AudioCodes Ltd (AUDC) 2020 Q4 法說會逐字稿

Greetings and welcome to AudioCodes Fourth Quarter and Year-End 2020 Earnings Conference Call.

(Operator Instructions)

It is now my pleasure to introduce Brett Mass for Hayden IR.

Thank you, 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 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.

Any statements assuming, assumptions made or expectations as to future events, conditions, performance or other matters are forward-looking statements as the term is defined under the 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 and 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; timing of products and technology developments, upgrades and the ability to manage changes in 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 in the AudioCodes business; possible adverse from COVID-19 pandemic on our business and the 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 was posted on the 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 this call.

With 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 fourth quarter 2020 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 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 supplemental non-GAAP financial information that I will be discussing on this call.

Revenues for the fourth quarter were $58.7 million, an increase of 11.1% over the $52.8 million reported in the fourth quarter of last year.

Full year 2020 revenues were $220.8 million, an increase of 10.2% over the $200.3 million reported in 2019.

Services revenues for the fourth quarter were $21 million, up 19.9% over the year-ago period.

Services revenues in the fourth quarter accounted for 35.8% of total revenues.

On an annual basis, services revenues increased by 16.7% compared to the previous year.

The amount of deferred revenues as of December 31, 2020, was $69.2 million, up from $62.2 million as of December 31, 2019.

Revenues by geographical region for the quarter were split as follows: North America, 14%; EMEA, 35%; Asia Pacific, 19%; and Central and Latin America, 6%.

Our top 15 customers represented an aggregate of 63% of our revenues in the fourth quarter, of which 49% was attributed to our 10 largest distributors.

GAAP results are as follows: gross margin for the quarter was 71.4%, operating income for the fourth quarter was $12.1 million compared to an operating loss of $26 million in Q4 2019.

Full year 2020 operating income was $38.4 million compared to operating loss of $9.6 million in 2019.

Net income for the quarter was $8.4 million or $0.24 per diluted share compared to a net loss of $8.2 million or $0.28 per diluted share for Q4 2019.

Full year 2020 net income was $27.2 million or $0.83 per diluted share compared to $4 million or $0.13 per diluted share in 2019.

I would like to remind you that GAAP results for the fourth quarter and full year of 2019 were impacted by the expense of $32.2 million we recognized in connection with the royalty buyout agreement with the IIA.

Non-GAAP results are as follows.

Non-GAAP gross margin for the quarter was 71.5% compared to 65.1% in Q4 2019.

Non-GAAP quarterly operating income was $15.4 million or 26.2% of revenues compared to operating income of $8.3 million in Q4 2019, an increase of 86.2%.

Full year 2020 non-GAAP operating income was $47.5 million compared to operating income of $28.2 million in 2019.

Non-GAAP quarterly net income was $15.2 million or $0.44 per diluted share compared to $8.1 million or $0.26 per diluted share in Q4 2019.

Full year 2020 non-GAAP net income was $46.7 million or $1.41 per diluted share compared to $27.8 million or $0.80 per diluted share in 2019.

At the end of December 2020, cash, cash equivalents, bank deposits and marketable securities totaled $186.3 million.

Net cash provided by operating activities was $10.1 million for the fourth quarter of 2020 and $38.5 million for 2020.

Net cash provided by operating activities in both periods were impacted by the $11.6 million payment made in December 2020, which was the second installment pursuant to the royalty buyout agreement.

Days sales outstanding as of December 31, 2020 were 54 days.

On January 2021, we received court approval in Israel to purchase up to an aggregate amount of $30 million of additional ordinary shares.

The court approval also permits us to declare a dividend of any part of this amount.

The approval is valid through July 19, 2021.

We continue to expect top line revenue growth and operating margin expansion in 2021.

For the full 2021 year, we currently expect revenues in the range of $240 million to $250 million and non-GAAP diluted earnings per share of $1.45 to $1.65.

I will now turn the call back over to Shabtai.

Thank you, Niran.

We're very pleased to report record financial results for the fourth quarter and the full year 2020.

Let me talk first about several major milestones achieved throughout the quarter and the full year.

First and foremost is the strong financial performance, which Niran just provided a detailed description of it.

I'd like to stress some of the most important achievements, which are strong expansion of our gross margin, operating margin and jump in net income, strong cash flow, positive cash flow, all I'll discuss further on in the following.

Then it's the evolution of our enterprise business.

Now close to 80% of our business, growing 17% year-over-year.

Third is the resurgence of 3 new growth engines for 2021 and going forward, namely Microsoft Teams, Contact Center and Conversational AI, all in the enterprise space heading into 2021.

Then it's the rapid transition of our solution and services to real-time cloud communications.

Much was achieved in 2020.

We now invest full force and accelerate investment in this area, driving the momentum into more real-time cloud communication solutions.

