Greetings, and welcome to the AudioCodes's Second Quarter 2021 Earnings 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, Roger Chuchen, Vice President of Investor Relations. Thank you. 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 would 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 Laws. 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 demand for existing products, the impact of competitive products and pricing on AudioCodes and its customers' products and markets, the timing of product, and technology developments, 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 from 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 Web site. Before I turn the call over to management, I would like to remind everyone that this call is being recorded. An archived webcast will be made available on the Investor Relations section of the company's Web site at the conclusion of the call. With all that said, I would like to turn the call over to Shabtai. Shabtai, please go ahead.

Thank you, Roger. Good morning, and good afternoon everybody. I would like to welcome all to our second quarter 2021 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 quarter, and 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, 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 $60.6 million, an increase of 13.2% over the $53.5 million reported in the second quarter of last year. Services revenues for the second quarter were $22.8 million, up 32.8% over the year-ago period. Services revenues in the second quarter accounted for 37.6% of total revenues. The amount of deferred revenues as of June 30, 2021, was $73.4 million, up from $65.1 million as of June 30, 2020. Revenues by geographical region for the quarter were split as follows: North America 43%; EMEA, 34%; Asia-Pacific, 17%; and Central and Latin America, 6%. Our top 15 customers represented in aggregate of 62% of our revenues in the second quarter, of which 47% was attributed to our 11 largest distributors. GAAP results are as follows. Gross margin for the quarter was 69.4%, compared to 66.7% in Q2 2020. Operating income for the second quarter was $10.1 million or 16.7% of revenues, compared to $8.8 million or 16.5% of revenues in Q2 2020. Net income for the quarter was $8.2 million or $0.24 per diluted share, compared to $6.6 million or $0.21 per diluted share for Q2 2020. Non-GAAP results are as follows. Non-GAAP gross margin [technical difficulty] compared to 66.9% in Q2 2020. Non-GAAP operating income for the second quarter was $13.6 million or 22.4% of revenues, compared to $10.7 million or 20.1% of revenues in Q2 2020, an increase of 26.3%. Non-GAAP net income for the second quarter was $12.7 million or $0.37 per diluted share, compared…

Thank you, Niran. We're very pleased to report strong financial results and continued progress in our business in the second quarter of 2021. This is the second quarter in a row where our revenue grew 13%-plus year-over-year. As a comparison, growth in the second quarter of 2020, last year, was about 8.2%, so quite a leap in terms of revenue growth rate. Now, the majority of this growth came from the enterprise business which has provided close to 85% of the company revenue in the second quarter. To remind us all, enterprise business consists of our UCaaS and Contact Center market operations. Bottom line of this is that while the company revenue grew 13.2%, enterprise-related revenue grew above 20% year-over-year, which clearly points to the potential of increasing our company annual revenue growth rate in coming years well beyond 13% a year. During the quarter, we continued to execute in all of our three strategic business areas in the enterprise space. First, Microsoft Teams, business grew well above 20% year-over-year. I should add that, in general, we saw robust demand in the U.S. enterprise market, much along the same trend we saw in the first quarter of 2021. This is a direct result of the decline in the pandemic in the U.S. and in other markets. Contact Center operations grew nicely year-over-year. We'll touch that later on, and we will talk about developments -- some developments that we have seen in certain areas. And in conversational AI, we saw nice progress in several business lines, most important, booking and revenue growth of more than 100% year-over-year. In summary of the progress made in the UCaaS and Contact Center and in view of similar such trends in several past quarters, second quarter industry dynamics further underscores the fact that collaboration, hybrid…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Samad Samana with Jefferies. Please proceed with your question.

Hi, good morning, and thank you for taking my questions. Maybe first, Shabtai, I appreciate all the detail that you gave in your prepared remarks. But just it sounded notable to me that you're seeing Zoom Phone more often. That felt like something incremental or new. Can you maybe just help us understand how the economics of that partnership work? And are you seeing Zoom -- are you seeing customers decide between Zoom Phone and Microsoft Teams for telephony or just maybe what are you seeing from those two, head-to-head?

So, Zoom as far as we know, right, much of what I'll tell you really comes from the market. Zoom was very -- is and will be successful mostly in the lower-end of the market. They're working their way up to the mid-market and the large enterprise. Obviously, we have more value to offer when you come to enterprise. So, if Zoom steps into more and more deals with large enterprise and mid-market companies, collaboration with Zoom will pick up. And that's really the source of our better performance in the first-half of 2021.

Great. And then maybe just a follow-up question on the guidance. We saw the bump up in the revenue outlook, but EPS was held in the same range. I'm curious how much of that is due to the FX weakness versus the ramping of actual growth investments? Just can you help us maybe bifurcate that? And if it hadn't been for FX, would you have raised that EPS guidance?

