AudioCodes (NASDAQ:AUDC) Q1 2020 Earnings Call

0:00 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. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note, this conference is being recorded. At this time, I'll hand the conference over to Brett Moss 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.

0:47 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 audio codes 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.

1:52 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 that 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 CORE conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance and Policy Health. Niran will start off by presenting a financial overview of the core. I will then review the business highlights and summary for the core, and then discuss trends and developments in our business and industry.

2:51 We will then turn it into the Q&A session. Niran? Thank you, Shabtai and Eloha Ebro. As usual, on today's call, we will be referring to both GAAP and non-GAAP 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.

3:40 The amount of deferred revenue as of March 31st, 2020 was $64.2 million compared to $52 million as of March 31st, 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 Undergate represented 63% of revenues in the quarter, of which 50% are attributed to our 11 largest distributors. Gross margins for the quarter was 65.9% compared to 62.8% in Q1 2018.

4:30 Non-GAAP gross margins for the quarter was 66.1% compared to 63% 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.

5:16 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, were 50 days. Operating cash flow generated during the quarter was $6.8 million. On February 4, 2020, we declared a semiannual dividend of $0.13 per share, the dividend in aggregate amount of $3.9 million was paid on March 4, 2020.

6:06 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 of 2020. As stated earlier in our financial release, We enjoyed good business momentum in the core, 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 UCS service market, the contact center market, and the service provider all IP migration market.

7:16 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 for the past two years and delivered 11.7% growth year-over-year. Growth margin expansion, we kept the steady progress in improving growth margin. In the first quarter, growth margin was 66.1% compared with 63% in the first quarter of 2019 and 65.1% in the fourth quarter of 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 and the second half of 2020 as a result of lower expenses anticipated in student budget items resulting from the COVID-19 pandemic impact.

8:22 Net income growth We saw a nice increase in earnings this first quarter 2020, delivering a net income of $7.8 million compared to $5.5 million in the first quarter 2019, an increase of 41.8%. Cash flow, we kept reducing cash from operating activities, delivering $6.8 million in line with our plan for the whole year. Finally, the revenues continued to grow and mounted I'd like to stress a note here that with revenue growing steadily in the past several quarters, and because revenue is growing in a similar trend all along, our ability to meet the top-line targets of every new quarter we step in improves, hence the momentum and the confidence in achieving the revenue target in coming quarter.

9:25 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. With China resuming business activity partially in second half of February and more so in March, We were able to quickly recover from the associated delay and were able to ship all of the products planned during the quarter. Then, in compliance with the Israeli regulation meant to cope with the COVID-19 crisis, we have moved on March 16th the majority of our headquarter employees, about 85% of them, to a work-from-home basis. Similar such transition took place in our U.S.

10:16 facilities and elsewhere in the world. The transition went smoothly, including our research and development team, sales, and marketing. Only must carry on-premise activities, such as warehouse, panel 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 regard 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.

11:01 The improved productivity was confirmed across the company, very seamlessly. Prior to the crisis, we were using Skype for Business on-premise at Office, which did great for a nice collaboration. However, now, remotely, where communication and collaboration is your only saver, nothing gets done unless it is well communicated, documented, followed, etc. Currently, communication and collaboration is much more crucial when you're not in the office. So, we see now great future for collaboration and productivity, mainly with large enterprises. To a large extent, and for certain 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.

11:58 This phenomenon deserves longer discussion. I'll leave it at that. 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 UCS servers, and as we all have seen, use of UCS servers 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 channeled most of our investment and efforts towards the unified communication collaboration market. In 2019, we derived above 55% of our $200 million annual revenue from this market. Sales into the Microsoft, Skype, and Teams markets provided around $80 million of this revenue.

12:56 In previous calls, we highlighted the fact that the UK market keeps 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 rates of about 18% and was growing 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 that. In the first quarter of 2020, we saw acceleration in the transition to UCAS 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.