On top of this, we have substantially moved our focus in sales towards recurring revenue model as compared to the previous years where the majority of sales was done as CapEx transaction.

To highlight this last point, in March 2020, we have announced our AudioCodes Live initiative, which is a portfolio of professional and managed services designed to offer AudioCodes' voice expertise, products and solution to enterprises via flexible subscription-based managed service model.

We have already made nice progress in the second half of 2020, and now see the momentum building up into 2021.

Now let me touch on the achievements made on the financial front.

Overall company top line revenue grew 10% -- about 10% year-over-year.

However, once you break down the revenue into key segments, enterprise and service providers, one can easily see that the progress made in 2020 in the enterprise space, about 78% of our business today, was substantially higher and more impressive.

Enterprise business, consisting mainly of Unified Communication, UCaaS and Contact Center, grew 17% in 2020 and now provides for about 78% of the overall company revenue.

We expect this annual growth rate to continue well into 2021 and beyond, for reasons I will dwell on shortly.

Therefore, in our updated long-term financial model, for next 3 years, we can clearly see that the company annual top line will step up to a range of 13% to 15% growth annually every year in 2 years from today.

UCaaS and Contact Center segments will drive this growth going forward.

UCaaS is driven mainly by continued success in the Microsoft Team space, where annual revenue grew by over 300% year-over-year and more than 30% compared to the third quarter of 2020.

Additionally, we experienced higher than originally planned revenue coming from the Contact Center business, which grew over 15% in 2020, with the world adopting substantially more collaboration and work from home.

In the coming years, the new normal, so to speak, we anticipate similar such growth in 2021 and beyond.

Now let me touch on the achievements made on financial front.

To provide a more complete picture of the revenue in 2020, I'll just add that while we grew nicely on the enterprise, we didn't do so well on the service provider front and technology.

I'll say that we have experienced a decline in service providers business, about -- which is now about 18% of business and which has declined for about 10% year-over-year.

And also continuing small decline in the technology business, which now provides for about 4% of business.

So 78% of business grew 17%, about 22% decline.

And that gives you the average of about 10% growth for the full year.

Providing more color on growth in different business lines in 2020.

UC-SIP business line grew about 20% year-over-year.

By the way, this would be the last time we will report numbers on UC-SIP.

Very simply, as this indicator bundles growing software-based business sciences, such as [BMBC], management software and routing software, together with devices and hardware appliances used in the service provider space and in on-prem deployments.

As these 2 last ones are bound to continue to suffer from the ongoing pandemic and not essential to our business, we will drop the UC-SIP report.

It's not going to be a good indicator to indicate our business health.

We will obviously track our business through the development in our UCaaS and Contact Center and Conversational AI business.

Revenue related to UCaaS, as a whole, grew close to 20% as well.

All in all, we're talking about $140 million annually at the end of 2020.

Revenue related to sales of session border controllers, SBC, have jumped in the fourth quarter, bringing this business plan very close to $100 million level for overall 2020.

That's a real jump.

The overall year, we sold above 40-plus percent, real cornerstone in our business going forward.

Service revenue grew about 20% in the fourth quarter, 16.7% annually.

Professional Managed Services growing substantially faster in the mix.

So lots of emphasis on managed services, professional services.

Those are growing very fast.

Actually, on an annual level, we're talking about 30% a year, which is a nice growth.

Now let's talk about the growth engines, which is becoming key factor for our 2021 success and beyond.

Entering 2020, Microsoft's on-prem Skype for Business was our main growing business.

However, with the pandemic growing an impact throughout the first quarter, 2 new key major trends evolved for the year, collaboration and work from home.

These two trends became essential to preserve business continuity and workplace productivity in the enterprise world.

These trends drove as a result, accelerated transition to ripen cloud communication and the introduction of a series of more new key technologies that we have developed, such as WebRTC, call automation processing, intelligent assistance and virtual agents.

As such, we emerged out of 2020 and add into 2021 with three new growth engines.

The first and most visible one is the Microsoft Teams, which became, in 2020, the fastest-growing business for us, which has grown more than 300% year-over-year and more than 30% in the last quarter over the previous quarter.

Next to it, we saw accelerated growth of activity in the Contact Center, where a series of disruptions in the space related to the transition to cloud, supporting high-quality communication for work from home agents over the Internet and the increased need for call automation and self-service drive growth in the space.

Third engine is the Conversational AI, which has become top priority for any contact centers.

You need to quickly and efficiently respond and add customer calls coming in large masses, as people are locked at home and providing a satisfactory customer experience.

Now to our long-term financial model.

As we have mentioned before, gross margin and operating margin have demonstrated record levels in 2020.

We ended the year with gross margin for the fourth quarter at 71.5% and 26.2% for the operating margin.

By the way, talking about gross margin, we looked into our annual performance, and I'd like to draw your attention to the progress we made in the past 5 years, where gross margin stepped from about 60% back in 2015 to 68.1% in 2020.

