Greetings. Welcome to the AudioCodes Second Quarter 2020 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] I’ll now turn 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 related 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 and is posted on this 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 second 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 second quarter were $53.5 million, an increase of 8.1% compared to the second quarter last year. Services revenues for the second quarter were $17.1 million, accounting for 32.1% of total revenues. The amount of deferred revenue as of June 30, 2020 was $65.1 million, compared to $55.8 million as of June 30, 2019. Revenues by geographical region for the quarter were split as follows: North America, 41%; Central and Latin America, 7%; EMEA, 40%; and Asia-Pacific, 12%. Our top-15 customers in aggregate represented 60% of revenues in the second quarter, of which 42% are attributed to our 9 largest distributors. Gross margin for the quarter was 66.7%, compared to 63.3% in Q2 2019. Non-GAAP gross margin for the quarter was 66.9%, compared to 63.5% in Q2 2019. Operating income for the quarter was $8.8 million, compared to an operating income of $5.9 million in Q2 2019. On a non-GAAP basis, quarterly operating income was $10.7 million, or 20.1% of revenues, compared to an operating income of $7 million in Q2 2019. Net income for the quarter was $6.6 million, or $0.21 per share, compared to net income of $4.8 million, or $0.16 per share in Q2 2019. On a non-GAAP basis, quarterly net income was $10.5 million, or $0.32 per share, compared to net income of $6.8 million, or $0.22 per share in Q2 2019. During the quarter, the company raised $85.4 million in net proceeds from the public offering of 2.6 million ordinary shares at a purchase price of $35 per share. At the end of June 2020 cash, cash equivalents and bank deposits total $170.4 million. Day sales outstanding as of June 30 2020 were 51 days. Operating cash flow generated during the quarter was $10.7 million. 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 now raising our guidance for non-GAAP diluted earnings per share, to be in the range of $1.18 to $1.24, compared to the previous range of $1.09 to $1.13 that we updated following the close of the first quarter 2020. I will now turn the call back over to Shabtai.

Thank you, Niran. We are very pleased to report strong financial results for the second quarter of 2020. As stated earlier in financial release, we enjoyed good business momentum in the quarter, both in the enterprise space and the service provider space. There's no question in our market these days, the team collaboration is where the action is, when it comes to enterprise communication platforms, primarily because of the fact that the pandemic forced the enterprises to move employees to work from home, and rollout collaboration systems like Microsoft Teams, which end users found to be no longer just interesting, but clearly indispensable. It must still if you want to preserve business continuity and recover fast from this current crisis. And so, UCaaS as cloud service and Collaboration became key to business resilience, and have taken center stage to the newly evolving digital workplace. Now let me touch on some recent theme collaboration market data that reinforces this statement. According to Nemertes, a global research based advisory and consulting firm in collaboration use has dramatically grown in past few months. It says that 42% of enterprises currently have more than one Team collaboration application in years. Obviously, this number is growing on an on-going basis. According to Nemertes, Microsoft teams are the clear leader at 14.3% followed by Cisco WebEx teams at 27%, Slack at 9% Google Chat at 8.5%. In another example, data from Eternity and Application Monitoring Company shows that between February 17 to June 14 this year, Microsoft teams use grew almost 900% while Zoom has grown 680%. More data points from a Globus study of more than 545 organization found that 91% of the organization now support work from home up from 63% prior to the pandemic, and of the level of workforce 72% are now…

Thank you. [Operator Instructions] Thank you. And our first question comes from the line of Tal Liani with Bank of America. Please proceed with your questions

Hey, guys. Thank you very much for the comprehensive overview of the quarter. I want to ask you, I want to go back to basics and understand first of all within Microsoft. What's the current use of voice in unified communication? And what are the efforts done? What's the outlook for increased use of voice, because I understand that it's about unified communication and about Microsoft meetings, but it's more about the use of voice within the platform? So that's not number one? And number two, can you talk about your efforts with other players other than Microsoft meetings? And what can you do for other players? Thanks.