13:59 As reported by leading companies such as Microsoft, Cisco and Zoom, UCAP's usage skyrocketed in the first quarter of 2020 A phenomenon which contributed to increased sales across the board in this space. As a result, revenues related to UC and UCSF service in the first quarter grew to more than 60% of our business, with growth related mainly to sales in the Microsoft 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 I believe that it is now realized by most leading businesses worldwide that an advanced and efficient communication and collaboration application is key to increase level of productivity across the enterprise and also key in the new emerging work-from-home trend.

14:58 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 UCSIP and the Gateway business line. The UCSIP business line grew nicely in the core. I'll touch that in a moment. We so declined in our Gateway business. UCC Business Line grew substantially above 20% in the first quarter and provides now to above 60% of our business revenue in the quarter.

15:44 Due to the growth, we 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 UCC Business Line grew substantially above This is 15 to 20% annual rate in previous years. Gross margin merges for this business line increase and is now about 65, mainly due to the increased sales of software products, transition to cloud communication, a nice level of service sales. All these combined contribute nicely to the company overall gross margin of 66.1%. So in summary of the review and going straight 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 that our ability to meet the original target performance plan for the second quarter and full year is in place.

16:47 Also, I'd like to add that currently we have no plans for layoffs. Also, as a matter of fact, the company expects 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 core. That was a very strong core revenue-wise. Also from the standpoint of creating new opportunities, newly created opportunities in first quarter more than doubled compared to the year ago core. We see continued accelerated trend of new opportunities created in recent weeks in April.

17:34 As for Microsoft Teams, Microsoft reported massive demand for the cloud services and Teams 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 have reported in March 44 million compared to only 20 million in November. I will just say that those are business customers put aside consumers who use 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.

18:38 According to some estimates, we believe that only about five, maybe less than 10% includes voice. That means a lot for us. Understanding that Teams 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 Teams. And we believe that we should see that coming in the second half of 2020. We've seen in the core accelerating number of opportunities with Microsoft Teams. We've seen also in the space a lot of activity in meeting devices.

19:23 We've seen gradual progress developing market awareness through our partnership with Dalby and our conference room devices, the ARC Suite. We have announced a few weeks ago Audicodes Live for Microsoft Teams. We have a plan to release and others. Objects like Microsoft Teams provide a managed service to fully voice-enabled teams. The core services include Teams Direct Routes, Microsoft Sentence Management, User Lifecycle Management, Moves, Adds and Changes of Personnel, and Plus integration with on-premise IT and legacy voice communication. All in all, it allows businesses to move fast to Teams relying on Audicode products and expertise in deploying projects in a very fast manner.

20:25 Let me just mention and give some color to some notable deals. We have won a deal with one of the world's largest chemical companies with over 100,000 employees. Zev selected Microsoft Teams and decided to work with Audicode for a networking solution. were primarily selected thanks to RSVC capabilities to run on Microsoft Azure and implementing Microsoft's new local media optimization functionality. For their remote branches, they selected the ODICOS Median 800 as managed applications, appliances, I'm sorry. This means that ODICOS is monitoring and managing the Median 800 from our network operations center. This account again demonstrates how ODICOS Cloud and premise portfolio are working together to meet the needs of giant companies.

21:16 And when combined with our professional services, we have a very compelling solution. Another example is the huge energy company. Our devices strategy continues to gain ground with large deals 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 Over time, and as they grow their deployments, we expect about 1 million in desk-home devices and mid-room devices. We were awarded this project thanks to our portfolio of devices and excellent sound quality and centralized management that we demonstrated throughout the evaluation process.

22:06 In other accounts, in the unified communication market, Zoom, we have Growing the number of Zoom opportunities, this is the first quarter of such growth. We've seen tens of opportunities open with an amount, potential of a few millions. We have been, those opportunities are mainly in North America, but some come from EMEA and AIPAC. And in all opportunities, it's mainly the SBC and the IPFON, which were certified by Zoom that are Key Offering. Also, AWS, we went live with a very efficient service of 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.