This is a result of the shift of mix for revenues from hardware appliances more and more into software solutions and services.

So very decent growth.

We believe we will continue to grow in coming years.

Obviously the last quarter, as I've mentioned, we did 71%.

Operating margin.

This is the second quarter in a row where operating margin is well above the 20% level, which is kind of a mark for us.

So let's talk a bit first on the longer-term financial model.

We believe that as we will keep progressing with our enterprise business, growing above 16% a year, we believe that we will step up gradually in a matter of 2, 3 years into annual revenue growth of about 13% to 15% overall for the company.

Gross margin, we are at 68%.

We believe that the range, we defined 67 to 70, we should be able to grow beyond that at the end of this period.

We would obviously work out of a strategy.

And actually, we are defining kind of a modified strategy for 2021.

We see much more value in keeping operating above 20%, but still allowing a big portion of it to be applied to growth and investment.

So we will not try to achieve 24%, 25% operating margin and above.

We will instead up for 20% plus and then invest the remaining into developing new areas for us, such as Conversational AI and likes.

So let me go now into the specific business line or more interesting data points.

First, let's talk obviously on Microsoft business.

In the fourth quarter, overall revenues were close to $30 million.

This represents a growth of 18% year-over-year and close to 15% sequentially.

For the full year, we saw a nice increase of about 19% compared to 2019 combined.

However, as we all know, there was a big, big shift in mix in Microsoft revenues between the 2 different collaboration solutions.

Entering into 2020, we entered with about $84 million of revenue, of which about $70 million came from Skype for Business, only about $13 million came from Teams.

That picture has substantially reversed in 2020.

We're coming out with Teams substantially on top.

Teams has grown.

Just to give you an idea, as I've mentioned, 300% year-over-year.

Looking at $13 million in 2019, we should look now into -- we have done about $55 million in 2020.

So that's big growth.

Also, I will mention that in the fourth quarter, we kept growing sequentially, grew more than 30%.

Sky for Business, on the other hand, declined from a level of, give or take, an average of $17 million, $18 million in the quarter.

We ended up, the last quarter, with less than $10 million.

So all in all, gradual decline.

I would say that the decline, as I've mentioned in previous quarter, has kind of been mild.

So we do expect continued decline, but obviously in terms of absolute millions of dollars, that will be less in 2021.

Now let's talk about new accounts.

So we definitely grew with a large number of new Microsoft Teams accounts in 2020.

On an overall annual level, I'll tell you that we have grown substantially.

We've grown more than 200% from 2019 to 2020.

We have seen the numbers.

I mean, roughly, if you look on the fourth quarter, I'll give you a data point here, that about 1/3 of the accounts were accounts migrating from Skype for Business and about 2/3 of the accounts were actually new accounts.

So all in all, a very nice growth on Teams and new accounts.

As to the future, as we kept saying, we have a very long runway ahead of us.

This Microsoft 365 is now at about $270 million.

Teams was announced to have $115 million last October.

I'm confident with the year in new numbers, as Microsoft releases their numbers today.

So far, we believe it's only about 10% of the Teams users have implemented voice.

Very simply, we know for a fact that as Microsoft tried to become the dominant player in that market, the intention was put really more into collaboration, chats and meetings, and voice was not a requirement.

So many organizations could live up with their old PBX.

It could be another company, PBX.

One of the previous manufacturers, named Avaya, named Cisco, name Mitel any other.

So people could stay with their PBX but still get on board with Teams using the collaboration and meetings.

We believe that as time goes by, the benefit of using an integrated solution, all coming from Microsoft, will basically drive the migration of those into Microsoft telephony solution as well.

So definitely a lot of potential going forward.

We have heard that customers who have standardized on Microsoft Teams really not looking back.

The product is working well and has become an important part of their daily work.

And we've seen in surveys that these days, in the enterprise, service show that more than 50% already selected Microsoft Teams over other players.

And actually, that number is expected to grow in about 2 to 3 days from -- 3 years from today to about 60%.

More on the Microsoft business.

So we have launched SBC as a Service on Azure a few months ago.

It is available on Microsoft Marketplace in North America, will soon be available in other regions as well.

Basically very, very easy for customers to get on board Teams by clicking a few times on the keyboard and getting connected.

Also, we enjoy strong activity in the field.

We -- in several cases, we also meet with the sales field staff for Microsoft helping winning accounts.

Also, we had a rather big investment in 2020 into expanding our meeting room offering for Teams, so we're just getting to market with some of our new products in that space.

We're getting to market with our meeting inside shortly 2, 3 weeks from today.

So all in all, definitely an activity.

To name few new wins in the quarter.

So we won a leader, a Teams project, actually migration project from Skype for Business from one of the leaders in the financial services world.

Basically, we have provided there our session border control technology and our management technology.