Shabtai

Okay. Tal, Sorry, I was in mute. Thank you, Tal, thank you. Regarding voice, voice is definitely probably one of the most important ingredients in unified communications. You know, put it side with chats -- if you run statistics, statistics say that voice is the most preferred medium of communication. Now Teams provide the voice capability for on that internally. There’s no need for voices, for voice services outside it. But, once you want to get a dial tone, once you want to talk with third party organization, you want to dial them or get a call, you need to add voice services. That is on the connectivity side, very simple functionalities, sometimes very complex in terms of implementation, but essential to having a full, comprehensive, unified communications solution. However, I now think about the new world that's emerging. And that's the world that knows to process the content, knows to take voice content and produce results from it. So if we were talking about virtual agents, then if you want to save costs if you want to provide a service substantially faster than waiting on the line for an agent, you have today a technology that takes the voice part for that, and basically can apply speech-to-text, natural language understanding machine learning, few more technologies that will now take advantage of the content itself. So, connectivity is key for connect to other organization. Content processing is key. So, voice is primarily a key technology within every communication solution. And that's the approach we take. Now regarding your question as to working with that organization, we definitely try to do that. We have partners. I can name a few working for many years now with companies like 8x8, and RingCentral and Vonage. We announce certification for Zoom, we have growing opportunities with Zoom in 2020. We have announced partnership with AWS Chime. So all-in-all, we're very active, we work with some legacy names like Alcatel. And we work also with companies in the contact center market. We worked with Genesys, and two more of the leading companies in the graphics market. All we know we have a broad play, and we try to work with more parties. But at the end of the day, right now it seems that the majority of our growth and success will reside with Microsoft Teams, which is obviously a very dominant and successful player in the market.

Great. Shabtai, if I can just have a follow up on your first answer. So when you talk about analytics, can you discuss the reception you're seeing from clients? Are there -- what's the competition there? I'm sure that there are other solutions that can ride on top of any voice company and provide the analytics. But what's the benefit of customers to go with you versus others? And what's the reception that you're seeing from clients?

Right. A, we enjoy the fact that we are a very known brand and established vendor and supplier in the enterprise world. So we have access to a lot of the large enterprises I have mentioned before. So you know, selling up in an existing customer usually is easier. Second, the company's early established, more than 20 years public many years in the business, very advanced sophisticated telephonic capability of quite an establish an organization with no functionalities. We have found ourselves several times competing with new setups. At the end of the day, our scale, our brands, our capabilities, I'm able to throw resources into a project because it is important to me. We find ourselves preferable with customers, due to the fact that we are very established and strong vendor. So all-in-all, one more data point is never discussing those cases is the fact that you know, contrary to the products, when you in the past, take a router, take a firewall, take anything that's “standard product”. The winner takes it all. So if Cisco was leaving the router market, it was very tough for other companies to plan. Simply because that reached to the overall market. When you’re talking about cognitive services, when talking about speech, text and text-to-speech, you’re talking about languages. And here, that picture is completely different. So that allows us to penetrate several markets in parallel, and basically will allow us to be much more successful because we will have the scale. If AudioCodes can sell to, let's say the U.S., Germany, U.K., Japan and Australia, you bet that our ability to invest resources and get to results will be substantially better than an Australian based startup that will be maybe successful in Australia, but will find it hard to expand being a smaller platform. So all-in-all, I think we're sitting in a very comfortable situation.

Shabtai, I'm just going to squeeze in one little, one small additional question and that's for Niran. Your revenues were roughly in line for the quarter, roughly in line with expectations, but your gross margins were almost 200 basis points above. And your operating margin was a lot more was almost 400 basis points above. So, first, what drives this great margin performance? And second, what's the sustainability? What's the outlook for the next few quarters, what are the puts and takes for margins?

Okay, so actually what drives the gross margin to 66.9% was mainly the increase in software revenue, the shop dimension in the call, more a professional services and all-in-all product mix was benefit there. This quarter, we had more revenues from SBC, which is in high gross margin. And then less revenue is related to phones, which is in low gross margin. And we believe, it's sustainable for the coming quarters and even may improve because we are selling more and more software revenues.

Thank you.

Our next question is from the line of Samad Samana with Jefferies. Please proceed with your question.

Hi, good morning. Thank you for taking my questions. Maybe one to start with on a follow up on Teams is clearly outstanding. How much of that was Skype for Business customers migrating to Teams versus maybe organic net new Teams customers using voice? And then I have a follow up question. Hello?

Sorry to disappoint you Samad on that. I really do not have the data with me now. I will look into it and I will provide the answer. But we've seen, I can tell you that we are seeing definitely a mix between you, Katherine [ph] and some of the customers already use -- sub mentioning some of the examples that you have already using Skype for Business and moving. But I don't have the actual division with me right now.

Okay, that's helpful. And then maybe just as a follow up to that. If you think about generally the customers that are adding Voice to Teams through AudioCodes, any characteristics in terms of maybe the average size of the customer, or is it usually a full end-to-end deployment? All or is it a phased rollout? How should we think about maybe the ramp that individual customers have rolling out voice into Teams?

