AudioCodes Ltd (AUDC) 2014 Q2 法說會逐字稿

Greetings and welcome to the AudioCodes second-quarter 2014 earnings conference call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Shirley Nakar, Director of Investor Relations. Thank you, Miss Nakar, you may begin.

Thank you all. I would like to welcome everyone to the AudioCodes second-quarter 2014 earnings conference call. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer, and Guy Avidan, Vice President Finance and Chief Financial Officer.

Before beginning, we would like to remind you that the information provided during this call may contain forward-looking statements relating to AudioCodes' business outlook, future economic performance, product introductions and plans and objectives related thereto, and statements concerning assumptions made or expectations as to any future events, conditions, performance, or other matters are forward-looking statements as the term is defined under US federal securities laws. Forward-looking statements are subject to various risks, 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 current global economic conditions and conditions in general and in AudioCodes' industry and target markets in particular, shift 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, family product and technology development, upgrades and ability to manage changes in market conditions as needed, possible need for additional financing, the ability to satisfy the 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' businesses, and other factors detailed in AudioCodes' filing with the US Securities and Exchange Commission. AudioCodes assumes no obligation to update that information.

In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share. AudioCodes has provided a reconciliation of non-GAAP net income and net income per share through its net income and net income per share according to GAAP in its press release and on its website.

Before I turn the call over to management, I would like to remind everyone that this call is being recorded and 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 would now like to turn the call over to Shabtai Adlersberg. Mr. Adlersberg, please go ahead.

Thank you Shirley. Good morning and good afternoon everybody. I would like to welcome all to our second-quarter 2014 conference call. With me this morning is Guy Avidan, Chief Financial Officer and Vice President of Finance. Guy 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. Guy?

Thank you Shabtai, and good morning, everyone. Before beginning the financial overview for the second quarter, I would like to remind you that the following discussion will include GAAP financial numbers as well as non-GAAP pro forma results. Our second-quarter non-GAAP pro forma results reflect adjustment for the following three non-cash items -- stock-based compensation expenses, which totaled $695,000; amortization expenses relating to the acquisitions of Nuera, Netrake and MailVision's assets, which totaled $329,000; and utilization of deferred tax assets in the amount of $581,000. A full reconciliation of our results on a GAAP and non-GAAP basis is available in the earnings press release issued earlier today and on our website.

Revenues for the second quarter were $37.6 million, a year-over-year increase of 11.5%. Sequentially, second-quarter revenue increased 4.5% from the prior quarter as demand for core networking equipment continued to grow. Networking equipment revenue increased 15.3% compared to the same quarter last year and accelerated by 8.3% from the prior quarter, which is in line with our annual forecast.

The increase in sales was driven by strong demand for new product lines, including enterprise SBC, multiservice business router, and iPhones. More specifically, demand for link unified communication and SIP trunk services continues to be a significant growth driver for our business.

In terms of revenue by business group, in the second quarter, our Networking business group accounted for 88% of revenue and our Technology business group accounted for 12% of revenues, compared to 85% in our Networking business group and 58% in our Technology business group in the first quarter of 2014. Revenues associated with our growing Managed and Technical Services business line grew by 33.4% year-over-year and were 22% of total revenue, or $8.2 million, in the second quarter of 2014, up from $6.1 million in the second quarter of 2013 or 18.2% of total revenue. Managed Services and Professional Services helped further buy an article of high-value relationship with its customers.

Service revenues typically carry high gross margin and revenues are usually recurring in nature. Our service offering merges AudioCodes' extensive experience and technical know-how from 20-plus years in the industry.

In terms of geographical revenue breakdown as a percentage of total revenues, sales in the Americas accounted for 52%; Europe, the Middle East and Africa, 32%; and Asia-Pacific, 16%. Our top 15 customers accounted for 51% of total revenue compared to 50% in the prior quarter.

In the second quarter, we had a single distributor in North America that accounted for 15% of sales compared to 13% in the sequential quarter. GAAP net loss for the second quarter was $46,000 or breakeven on a per-diluted share basis, compared with net income of $441,000 or $0.01 on a diluted EPS basis for the year-ago quarter. This quarter, we recognized a non-cash utilization of our deferred tax assets of $581,000 compared to $380,000 utilization in our deferred assets in the previous quarter based on statutory tax rate.