And all in all, some professional services, so a nice mix, above $0.5 million projects.

We won a large project with a very large world-leading Asia Pacific service provider, where we have expanded into several of their subsidiaries.

We have provided there SBC as a Service.

It's running on Azure, and we plan to expand into few more subsidiaries.

We won a World Leader in chemical products for the car industry.

We're working through a very large service provider who provides a fully managed service as part of their teams' rollout.

A lot of success.

So all in all, a lot of activity in Microsoft.

Assuming that -- well, knowing that Microsoft is now 45% of business, right about $100 million out of the $220 million in 2020, Teams now become the most important business for us.

Traditionally, we've been selling to the enterprises, companies that have 5,000, 10,000 and more employees.

We're now starting to target the mid-market, with our AudioCodes Live offering.

As I mentioned before, AudioCodes Live offering is a managed services offering, providing many solutions.

We offer it in like 3-tier program, and we enjoy quite a success in second half of 2020.

How do we grow from here on Microsoft Teams?

So first is obviously we intend to grow in the number of AudioCodes Live users.

That's one dimension.

The second dimension is trying to scale up in revenue from the Essential program to the Pro and premium services, where we can charge for more on a per-user, per-month basis.

We do intend to introduce new business application services this year.

We will shortly announce our recording services.

We, several times, have been selling contact center solution from partners we work with.

We will be providing analytics -- voice analytics and meeting analytics shortly, conversational AI services and more.

So all in all, this is the main focus of the company going forward.

Now to take you to the second priority in the company, which is the Contact Center market.

This is a fast-growing market.

No question that COVID-19 pandemic further accelerated growth in this space.

Right now, about 15% of our business basically are -- in the Contact Center market, grew 15% last year.

All in all, this market is a great market for us.

Very simply, a lot of disruption, a lot of room to apply technology advancement.

I've mentioned transition to cloud.

I've mentioned work from home and WebRTC to maintain quality of service.

I've mentioned the trend to intelligent contact center that's emerging, that's basically providing a much greater role to Conversational AI to deal with customers' inputs and requests.

So basically, we are expanding.

While in the past, our play was majorly around Genesis business.

We now see more entry into other names in the industry than basically quite expand the reach of our solution to other contact center vendors.

Also, we have changed a bit our strategy that instead of trying to focus on the (inaudible) themselves such as Genesis, and we've mentioned throughout the years names, like Five9 and NICE inContact, we now intend to go more towards end users.

Some of them prefer to stay on-prem and not transition to cloud.

And then they find our solution fairly helpful in allowing them to maintain this on-prem operation.

On top of that, Conversational AI gets a big boost for automatic handling of self-service customer engagement.

So we're providing that market connectivity solution, voice quality monitoring solution.

We're about to see virtual agent solution and agent assist solution.

All in all, fairly active space.

In terms of revenues, we didn't grow much between '19 to '18.

We said it's about $30 million level.

In 2020, revenue grew to close to $35 million, that's 15%.

Throughout the year, we didn't broke down yet revenues from different quarters, but we can easily see that we have been stepping up in revenues throughout the year.

So ending the year on a strong note on the Contact Center.

Obviously Conversational AI, that's built to improve customer experience and reduce cost, is growing in use.

It is estimated that already 30% or 40% of customers prefer to use self-service speech interfaces, not involving a human agent.

It is predicted that towards 2023 that percentage will grow to 70%.

So a lot of room to grow there.

Let me touch on our SBC operation, because this is turning to be a stellar performance in our company with a record revenue growing, as I've mentioned, above 40% in the quarter.

All in all, as I've mentioned, we will grow to close to $100 million from just $60 million plus last year.

The share of sales of SBC into the Microsoft space grew substantially in the fourth quarter.

Now it's more than 50%.

We have a rather a nice geo split, about 38% of revenues in North America, about 34% in Western Europe, and about 10% to 11% in Asia Pacific and then Kala.

We've seen strong bookings growth going forward, so we feel very confident in our ability to perform here.

On a -- if I'll do the breakdown between product and services, I'll tell you that product grew more than 50% this year.

And we also grew very nicely on the services.

One very important note to make here is that, as I told you in the beginning, we put a lot of emphasis on managed services.

Just to tell you that in the SBC business line, those services really jumped and almost tripled in the year.

So we started from a low number of millions in the SBC-managed service, and now we have grown to close to 3x in that.

Also very important, being questioned many times, about what's a portion of software versus hardware.

I'll tell you that while we saw a huge increase in SBC in 2020, the hardware portion of it almost did not grow.

It did grow, but very mild between 5 to 10.

Majority of the growth really came from the software.

And now virtual SBC, and it's being used in data centers and in the cloud.

Basically, SBC software solutions grew more than 150% as compared to 2019.

So give or take, all of the SBC use the same software load, the same technology.

It's a great success, and the gross margin is really high there.