Yes, so we [add] [Ph] a step function in terms of the FX. So, all the impact of the U.S. dollar exchange rate going down from 3.7 to 3.3 is now fully embedded, and therefore we do not expect any further change in coming quarters. On the other end, I can tell you that we have pressure, from both partners and some big customers, to perform certain developments. Some of our partners come to us with requests to invest and develop new capabilities. And us serving them says, yes, we will evaluate it and we will invest in it. So, basically this is really what drives our investments. I can tell you that most of the investments really were made in three different areas, it's R&D, developing those solutions itself, and marketing to attract and achieve more sales in the market. And then service, because once we focus more on managed services we need to increase personnel that helps customers deploy those managed services. Beyond that, I think that we need to take, again, into consideration two phenomenon; one is the shortage in components which may hurt sales going forward, third quarter. We already know that some deals were pushed from the third quarter because of shortage of components. And then there's also the pandemic which we thought -- we all thought we were out of it, and now we have the fourth wave. So, trying to be a bit more conservative, I can tell you that we will keep pushing on all cylinders on growing revenues. But as far as profitability, we need to be more conservative. But that's where it is.

Okay, great. And then just one housekeeping question. I didn't hear if you said Teams growth specifically for the quarter. Can you just tell us what Teams-related growth was, please?

I'm sorry; can you repeat the question, please?

Yes, Microsoft Teams-related growth, I think you said overall Microsoft growth, but I didn't catch the Teams growth?

Yes, we've mentioned, yes. Yes, I've mentioned the Teams revenue grew 90% year-over-year, 9-0.

Okay, great. Great, thank you. I'll turn it over to the next analyst. Appreciate the questions this morning and congrats on the quarter.

Thank you, Samad. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Greg Burns with Sidoti & Company. Please proceed with your question.

Morning. Is there any potential benefit for you from Zoom's acquisition of Five9?

Good question, Greg. So, on the first glance, not sure, however, should Zoom be successful in integrating with Five9 in terms of their customer base, with Five9 assume is the strong mid-market player, that may help -- may help Zoom to win those mid-market players. Now, if that happens the answer is yes, meaning that if Zoom is successful in acquiring more mid-market customers of Five9, that would be good for us.

Okay. And then just getting back to the OpEx, and I think the increased investments you're making, I didn't quite catch it. Did you raise your target for OpEx, that cap from 47% -- above 47%, like how should we think about that going forward?

Yes, good question. Okay, good question. Originally, when we have established the range for OpEx to be capped at 47%, that was made end of last year. We have not anticipated that the U.S. dollars will depreciate against the new Israeli shekel that much. I'll tell you that the guiding line for us is really increasing investments where needed, be it in services, be it in R&D, and in other areas, [so I think] [Ph] sales positions. So, in view of that we'd rather change what we have said, that OpEx will be capped by 47%. And basically we want to expand it to be capped by 50%, okay, an increase of 3%. That would mean that if that happens then operating margin will go down towards the 20% rather than stay as they are today, above 22%. So, that's the compromise. We give priority to increasing investments over profitability.

Okay. Okay, and then in terms of the declines you're seeing in the service provider, the CPE area, pretty, I guess, significant decline this quarter. What's the outlook for that [technical difficulty] the year? And do you expect it to stabilize or to kind of continue on the same downward trajectory?

Second quarter represented [bottom incident stacks] [Ph]. We have received some signs of a better market in third quarter. Already you know some of the customers; some of the service provider really did not place with us a purchase order for a long time. We've started to see, towards the end of the quarter, some new POs. However, with the rise of the fourth wave, hard for me to say, I'll tell you that our plans, because enterprise market goes well, software and services goes well, most of the company priority and strategy lies in that area. And therefore, at this stage service provider is still a 10% to 15% revenue source for the company, but we place less importance to that. We'll have to live with what the market provides us.

Okay. Thank you.

Thank you. [Operator Instructions] Thank you. Our next question comes from the line of Ethan Etzioni with Etzioni Portfolio Management. Please proceed with your question.

Yes, I wanted to ask about the interest expense. Why would you have an interest expense when you have so much cash and no debt?

Hi. First, we are investing in -- marketable securities are mostly at the yield of 1%, because we don't want to take any risk about our cash investments. And then, with some exchange rate differences, it come close to zero for this quarter and previous quarter. Of course, if the interest rate for a marketable securities or bonds will raise we should expect more.

But then negative, do you have IFRS 16, are you impacted by that or you're not subject to -- is GAAP subject to IFRS 16?

No. We are subject to U.S. GAAP, not to IFRS.

Okay. So, this has nothing to do with leasing or something like that?

. :

Right. So, we should expect a positive financing income over the long-term?

Yes.

Okay. Thank you very much.

Okay.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to management for any final comments.

Thank you, Operator.

Thank you, Operator. I would like to thank everyone for attending our conference call today. With continued good business momentum and execution in the first-half of 2021, we believe we are on track to achieve another strong year of growth and expansion in 2021. 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.