Non-GAAP net income for the second quarter was $1.6 million, or $0.04 per diluted share, an increase of $537,000 versus the year-ago quarter and an increase of $507,000 sequentially. In the second quarter of 2014, on a GAAP basis, gross margin was 59.2%. Non-GAAP gross margin was 60%.

GAAP operating expenses were $21.9 million in the second quarter compared to $21 million in the first quarter of 2014. Our total non-GAAP pro forma operating expenses were $21.1 million compared to $20.3 million in the first quarter of 2014. The increase in GAAP and non-GAAP pro forma operating expenses was predominantly attributed to the growing in our workforce and the strengthening of the Israeli shekel versus the US dollar, partially offset by an increasing grant from the Israeli Office of the Chief Scientist. We added 22 employees during the second quarter and our total headcount as of June 30 was 651 employees. We continue to invest in sales and services personnel to take advantage of the growth opportunity in our new product business line and service business, and are focused on gaining market share. In addition, we will continue to add new engineers that will further develop the AudioCodes cloud delivery network and strengthen our new product business.

Net cash used in operating activities was $386,000 this quarter compared to $1.9 million cash provided in the sequential quarter and net cash provided by operating activities of $4.1 million in the year-ago quarter. Short-term and long-term cash balances at quarter end were $91.8 million compared to $94 million as of March 31, 2014. The decreasing cash balances in the second quarter was primarily attributed to an increase in trade receivables this quarter due to back-end loaded quarter.

DSO came in at 75 days compared to 69 days last quarter.

While we expect demand for our new product and solution to continue growing at a double-digit compound annual growth rate over the next three to five years within this large growth trend for our new product and solutions, we do anticipate some of this growth will be offset by a decline in our technology and legacy product which accounted for 12% of our revenue in the second quarter of 2014.

We are reaffirming our guidance for 2014 as follows. On an annual basis, we forecast revenue to be in the range of $147 million to $152 million, and non-GAAP earnings per diluted share are expected to be in the range of $0.18 to $0.22.

I will now transfer the call to Shabtai.

Thank you Guy. We are very pleased to report continued momentum in our business and strong revenue growth for the second quarter of 2014, our eighth consecutive quarter of growing revenues. The porous and higher sales were across almost all of our business lines, starting with session border controls, demand for service routers, the IP phones, growth in our Services and Professional Services in the markets, unified indication business services and contact center, and finally in the Microsoft and BroadSoft ecosystems. And so the second quarter of 2014 has contributed much to our long-term business growth and prosperity. And in view of the progress achieved this quarter, I am confident in stating that AudioCodes is emerging a much stronger company and better positioned to become an industry leader in the voice networking market in the areas of unified communication, real-time communications, and business services.

Our Networking business line, now 88% of our business, keeps growing. This is the third consecutive quarter in a row that we are growing on an annual rate of 15%. As noted in our press release earlier today, we achieved new record sales for our session border controls, a new product category, both of which provide further evidence and support to the success of our strategy in the market.

We continued to ramp up sales in the Microsoft Lync market and continued to introduce new products and solutions. As mentioned, the launch of AudioCodes' One Box 365 and new One Voice for Lync solution that provides all partners an intuitive and quick way to bring enterprise voice alongside Office 365 in both pure cloud and hybrid on-premise solutions, expands our market opportunity in the markets of Lync ecosystem. We have also launched the new cloud delivery network architecture program and opened a new R&D center with an approved budget and support from the Chief Scientist of Israel for about $29 million over the next three years. We have already 20 new engineers on board and plan to add more IT positions in order to advance our development in the emerging cloud and the SDN and NFV industry trends. We expect to start to see return on investment as early as 2015.