Just mentioned, also on the SBC side that we've seen nice growth on WebRTC as a result of the move to work from home.

And we've grown more than 50%, so definitely interesting.

The last area I'll touch is Conversational AI, which is really -- seems to be our next-gen growth engines.

It's a very fast-growing market, with COVID-19 pandemic definitely driving that with the lockdown situation in many countries in this world.

Bookings and revenues grew more than 50%.

Still, we are talking about small numbers, less than $4 million.

But we do have a target of targeting above $10 million in 2 years by the end of 2022.

Conversational AI business grow fast.

It does include 3 different business line.

One is recording services.

It's the smart app, which is a compliance recording.

We just got certified about 1 month ago for Teams.

We are the second company certified for Teams so that start to sell nicely.

We're also, as I've mentioned before, going to introduce meeting inside in a major way in Teams shortly.

Second line is the Voice iConnect.

Voice iConnect basically allows chat bots in text bots to be serviced and approach enabled by voice.

So you have today hundreds and thousands of different chat bots, used daily, some could be used as millions, take a service provider, allowing customers to reach out through messaging and WhatsApp and like in Messenger.

So if you want to allow all the public to access those same services by voice, that's definitely where Voice iConnect comes in, and we enjoy quite a success.

Third is our Voca operation, which was very successful this year, growing more than 150%.

All in all, the technology using all those 3 business lines has been homegrown.

It's a combination of some homegrown cognitive services technologies we use in conjunction with some Microsoft and Google and AWS cloud cognitive services.

And above all, our huge experience in networking, telephony and SBC really gives us an advantage as compared to other players in the market.

So all in all, very exciting business.

Just say that we definitely intend to grow in 2021, substantially about 50% in this line.

So we do expect to see it popping to the range of $5 million to $10 million at the end of this year.

One more very important note to make is that we are expanding our solution for Voice.

AI Connect.

While in the past, we just offered its connection to cognitive services mainly and to analyze solution, now we're talking about adding recording capabilities to adding speaker verification and notification to it and a few more technologies.

So all in all, we believe that we will come with a very comprehensive voice subsystem for Conversational AI, which will basically leave us fully at the top of the competition.

Finally, to complete my presentation, I'll just repeat what Niran mentioned in terms of guidance.

So in terms of revenue, we now guide, based on the results in the fourth quarter and plans for the year, we're guiding for a range of between $240 million to $250 million.

As to the earnings, as Niran guided, we have announced a range that's a bit wide than before.

We're talking about $1.45 to $1.65.

Key reasons for rates.

The business outlook is good and tracking along the same lines of success in 2020, so we see no difference in that.

There going to be 2 new changes in 2021.

One is there's a big change in the U.S. dollar and new Israeli shekel conversion rate, which we assume that this will impact the bottom line of our earnings by about 10%.

So unfortunately, with the U.S. dollar weakening in Israel, we're going to lose like 7% or 8% in terms of applying it to salaries.

And that will result in about 10% in the profit.

Second is that we believe that as we enter 2021, our new effective tax rate is going to be raised.

And it's going to be right to a level we predict of 10%.

So that will basically lead to additional impact of about 10%.

All in all, we still believe that we'll keep growing but we, therefore, provide relatively larger band of $1.45 to $1.65.

And with that, I have ended my presentation.

We'll move it now to the Q&A session.

Operator?

(Operator Instructions) And our first question is from the line of Rich Valera with Needham & Company.

Shabtai, first question around your long-term top line growth target of 13% to 15%.

Just wanted to clarify, are you thinking about that as kind of a 2023 target?

Or just what time frame that is?

And then what specifically do you expect to drive the acceleration of the top line growth over that time frame?

Okay.

Yes.

The answer to the first question, yes, we view that range of supplying to 2023.

Where does the confidence come from?

So last year, we grew 10%.

What drove it was 18% in enterprise and decline of about 10% in service provider.

We believe that service provider decline will basically flatten out.

So in our plans and assumptions, we do not see the service provider business declining substantially for where it is today.

Once we keep growing 17% on the enterprise, you will see gradually every year, growth in the top line.

So our guidance, if you take the midrange of it, $245 million, that represents roughly 11% growth.

And we believe we will step up into any new single year, you'll see that growing at least to 13%, if not more.

Got it.

And then maybe this one is for Niran.

Your product gross margins were very strong in the fourth quarter.

And just wondering if you could talk about what drove them to be so much stronger?

Was there anything nonrecurring in that?

And how you're thinking about your gross margins in 2021?

Yes.

So indeed, the gross margin of the product was very, very high relatively to previous quarter.

What drove that is the product mix.

Shabtai mentioned, SBC grew very nicely, and this is a very high gross margin.

And most of it is actually software and services.

With regards to 2021, as Shabtai mentioned, on our long 3 years model, we believe 67% to 70% gross margin is achievable.