23:01 We have a first public case study, a company called EMC Insurance, 2,400 employees 19 U.S. locations using AWS QIIME SIP trunk. Going to our accession border controls, we're the record core. We grew more than 30% year-over-year. Most of the revenue came from enterprise accounts, about 70% of revenue. In terms of geo-splits, it was mainly even between North America and West Europe, each contributing about 36%. We're also stepping up in the new Created Opportunity number. I'll give you some perspective on the line.

23:46 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 quality basis, we keep growing both product and services. So, all in all, one of our Most important, there's a sign which is very competitive. We're winning many wins against competitors. I'll mention immediately one such thing. To mention the products, the new products we have, so I've mentioned the pay-as-you-go offering in AWS Marketplace. Aligning with how AWS is aligned our offering with how AWS charges for Shine Voice Connector. As I've mentioned, we have more than 30 customers.

24:41 Also today, we've announced cooperation with Google, the Google One Click program. This is a true software-as-a-service offering to connect Google Dialogflow virtual agents to California. A new brand portal where customers can purchase phone numbers in the U.S. and U.K. at the moment and connect them to Dialogflow virtual agents. In the future, we intend to connect also to our OCI Gateway, which will provide better telephony access. Coming to talk a bit about the work at ARM, you know, the global COVID-19 crisis is causing companies all over the world to move all of our significant parts of the workforce to remote working in order to ensure business continuity.

25:29 This is what is driving Teams and Zoom usage. Adico has announced three work-at-home offerings. We have announced Adico's 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 patient web RTC-based cell phone 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 to work from home. Basically, they've determined that agents working from home are more productive, it is easier to find and retain talent, employee satisfaction is higher, and provides business agility. AuditCodes was selected to design and deploy our complete one voice solution to include OPPOS-enabled session button controls, IP Fountain or Management One Voice Operations Center.

26:35 This project is expected to gradually expand to support more than 15,000 agents who work at UMM. Last, I'll just mention that another company from Australia, another contact center company has adopted WebRTC as their solution for agents at UMM who think Rapid growth of different retail chains for which work-at-home technology can help them much. This company was in a need to expand their customer service capacity to take over by phone calls and work-at-home agents and leveraging our web-optical capabilities as part of our session building control.

27:22 We also won, and this is very notable, we won one of the leading UC markets and other providers worldwide. They are expanding their service and operations to specific countries in APEX, in color, in need, and needed a high-capacity session board control platform due to regulatory requirements. We are selected out of seven SBC contenders thanks to our flexible SBC capability alongside with our all-book lifecycle management suite and primary real-time voice quality monitoring. And with that, I've basically came to the end of the review of our business plan activity. I'll just get back to a 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 target for the second quarter and full year.

28:17 And so we do not change the guidance provided earlier for the revenue range of 214 to 222. We are confident to earnings. We are confident in our ability to continue the growth in our earnings. It's a result of the success to grow earnings in the first quarter above the original plan. We're now updating our earnings guidance and increase the earnings range to 109 to 115. With that, I've completed my presentation, and we can move the call to the Q&A session. Operator? Thank you. We'll now be conducting the question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad and the confirmation tone will indicate your line is in the question queue.

29:06 You may press star 2 if you'd like to remove your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. The first question is from the line of Rich Valera with Needham. Pleased to see you with your questions. Thank you. Congratulations on the strong results in a challenging environment, Shabtai and team. 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.

29:56 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, you know, 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 to Microsoft, well, originally, if we all remember, 2019 has been a bit slow.

30:42 But towards the end of 2019, I believe, that many of the potential customers moved off the fence they were sitting on and decided to go with Tim. 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 and dramatic growth in usage of UCS service, minutes of meetings, calls, 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.

31:34 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 is being substantially more than initially planned, use of web conferencing drives the use of phones. If you watch Zoom play which went out initially with the conferencing solution and then follow that with the Zoom phone, you would see similar such So all in all, I'll tell you that it's a bit premature to make a code for the whole year. We definitely see higher new opportunities, you know, development rates. So at this stage, I would say with our 15 to 20 million Projection, but it may as well be that when it comes to our next conference call, you know, we may have that.

