your gross margin, you expected – I think you said you expected it to be up in Q2 and you referenced COVID-related expenses or expenses you’re not going to incur because of COVID. I wasn’t sure what that comment meant. But if you could just clarify on your expectations for gross margin trajectory, I guess, into Q2?

Right. So, as we know, activity – business activity around the world kind of stalled from the middle of the first quarter and still continues for the second quarter. We did a new estimate of budget items going forward. Obviously, everybody understand that traveling is going down. So expense on travelling is going down. Same for marketing, simply because events which – some of which draw a lot of expense in terms of presence and sponsorship and participation, that is not happening yet in a major way. So we expect some of these items to come down in the second quarter and second-half of 2020, and that would be the source of lower expenses and increased operating margin, not gross margin, but operating margin.

Got it. Okay. So that was more in reference to operating than gross margin. Okay, that makes sense. And then could you just give us an update on the Voice.ai business, kind of where that is in terms of scale growth and any updates there?

Right. So we have two main activities there, the NLP ASR activity and then the recording activity. The ASR NLP activity, this is very – grows very nicely in the first quarter. We were hit – we plan to go major efforts in other countries, but now that has stalled due to the virus. On the other hand, we have very interesting activity developing around our two new products that we have delivered to market, as mentioned, one in our press release, Meeting Insights. That is a software productivity enhancement tool, which allows you to basically process, analyze and derive actionable items for meetings in a very efficient way. And basically, it will allow meetings to become source of productivity, again, compared to what is growing today. We have more than 10 accounts right now in beta and we expect to grow in a larger way in the second quarter. Another very interesting product connected with the announcements we made with the Google Dialogflow, the voice AI Gateway, which basically allow to connect telephony in those channels into how the overview of established world of virtual agents embark. So we provide – we have today one of the best product that’s allowed. If you take the corona crisis situation, where people were trying to call institutions, health organization, et cetera, you had massive, lot of people, most of which do not really know to use text-based chat bots for which telephony can help much, take help from people equally in their stride. So we are providing right now a very efficient solution, which allows to connect massive number of telephony channels into those bots. So those are two of the new developments we have in the Voice.ai business.

Great. Thanks for taking the questions, Shabtai. I appreciate it.

Sure. You’re welcome.

Thank you. Our next question is from the line of Tavy Rosner with Barclays. Please proceed with your question.

Hi, thanks for taking my questions and congratulation on the solid results. As a follow-up to your comments on guidance. You talked about how the company managed to weather the impact of COVID-19 on your supply chain. And you also talked about how the switch to working from home is having a positive impact on demand. So I guess, looking at your reiteration of guidance, are you guys being conservative or put another way, if working from home was to last for a longer period, would that be very positive for your top line?

Yes. I think, in one of my conversation with one of our investors, it became obvious that AudioCodes sits right now on two of the main trends in communications. One, which is the collaborations team and second is the work from home team. And because we have huge investment made over the last years and actually, we are ready with those solution connected with the right partners in the market, yes, we definitely are very confident in our business to keep growing. I just mentioned that if you look on our bottom line earnings, we’ve been able to grow earnings more than 25%, 30% every year in the past five years. And definitely, now in view of the new developments, there is no reason to be pessimistic about it. I think, we will keep growing. We just need to do the right things. We need to execute.

That’s helpful. And I guess, the last one for me. How do you guys view acquisitions as part of your growth strategy? I’m asking in the context of your growing cash balance.

Right. So it’s a matter of the regular business. We – in each of the business line, we do monitor and study the environment, the other players competition sometimes. And once we will get into conclusion that a business would be necessary, or very good to help grow or if we feel, make it jump, we will definitely do that. So yes, we are always looking for opportunities.

Great. Thank you. I’ll get back in the queue.

Sure.

[Operator Instructions] The next question is from the line of Greg Burns with Sidoti & Company. Please proceed with your question.

Good morning. Just want to follow-up maybe a little bit on the last question. Just to get a better understanding of how the business may be negatively impacted by the actions taken to fight the virus, whether it be from a sales or deployment perspective? And if we do see the economy is starting to open up a little bit more, is there potentially a – maybe a backlog of business that could provide even more of a tailwind as we go into the second-half of the year? Thanks.

Sure. So I believe that the world moves these days a much faster through cloud communications. And our real challenge as a company would be to cope with the developments. And if you look on names mentioned in this call, some of the world’s biggest, largest and quite fast ramping companies that’s all leading unified communication and collaboration market forward. For us, that would be a big challenge to keep pace with the need to support key partners and customers. So this is where most of our energy would – will go for. Due to the fact that businesses going cloud, there’s less and less requirements for on-prem deployment. So that is coming down, that’s a plus. And all in all, I believe that, we kind of reveal the value of work remotely and be efficient. And I think that will really help us to get more – we will not get leaner, we will grow and hire people. But I think, we can definitely grow meaner, meaning, we can now get access into good resources that we can find in other places. So all in all, it’s very positive. We’re not really concerned with – if you want to touch the negative of this quarter, we’re not really bothered by the decline in Gateways. That was perceived to happen along the time and the fact that now UC-SIP is more than 60% of the business and Gateways really declined to a level, where that very decline is that material, I think, we are in good shape.