Okay.

That's overall gross margin?

Yes.

Got it.

And then just a final one for me, clarification on the SBC business.

You said I think it grew to close to $100 million.

If you could just say sort of what that was on a percentage basis for the entire year?

And then could you clarify what percent of SBC was, in fact, software this year?

It sounds like that percent must have gone up based on what you said?

But just wondering if you could provide the actual percentage of SBC revenue that was software-based in 2020?

Right.

So yes, first, yes, we have approached the $100 million level in SBC, okay, that's a number.

I don't have here with me the right split between software and hardware.

But again, I want to urge you to change a bit the way it's being perceived.

Guys, listen, all of our hardware was developed 7, 10 years ago, okay?

It's median 1000, median 800, a long list of hardware products.

But that is something that was developed.

And we do not engage on it.

Just to give you an idea that out of 350 employees in R&D, there are about 15 guys in hardware, all doing fixes, end-of-life issues, et cetera.

So no -- and the load is one load.

We do release a new workload every 7 to 9 months.

And that's basically a load that's going to be sitting on everything, both in the virtual machines that's running on public cloud, on data centers and then running on top of hardware on hardware that new servers that were designed several years ago.

But still, the customer pays for the intellectual property, the SBC, not really for the hardware.

So all in all, I think now as time goes by -- and one more, by the way, very important point to make.

When you're talking about data centers, at premises and/or in the cloud, you're talking about software, and this is what we sell.

We sell virtual software.

However, when you go to offices, when you go to branch offices, which every large company has, there's no way -- if you want to optimize cost and efficiency for those branch offices, you need to use a hardware device.

That hardware device is going to include a firewall, a router, an SBC switch and a few more.

So calling this an SBC hardware is really -- doesn't make sense.

It's all about software.

So that's the way you should look upon it.

And I'm not mentioning the gross margin.

But you can bet that the gross margin on the hardware and software combined, it's very, very high.

North of -- just draw a number, north of 80%, 85%.

Our next questions come from the line of Raimo Lenschow with Barclays.

Congrats on a strong finish to the year.

Shabtai, can you go a little bit deeper.

When you say you -- on the CC side, you want to go closer to the end user and talk more on a little bit with the on-premise-focused clients as well?

That sounds to me more like Avaya-type customers.

Do I read that correctly?

Like how do I have to think about that strategy?

And then I had one follow-up.

Okay.

So yes, we've not mentioned names, and this is not really limited to one barrel or more.

I think when you're going to large end users, you find probably some resistance in moving the solution to cloud, simply because in terms of cost, it's going to be substantially more expensive for them.

So large companies do not necessarily rush to move to cloud.

Still, the more advanced solutions are going to be applied into the cloud.

So some of these end users find themselves with a need, let's say, for WebRTC, just to provide high quality of service to their own based agents.

And/or they need to use Conversational AI just to be able to automation of customer costs and self-service.

So we find a need in the market, and not only with the name you have mentioned, to really be able to upgrade the capabilities of on-prem solutions.

And we have seen a large number.

I mean, I think more than 10 just in the second half of 2020.

So we believe this could be a trend that we can work.

And by the way, it happened also with Genesis accounts (inaudible) accounts, that's the trend.

Yes.

Okay.

And then how do you -- on the Teams side, how do you think this will play out?

Like in terms of where are we in terms of your penetration on new teams deployments?

And where do you see that overall Teams trend going?

So all in all, as I've mentioned, we've been growing nicely in terms of our quarterly sequentially in new accounts on Microsoft Teams.

And actually, looking into the chart I have in front of me, relatively the pace of Skype for Business customer moving into Teams is kind of flat.

So we're talking about more than 100 -- I would tell you, more than 100 accounts this quarter moving.

But then on new accounts on Teams, we see like about 20% growth in terms of number of new accounts.

So it's going forward.

And again, I want to stress the point I was making that while Microsoft was very explicit in convincing customers use Teams for collaboration and meetings, there was no much pressure on them to move to Teams Voice.

And the customer could have keep using his old PBX.

As Conversational AI capabilities grow, meeting capabilities grow, there will be -- anybody that's stuck with an old PBX will just add few more dollars for its license and will move into a more comprehensive advanced voice solutions.

So we believe that we should see -- I don't think we'll have a problem keeping up with the 20% growth a year in Microsoft Teams.

Our next question is come from the line of Ramsey [Ellisal] of Jefferies.

Yes.

Sorry.

This is Samad Samana.

I'm not quite sure where Ramsey's name came from.

Congrats again on a strong finish to the year.

Maybe just the first, Shabtai.

On the Skype for Business installed base, how much of that do you believe is left to convert over to Teams for voice?

And what percentage do you think realistically you could convert over to Teams for voice?

Tough for me to answer that question simply because a, one needs to assume that will be a certain portion of the end users.