32:42 So we need to wait. As to gateways, yes, gateways declined in the core, more than 10%. Actually, we now can start to see that this is a trend. Fortunately enough, you know, gateways are being sold these days mainly to service providers. and there are basically sold in two forms. One is standalone gateway, the other one is gateways which are embedding routing capability and DSL capability. We call that type of product MSBR which stands for Multi-Service Business Router. Now our sales in the service provider market for the OLIP were almost as planned.

33:29 There was no meaningful decline there. But the portion of MSBR sold was more than the gateway sold. So that's one explanation. I'll tell you one more very important point is that when talking about revenues, we usually, you know, we all know that we combine product revenues and service 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.

34:18 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, you know, 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, not really audited. But I would say that session button controllers were sold for a bit above $60 million last year. This year, we look for growth that's above 20% annually. As I've mentioned, in the first quarter, we grew above that target. We grew 30%. That's roughly with regard to session bonuses.

35:06 As to the mix, by the way, the mix has been 25% so far this year. I believe that we will see substantially higher growth this year in software simply because many of the new implementations or Cloudbase 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 Projectory, I guess, into Q2.

35:52 Right. So, as we know, 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 understands that traveling is going down. So expense on traveling is going down. Same for marketing simply because events, 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 increase operating margin.

36:52 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 are the NLP, ASR activity, and then the recruiting activity. The ASR and NLP activity goes very nicely in the first quarter. We were hit. We plan to go major efforts in other countries, but now that it's all due to the virus.

37:45 On the other end, we have a very interesting activity developing around two new products that we have delivered to market. I've 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 from meetings in a very efficient way. and basically will allow many to become a source of productivity again compared to what is going today. We have more than 10 accounts right now in beta and we expect to go in a larger way in the second quarter. Another very interesting product connected to the announcement we met with the Google Dialogflow is the Voice AI Gateway. which basically allow to connect telephony and those channels into the already established world of virtual agents and bots.

38:51 So we provide, we have today one of the best products that allow, if you take the Corona crisis situation where people were trying to call institutions, health organization, et cetera, you had massive A lot of people, most of which do not really know to use text-based chatbots for which, you know, telephony can help much. Take elders, people in distress. So we are providing right now a very efficient solution that's allowed to connect a massive number of telephony channels into those bots. So those are two of the new developments we have in the voice AI business.

39:42 Great. Thanks for taking the questions, Shabtai. I appreciate it. Sure. You're welcome. Thank you. Our next question is from the line of Tavi Rossner with Barclays. Please proceed with your question. Hi. Thanks for taking my questions and congratulations 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 the 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?

40:34 Yeah, I think, you know, in one of my conversations with one of our investors, It became obvious that Articode sits right now on two of the main trends in communication. One which is the collaboration theme and second is the work from home theme. And because we have huge investment made over the last years and actually we are ready with those solutions connected to the right partners in the market, yes, we definitely, you know, 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 development, there's no reason to be pessimistic about it. I think we will keep growing. We just need to do the right thing.

41:34 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, you know, it's a matter of, you know, the regular business. In each of the business lines, we do monitor and study the environment, the other players, competition sometimes. And once we'll get into conclusion that a business would be necessary or very good to help grow our activity or make it jump, we will definitely do that. So yes, we are always looking for opportunities.

42:28 Great, thank you. I'll get back to the queue. Sure. As a reminder to ask a question today, you may press star 1 from your telephone keypad. The next question is from the line of Greg Burns at Sidonian Company. Please proceed with your question. Good morning. I want to follow up maybe a little bit on the last question 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 Are new economies starting to open up a little bit more? Is there potentially maybe a backlog of business that can provide even more of a tailwind as we go into the second half of the year?

43:14 Thanks. Sure. So I believe that, you know, the world moves these days much faster to cloud communications. And our real challenge as a company would be to cope with the development. And, you know, if you look on names Some of the world's biggest, largest, and quite fast-ramping companies that are leading the 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. This is where most of our energy will go for.