Okay, great. Thanks. And in terms of the the Voice.ai and what you’re doing with Google, how – what’s the business model there? Is it a flat fee? Is it transactional? And what kind of installed base does Google have with that platform? Thank you.

Okay. So very simply, this is a Software-as-a-Service solution, meaning that every chatbot developer that wants to add phone accessing today in the U.S. and the UK and goes to the site and click on using our solution, the One-Click Telephony Gateway, there is a price that’s for the team. So all in all, it’s a Software-as-a-Service solution, very simple.

Okay. And just the installed base that maybe Google has a number of bots or the number of transactions that they’re transacting among, just to get a maybe a feel for the size of the market, or maybe you could talk about the overall size of the bot market, the opportunity you see there for yourself? Thanks.

Right. Actually, what we announced today is very similar. We worked hard on implementing it, it’s not that trivial. But still, it’s just the first step that you can think about a CPaaS solution, a Communication Platform-as-a-Service connected to the One-Click Telephonic Gateway. So we intend to connect some of our capabilities in voice processing to create a more advanced Communication Platform-as-a-Service that will help Dialogflow virtual agents to use mainly in terms of our voice channels. So definitely, there’s huge potential out there. The bot industry grows. There’s the need for easy access and we’re bringing the telephony access to it using just the same bots that are there.

Okay. And lastly, the – I guess, when you gave your initial guidance, the shekel to U.S. dollar was like, I think, like a $0.05 headwind or so. But it seems like the shekel has depreciated a little bit that you’re kind of – what you are embedding in your guidance change in terms of the FX impact?

Yes. You touched on a very important point. Yes, indeed, during the crisis, the U.S. dollar has appreciated against the new Israeli shekel. We took advantage of that. And basically, when compared to the original budget, we have – we will now have, in each of the coming quarter, a better budget position, because expenses in U.S. dollars are going to be lower.

Okay. Thank you.

Sure.

Shabtai, we have a question from a shareholder came in via e-mail. Can you please go into the details about the transition from Microsoft Skype for Business to Teams. As well as in the past, you’ve indicated this migration might be headwinds to Microsoft revenues. Also could you go into more detail on the transition? How is Microsoft doing? Is Teams as functional yet as Skype? What was the growth in Microsoft-related sales? What is the difference in content for Skype implementation, as compared with Teams for AudioCodes?

Okay, that’s a long one. Okay, I’ll try to take it one at a time. Basically, we – I have mentioned, I mean, we as a company used Skype for Business for many years. It’s a great unified communication on-prem solution. When we moved to work from home, we started using it personally, as you said, and then – the huge amount of traffic over the Internet side, that is usage of Teams. I was surprised to see much better performance of Teams compared to the Skype for Business and also obviously Microsoft putting all its weight behind Teams, adding features really quickly. So in a matter of two, three weeks, it became apparent that we want to, at this stage, put Skype for Business behind us and move to Teams. We actually had a project when we were all at home. The IT team took the project to move all of the company, we’re talking about more than 500 seats from Skype for Business to Teams. Glad to say that, basically, I was – they were afraid to move me among the first one. So I moved at seat number 400. Anyway, if everything plays well and everybody is very happy with using Teams, I can tell you that a lot of people complain now with using Teams, it really makes them work essentially harder than they are used to when they came to the office and had coffee and small stuff. So, yes, Teams is very efficient. I believe that in view of our experience, we will definitely see other customers of Microsoft using Skype for Business consider moving to Teams really quick. All in all, we believe that we are on top of that. I think, we are one of the leading company, if not the largest one, that supports that transition. And so far, we can see, Skype for Business revenues are not going down dramatically simply because there’s lot of expansion of accounts that have been declining seven, five and three years ago, because they keep buying equipment for their other facilities. But we definitely see a growth up with Teams. And hopefully, I’ve covered all of your questions, Brett, I don’t remember more of them now.

No, it’s okay. Two more, where should gross margins level off and why? And then also, can you explain what you can sell into enterprise accounts that use UCaaS service like RingCentral?

Okay. So that is exactly what AudioCodes Live is about. So we definitely have a lot of products associated with deployment of Teams, our Session Border Controllers for direct route, phones, management systems, conference devices, et cetera. But the real value is really in our ability to help the companies get fast on Board and deploy the service very fast. So we will provide them day zero service to help them with the planning and the deployment and then day two service with bringing it up and monitoring and helping. So all in all, I think we can expedite the deployment of Teams account, definitely in the mid-market for SMBs. And by the way, one of the products announced, which is called AudioCodes Live Cloud is exactly that. We target large channels, the companies could be service providers who will then deploy our own solutions to their customers.

Thank you. This concludes our question-and-answer session. I’ll turn the call back to Shabtai Adlersberg for closing remarks.

Okay. So thank you, operator. I would like to thank everyone who attended our conference call today. With continued good business momentum and execution in our markets in 2020, we believe we are on track to achieve another strong growth year in our business. We look forward to your participation in our next quarterly conference call. Thank you very much. Have a nice day. Thank you.

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