So I would rather stick to on-prem installation and not move to the cloud for many reasons, it could be security and others.

And quite frankly, I don't have a very detailed analytic tools that would allow me to look into the specific accounts.

It's a trend.

I can tell you -- the only data points I can give you is that, as I mentioned before, that it has been growing throughout the year.

In the last 2 quarters, I see that number of old Skype for Business accounts flattening above 100 and some.

But really, I have no idea on how it's going to keep -- we'll keep reporting.

That's the only thing I can do.

Great.

And this one may be for Niran or for you, whoever wants to take it.

But we appreciate all the disclosures that you give around kind of full year numbers and growth rates.

But is there any chance or is there any philosophical thought around giving -- reporting the dollars around how big your Microsoft business is kind of more precisely on a quarterly basis, just given that that's -- as you noted, that that's the most important part of the business on a go-forward basis?

We're just seeing if we'll maybe get more color on that on a consistent basis in dollar terms going forward.

Yes.

So Samad, we are not providing it on a quarterly basis.

The numbers we provide are not audited by our auditors that are based on internal reports that we have, so we can't provide it historically on a quarterly basis.

Got you.

And then maybe just a last question.

We saw the news around the buyback extension.

Just curious maybe, more broadly speaking, what the philosophical approach to that will be?

And how we should think about the execution of that?

Or just maybe the logic behind asking for an increased buyback?

Right.

So the idea is that sometimes, the market gets irrational, right?

I mean, we all know that those times.

And we have our view on the fair value of what we do compare it to the value of other assets in the market.

And when we'll find it beneficial for us, we will engage on the buyback.

It's not that we intend to go for the same strategy when we add, we're going to look on the multiples, et cetera.

But all in all, I'll tell you that we are -- I'm glad to say that we are big producers of cash flow.

Before paying the $10 million or $11 million to the Israel Innovation Authority, we have produced about 50 million.

One of our board members told me, it's half of the offering, right?

So we're producing a lot of cash.

In terms of cash allocation, we answered that question a few times, priority goes into M&A, then to dividend payments and then to buyback.

And again, we will weigh the situation over time and decide it currently.

Our next questions come from the line of Walter Pritchard with Citi.

Wondering if you could just talk to -- you mentioned some pullback from the selling into the UCaaS providers and instead focused on the end users.

Can you just talk a little bit about that decision?

And how you're seeing as the Teams' adoption goes forward?

How you're seeing customers choose connectivity options there?

And if there's been any change relative to what you've seen more recently?

Yes.

I think there's some confusion.

I've not mentioned that in conjunction with UCaaS.

In UCaaS -- well, a, in UCaaS, we do it for a long time, right?

I mean, we are selling sometimes indirect or direct to the end users.

It's certainly what I've mentioned on the call, related more to the Contact Center market, where our go-to-market, up to last year, was substantially on working with the vendor themselves to reach to the end users.

We found that with the more, I would say, the move to cloud, which really moves the world from being an on-prem market to being a twofold on-prem and cloud market, we found that in order to service better the on-prem portion of it, we better develop a direct go-to-market for those.

And obviously you can imagine that we will use the same sales force.

At this stage, we have more than 200 people both in terms of salespeople and presales.

And any sales measure getting into account would be able to sell not only a U.K. solution, but also a Contact Center solution.

So that's -- it's not -- and one big, big, big clarification, we're not selling contact center guys.

I mean, let's be very clear about it.

We do sell complementary technology and solution that help to improve.

Okay?

So we're selling WebRTC.

We're selling SBC for access.

We're selling a technology called Click to Call.

It allows calling over the Internet.

We will be selling Conversational AI.

So those were -- those will be the type of solution that we would be selling.

Got it.

And then just, I guess, relative to Microsoft and Meta Switch, in terms of their own offerings on that end, you talked about your SBC as a Service that rolled out in the quarter.

What are you seeing in terms of the market with the customers looking at those different offerings, understanding it's quite early?

We haven't seen any of that.

Quite frankly, not seen.

We may, but right now, we are developing our own offering.

As you have heard, we developed SBC as a Service approach.

We're developing managed services approach.

We believe this we will be competitive, even if ever that happens.

Our next questions come from the line of Tal Liani of Bank of America.

A few questions.

First, can you give us an update on Zoom?

You had an announcement before.

I just want to know what's the experience so far?

Second, can you -- I want to understand how it works with Microsoft Teams?

And sorry for the very basic question but how does the sale cycle happen?

Meaning, do you sell to them?

Or do you sell to the enterprise?

Who's selecting the technology behind it?

I just -- I'm trying to understand the drivers.

Maybe we'll do.

We'll take one by one.

We'll do these two, and then I'll ask my other questions.

Okay.

As related to Zoom, we have seen a little of Zoom phone activity earlier in 2020.

But towards the fourth quarter, we have seen some uptake.