44:03 You know, due to the fact that business is 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, you know, we kind of, you know, revealed the value of, you know, work remotely and be efficient. And I think that will really help us to get More, we will not get linear. 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.

44:48 So, all in all, it's very positive. We're not really concerned with to want to touch the negative of this, where we're not really bothered by The Decline in Gateway that was perceived to happen along the time and the fact that now UCC is moving 60% of the business and Gateway is really declined to a level where there is a sign that materials think we are in good shape. Okay, great. Thanks. And in terms of 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 install base does Google have with that platform? Thank you.

45:41 Okay, so very simply, this is a software-as-a-service solution, meaning that every chatbot developer that wants to add phone access today in the U.S. and the U.K. and goes to the site and clicks On using our solution, the one-click telephony gateway, there's a price that's quoted to him. So all in all, it's a software-as-a-service solution, very simple. Okay, and just the install base that maybe Google has, the number of bots or the number of transactions that they're transacting a month, just to get maybe a...

46:27 Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg 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 voice channels.

47:15 So definitely there's huge potential out there. The bot industry grows, there's a need for easy access and we bring the telephony access to it using just the same bus that's all there. Okay. And lastly, I guess when you gave your initial guidance, the shekel to U.S. dollar was like I think like a five-cent headwind or so, but it seems like the shekel's depreciated a little bit. Is that kind of what you're embedding in your guidance changed 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 will now have in each of the coming quarter a better budget position because expenses in U.S. dollars are going to be lower.

48:26 Okay, thank you. Sure. Shabtai, we have a question from a shareholder who came in via email. Can you please go into the details about the transition from Microsoft Skype for business to Teams, as well as, you know, in the past you've indicated this migration might be headwinds to Microsoft revenues. Also, can 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 audio codes? Okay, that's a long one. Okay, I'll try to take it one at a time. Basically, I've mentioned, I mean, we as a company use Skype for so many years. It's a great, you know, unified communication on-prem solution.

49:21 When we moved to work from home, We started using it. Personally, I've used that. And then, there were huge amounts of traffic over the Internet, so I decided to test 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. In a matter of two or 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, you know, when we were all at home.

50:08 The IT team took a project to move all of the company. We're talking about more than 500 seats from Skype for Business to Teams. I'm glad to say that basically I was, you know, They were afraid to move me among the first ones, so I moved S6 number 400. Anyway, everything plays well, and everybody is very happy with using Teams. I can tell you that a lot of people complain now that using Teams with Tom really makes them work essentially harder than they were used to when they came to the office and had coffee and small talk. So yes, Teams is very efficient. I believe that in the view of our experience, we will definitely see other customers of Microsoft using Skype for Business consider moving to Teams fairly quick.

51:03 All in all, we believe that we are on top of that. I think we are one of the leading companies, if not the largest one, that supports that transition. And so far, as we can see, Skype for Business Revenues are not going down dramatically simply because there's a lot of expansion of accounts that have been deploying seven, five, and three years ago. So they keep buying equipment for their other facilities. But we definitely see a big ramp up with SIMs. And hopefully I've covered all of your questions. Remember more of them now. No, it's okay. Where should gross margins level off and why?

51:49 And then also, can you explain what you can sell into enterprise accounts that use UCaaS service like RingCentral? Okay. So, that is, you know, that is exactly what OjiCodes Live is about. So, we definitely have a lot of products associated with deployment of Teams. Session border controls for direct browse, phones, Management Systems, Conference Devices, etc. But the real value is really in our ability to help companies get fast on board and deploy the service very fast. 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.

52:40 So all in all, I think we can expedite The deployment of Teams accounts, definitely in the mid-market and for SMBs. And by the way, one of the products announced, which is called Audiocodes Live Cloud, is exactly that. It targets large channels, could be companies, could be service providers, who will then deploy our solution to their customers. Thank you. This concludes our question and answer session. I'll turn the call back to Shabtai Adlersberg for closing remarks.

53:26 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.