Okay, that's actually a very interesting question. I'll tell you why. Because in the past, when Microsoft was selling mainly Skype for Business, large companies always took the time to do a pilot, deployed it with several branch offices, and then continued the deployment every quarter in coming years. I think this is situation right now with teams is completely different. I think these days organization are moving out of necessity, nobody has the time to wait for a prolonged deployment. So, and because actually there's no deployment. I mean, we’re not talking about deploying, Microsoft servers, on prime; you're talking about using a cloud service. So actually, you can think about companies going online with teams all across the company unless, of course they want to first try it with, a small group. So that’s regarding that, I'm sorry, your first question was Samad?

No you got you them both, but just to get that rollout cadence. And maybe just one final financial question. Clearly, the earnings was a solid performance this quarter. How should we think about maybe the investment philosophy for the back half of the year on expenses since if I heard the guidance correctly, there isn't, the guidance was just reiterated. So is the upside planning on being on reinvested or how should we think about OpEx trends maybe for the rest of 2020.

Okay, so OpEx indeed decreased from a level of 26.5 million in the first quarter to 25 million in the second quarter, it was mainly related to less expenses, related to travel and to HR related expenses. I could tell you that our planning for the second half of 2020 is to be still saving in this major expenses travel and HR related. Moreover, we have a better FX rate, Israeli Shekel against the dollar and as such we believe the OpEx it will be increased, but not too much compared to the second quarter of 2020.

Okay, Well I appreciate you taking my questions. And thanks again for the time. Have a good day.

Thank you.

Thank you. [Operator Instructions] The next question is from the line of Rich Valera with Needham and Company.

Thank you. Shabtai, you've noted the conflicting dynamics in the Microsoft business with Skype for Business declining and Teams growing quite rapidly. How do you think that nets out for you kind of for the year for the year outlook perspective from Microsoft? And then taking that a level higher, UC-SIP sounded like its all very good growth overall. So how do you think about kind of UC-SIP outlook for the year? Do you think that's kind of a 20% or better growth business overall for the year? Thank you.

Thank you, Rich. Yes, that is indeed a very interesting question. As I've mentioned before, take our 20 plus revenue for the second quarter give you a more -- one more data point that Teams and Skype for Business who are basically around the same level, give or take a million. Now, the real question is, how fast Skype for Business declines, purchase orders, or Skype for Business related equipment decline versus growth in Team. We think a very strong pickup in Teams. Actually, as we speak, this is now July 28. Already, the current ramp up in the third quarter is substantially better than what we've seen in April. So, I'm confident that at least based on data we have an end right now, that growth in Teams will more than outgrow declining Skype for Business. Also let's bear in mind that every time a business line is dropping, the majority of the drop occurs in the initial phase and then it basically it's waited out. So all-in-all, we're pretty confident in our abilities to keep growing the Microsoft revenue for the rest of the year, and we believe we will see continued growth next year. Also, I'll mention that we all -- we try always to increase the new products and new services we offer in that environment. So in many ways, our offering for Skype for Business was kind of altered more than a year, two years ago. And on the other end, we have, as I've mentioned, more investment in new offering new opportunities for Team. So all-in-all, we believe the Teams would be fully successful.

Got it. And just one more if I could on the service revenue, which I guess was a little light from a growth perspective this quarter, but it has shown some historical lumpiness. How should we think about that going forward? Was that just kind of lumpiness? And should we expect that the kind of resume more of its historical growth trajectory?

Yes, definitely. I mean, services basically has two components. One is the maintenance contracts. And the other one is professional services. Maintenance contracts it's already years, five, six years now that growth in a year is usually between 11% to 15%. And we believe we will see the same year. So I mentioned already if you take into account the first half of the year, the growth was 13.2%. However, there's another component and this is the professional services, and here I think the picture is substantially rosier. We are growing substantially. There's much need, by the way, a philosophical point. When people are saying at time [Ph], although they are productive and efficient, when it comes to new large projects that has to occur within a company, it's always substantially more difficult to put them to work and complete them when you have people distributed all around the place. So you can assume that the needs or desire to move, to use more services from a party that can provide them, you can assume that that desire is growing. And therefore, we believe that professional services on a global basis will become a much more successful area for deployment. This is what we focus these days.

Got it. Thank you.

Thank you. We've reached the end of the question and answer session and I'll now turn the call over to Shabtai Adlersberg for closing remarks.

Okay, well 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 the first half of 2020 we believe, we are on track to achieve another strong year of growth 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.