We are also been reported that we see more opportunities coming up in 2021.

Zoom announced about a few weeks ago that they've reached a level of 1 million Zoom phone users.

So we do expect that, going to 2021, we will win more Zoom phone accounts.

I think the only thing that's left is really to wait for the next 6, 9 months and then provide more information.

But we definitely see a change from 2020.

As to Microsoft Teams, always, the discussion is at the end of the day, with the CIO and the IT manager of the end users and basically, is the one that's making the decision.

How we fulfill that?

Usually it's being fulfilled by partners.

So we have partners in the field, which, based on the final solution proposed to the end users, that end users buying that -- is buying the equipment and our solution from the partner, and the partner in return buys it from us.

And in your view, what's the win rate?

Or can you tell us about the competitive landscape in these kind of accounts?

We believe that due to the fact that we have capped throughout the years to develop a very comprehensive portfolio of not only product but really solutions, where we combine several products and add on top of them a management solution, a recording solution, an analytics solution and a few more, likely also Conversational AI or VOCA [tag], our offering is substantially more comprehensive than competition.

The only competition we had in the past is -- now seems to be focusing much more on service provider business.

So quite frankly, I think we're doing fairly well in this Teams environment.

No tough competition.

Always competition, but not too strong.

Great.

Shabtai, two more quick ones.

One is, can you discuss the environment in 2020 and the sustainability?

Meaning, in 2020, employees started working from home, we had to invest in collaboration tools, Teams one of them.

Do you have concerns that you have tougher comps for 2021 and that corporates bought what they needed, and now they can slow down?

Any concern about sustainability of what we've seen in 2020?

I'm an optimistic guy, so tough for me to be pessimistic on this one.

I'll tell you the following, okay?

In Contact Center, it's pretty obvious that we just started a completely new cycle, right?

Work from home, we have seen WebRTC growing substantially faster.

Conversational AI is growing fast.

Same for SBC solutions that need to support cloud migration.

So in Contact Center, we really are in the first inning of the thing.

As we go for Microsoft Teams, again, I have no reasons to believe that we will "see customer already got their needs back in 2020."

And there's no more accounts.

Quite frankly, as I mentioned, only about 10% of Microsoft Teams users have applied Teams Voice.

And we believe there's a huge, huge growth area for us.

So I do not share.

But again, we will go through the year.

But in every single quarter, since the beginning of the year, we've seen growth.

I've mentioned we grew in fourth quarter, 30% over the third quarter.

So right now, I have no evidence that it's long or no changing.

Got it.

My last question is stupid question.

Not that my other questions were very smart, but in your press release, you mentioned that you went through -- that's what happens when you get a COVID vaccine.

That's -- my last question is, you mentioned in the press release that you got court approval for buyback.

Stupid question, just to understand the kind of the procedure.

Why is there a court approval?

Why can just the Board decide?

I don't know how it works with Israeli companies.

Tal, this is Niran.

In Israel, whenever you would like to distribute dividend or to do buyback, you need to file an application to get the court permission for that, unless you have sufficient retained earnings over the past 2 years.

If you will go to our GAAP financials, you will see that we already bought back or distribute dividend more than the 2 years GAAP profit.

That's the reason.

(Operator Instructions) Our next questions come from the line of [Robin Gas of Opus Capital].

A follow-up question regarding the Teams moving into PBX and voice and competition there.

Just first to verify that I understand correctly, your solution would be needed as you have opportunities there, if this PBX to the cloud, Teams Voice would be based on the Microsoft Teams solution?

My understanding is that there is a competition there with the existing UCaaS leading companies like 8x8 and Ring Central.

Also jumping on the Teams voice opportunity, offering their PBX in the cloud.

So this is my question.

The competitive dynamics there?

And is it correct that your solution would not be needed if they grow this UCaaS as a target?

Right.

You're definitely right, okay?

Definitely, there's competition arising from the middle of 2020 by UCaaS -- other UCaaS players such as RingCentral and 8x8 telling customers, "Okay, you have set alone own Microsoft Teams, but for telephony, either you already using mine or you want to use mine, instead of using Microsoft telephony and allow for U.S. solution."

I'll tell you that, that is a fair competition, but I'll tell you that I believe that long term, the capabilities and the services that we are offering for Microsoft Teams voice and telephony will supersede those offered by other companies.

Business is voice.

This is the only thing we do.

And just we're coming out with Meeting Insight, I don't think you'll see any comparable capability in other companies.

So yes, it's a competition we know too fair.

There are no further questions at this time.

I would like to turn the call back over to management for any closing remarks.

Okay.

Well, thank you, operator.

I would like to thank everyone for attending our conference call today.

With continued good business momentum and execution towards the end of 2020, 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.

Bye-bye.

Thank you for your participation.

This does conclude today's teleconference.

You may disconnect your lines at this time.

Have a great day or a great evening.