Now let me touch on some of the more significant data points. As Guy mentioned before, quarterly revenues grew 11.5% year-over-year and 4.5% quarter-over-quarter. More significant and relevant is our ability to grow the Networking business by 15.3% year-over-year and 8.1% over the previous quarter to a level of $33.2 million. Again, this is the third quarter in a row where quarterly Networking revenues increased above 15% year-over-year.

Another record, new record, is the level of gross margin which for the first time reached the level of 60%. As stated previously, we believe that this is a sustainable gross margin range, given our transition to better mix of software solution and services.

Now, let me touch headcount and OpEx. In order to support further growth in our business and part of the plan to add a new position in line with our cloud computing R&D program, headcount grew in the quarter to 651 employees, an increase of 22 employees from the previous quarter and 40 employees since the year-ago quarter. Operating expenses grew $860,000 from the previous quarter and $2.8 million from the year-ago quarter. When compared to 2013, the increase in OpEx is attributed mainly to the growth in headcount to support growth and to the strength of the Israeli shekel against the US dollar.

To provide more insight to the impact of the FX rate issue, I will simply indicate that while we enjoyed a very favorable new Israeli shekel versus US dollar conversion rate in 2013, now we witness a much lower conversion rate, about 12% to 13% lower. Applying this 12% to 13% lower conversion rate increase to our annual expense of about NIS40 million, this represents an average increase of about $1.5 million in each of our quarters on the quarterly OpEx in 2014. As such, the increase in real OpEx since a year ago is about $1.3 million out of $2.8 million. That represents a real increase of 7%. I'll compare that to our revenue growth of 11.5%. So that should give some light as to why OpEx has been growing fast.

We are investing in our business. We see growth all across the lines and this is a good reason to keep investing.

Now let me go to sales. Sales generally exceeded the original plan for the quarter, which was $37 million. All in all, we saw nice contribution from most regions with Asia-Pacific and Latin America over-performing. The one region that stands out for weakness the second quarter in a row is Russia.

Now let me mention some notable deals. In the Lync, Microsoft Lync segment, we had a few notable deals. We had two large projects, one in Western Europe for hosted Lync with two Tier 1 service providers. Then we can mention a large deal in North America for SBC for Lync connectivity on a Verizon SIP trunk. And third is a new project for us in India which, again, this is the first time we see Lync deployed in India.

Second segment, second market is Business Services. Here we saw two large deals, one in Asia-Pacific comprising of a combination of session border controls and gateways, and then in South Europe a very large multiservice routers deal with a Tier 1 service provider. We see a lot of growth in that area.

The third space, the contact center, both notable deals were in Latin America and Brazil where we enjoy large projects, one through the Avaya channel and in both cases, we sold mini gateways and session border controllers.

Now let me touch some of our notable product strengths. First of all, new products represents a proxy for the growth and prosperity of the Company. I'll mention to all that new products category includes now session border controllers, multiservice routers, and IP phones. To touch upon annual growth, in 2012, the total revenues from these three product lines totaled $10.3 million. In 2013, we grew 80% to about $18.6 million. This year, we have a target for reaching above $30 million, which would represent about 60% growth in 2014. I'm glad to say that already in the first due course of 2014, we have reached that plan and might even achieve better.

Growth has been all across the lines, session border controllers, multiservice routers, and IP. Phones, we grew in that category new products more than 30% quarter-over-quarter, more than 80% year-over-year. We feel very good and definitely now see new products becoming a real growth engine in the Company next to some very stable and very strong lines such as the services and media gateways.

Going into our session border control sales and talking about our success fetters, first we grew 30% quarter-over-quarter and 100% year-over-year. We now have a substantially much more complete broader portfolio. In the past two years, we have been able to close gaps against competition in terms of capacity, access session border controllers, software solutions in a much richer portfolio. That explains much of the very fast ramp up in that product line.

We are embedded in some of the leading ecosystem applications embedded in the world. We are embedded into the Lync solution. We are certified there. We are embedded into a BroadSoft solution for enterprise and premises. We are embedded into the Genesys solution. We are working on launching that at least, so as long as we are embedded in those ecosystems and applications and those applications grow in sales, we will grow. We simply are embedded there.

In Q2, we saw the first signs of penetrating some Tier 1 service provider portfolios, and I'm glad to say that we have now already three large Tier 1 service providers in EMEA selecting our session border controller.

Going to the multiservice routers, we have introduced a new very effective, cost effective product line, the Mediant 500 line. We are on track to more than double our revenues over 2013. We have new design with a notable Tier 1 win in EMEA. We have good entry already in the third quarter of 2014. We see strong demand for the product and we are engaged deeply in transitioning into the new era of NFV and SDN and plan to announce more development in the second half of 2014.

As for our Services, global services, second quarter 2014 has been very, very successful. Target has been achieved for all service business lines, including support and maintenance, Professional Services and training.

In the second quarter, Services sales did 15% better than the original plan. All in all, when compared to the first half of 2013, we saw 18% growth over the year ago.

Professional Services grow faster, grow above 50% year-over-year. We have new services launched in the past 12, 18 months and those are just starting to ramp up. And most of the momentum right now is in the US and EMEA.

Microsoft Lync ecosystem revenue grew about 5%, all in all 48% over second quarter of 2013. And if I compare the first half of 2014 to the first half of 2013, we see 44% growth.

As before, North America is the largest region. We are selling there more than $2 million a quarter for the fourth consecutive quarter.

We have been improving our operations selling into the Lync environment in Western Europe. We now are in a better position versus competition in the past when compared to past 12 and 18 months.

We have successfully launched the One Box 365. This will enable enterprise voice alongside Office 365 in both pure cloud and hybrid on-premise solutions. We have received much interest from that announcement. We have seen very impressive website pages in the first week of announcement. This initiative is 100% in line with Microsoft cloud initiative for triple-digit growth, adding 1 million users a quarter to Microsoft. The initiative supports Microsoft field team's effort to achieve their target, which is selling 365 online licenses, and further enhances our ability to offer our services into that environment.

We are announcing two new products for that environment, an extended element management system for IP phones within the solution framework of One Voice for Lync, and we also are announcing a very efficient, very strong solution for voice session monitoring quality for Lync.

With that, I have completed my review for the quarter and I'll now hand the session to Q&A. Operator?

(Operator Instructions). Dmitry Netis, William Blair.

Yes, thank you gentlemen. A question on OpEx. I want to go right to it. I think you spent $21 million. I understand the ForEx issue. But if I look to the guidance you provided, $0.18 to $0.22, and I continue with that same run rate of roughly $21 million, I basically wind up at the low end of that guide. So, can you give us some idea what you think the OpEx will be for September-December quarters and how you plan to achieve maybe the midpoint of that guide, or maybe the high end of that guide? Give us some kind of color around that OpEx as we go through the year.

So, as you remember, our plan for the year was to continue to grow in terms of personnel in the second half and to add more than 10x predominantly in R&D. So number one, we cannot really control the FX. We will recruit based on the FX. As you look at your model, we are actually, in terms of revenue and gross margin, really ahead of plan. And this is why we felt very confident to recruit personnel ahead of time. But for the second half, we believe that we will continue to grow revenue and gross margin, so we will definitely meet the guidance.

Got it. So it's gross margin impact. I guess I might be shaking out a little bit lower than what you came out with this quarter which may explain that. Okay.

Right. And as I mentioned before, we were talking at the beginning of the year, in the newer model, you added something like 58% or 1% in terms of gross margin obviously due to favorable product mix or revenue from support. We are at the 60% level today and we believe it's going to be even better in the future.

Okay, very good. That's helpful. And on the Beersheba headcount additions, I think you said 20 new engineers and then you transferred some over. So how many engineers do you have in the facility today and is the plan still to kind of wind up with 50 by the end of the year?

Yes. Right now, we have about 25, which is comprised of about 20 new people on board and few people from our headquarter R&D center. As Guy mentioned, we have a plan to grow to close to 50 personnel towards the end of the year, but again we will wait out growth and FX and rate of course incurrence, and according to that, we will maneuver with recruiting the R&D.

Okay. Great. And then one other question and I'll jump back in the queue. If I did the math, your new products grew about to $6.6 million or thereabouts. So can you confirm that? And if you are saying that you expect to achieve -- I'm just trying to clarify I heard you right -- you're trying to achieve about $30 million out of that product line this year? Is that correct? That would entail a pretty big ramp in the second half, so is that correct? Is that your expectations?

Actually, for the second quarter, the number for new product is substantially higher than what you mentioned. So it's above, much above, 6. X. Second, yes. Indeed, we do plan to -- assuming growth continues for the second half, we do plan to end up the year above $30 million for new products.

Okay. Is your MSBR and IP phone products are kind of over the $1 million run rate per quarter right now, or they are still below that number?

All lines are above the $1 million quarter rate.

Okay, excellent. And then maybe just to kind of zero in on the Israeli conflict, did you guys see any impact on the business spend in Israel or Europe? I think, if I look back, I think you did about $8 million in revenue in Israel. Have you seen any impact of that? What's your kind of take on the run rate of that business, given what's going on in your country right now?

Yes, actually, there's very little impact to our business. Basically business is almost as usual apart from the fact that we've got about 10 employees which were called on the on-front command, nothing unusual. Business is usual in Israel in any war place.

Okay. Thank you gentlemen. Stay safe.

Ittai Kidron, Oppenheimer.

Thanks. Can you talk about the new products, specifically on the SBC side? What is there -- how do you look at the pipeline over there? Is there any regional color you can add around that or type of deployments you're seeing more traction for -- with that product?

All in all, we're very successful mainly in the ecosystem of our partners and service providers. So again, since we are lading with sales in the Microsoft Lync environment, SBC sales in that segment grow, same goes for the BroadSoft ecosystem, same goes for Genesys, same goes for a few more names which we will not mention this time.

Also, I mentioned the fact that we've been very successful mainly in Europe with tree lodge Tier 1 service providers. So yes, we feel that EMEA could be a strong place for us given that most of our competition 3-B companies all are American companies. Therefore, we believe position in EMEA could be stronger. But all in all, I think the fact that we have invested heavily in lodging the portfolio and basically closing the gap on almost most of the issues such as capacity and features and others, we see the momentum very strong. This is the fourth quarter in a row where we grow very fast on the SBC.

Okay, very good. Now, regarding the gross margin, can you tell us, give us a little bit more color what was it that really drove it to the 60%? How much of it was competition being less pushy or product mix or regional mix, whatever you color you can give us on the gross margin?

The gross margin, we discussed before. We mentioned we are seeing much more revenue from services and we actually gave information regarding Services as a segment and we are reporting around 75% gross margin on Services. So it is always, for us it is always beneficial to sell more services, and out of that 50 basis point growth in gross margin, Services was number one.

Okay. And Guy, regarding your annual guidance, you haven't changed it. You've talked. Clearly it sounds like your products are getting (technical difficulty). You haven't changed your annual guidance but it sounds like new products are running ahead of what your plan was. So can you help us fill in the gap? Would it be fair to say that technology is dropping faster than you expected or the media gateway business is decelerating faster than you expected? I'm just trying to put in the puzzle.

Okay. Let me try and give you an overall breakdown of the Company. Target this year is to reach a level of $147 million to $152 million, let's talk $150 million. The largest and most stable business in the Company is gateways. We've been running on a level that's above $80 million, $80 million to $90 million, I would say, meaning a year on that business. Actually we expect this year to be a little up by 3% or 4%. So that's one area.

The other area is technology. Technology is indeed declining on an annual basis. Last year, it went down from about $25 million to $21 million. This year we expect it to go down from $21 million to $18 million.

Then Services. Services is growing nicely. I don't have the exact number but somewhere between -- it was about, if I'm not wrong, about $28 million last year. By the way, that does include media gateway services too, so it's kind of overlapping. But Services should grow 10% to 15% this year.

New products, which is indeed a proxy for ability to grow the Company and prosper, indeed provide 15% annual growth we always talk about. New products will grow above 60% this year. So I've mentioned the numbers. We did $10.3 million in 2012, $18.6 million in 2013, and this year we plan to do more than $30 million. So that drives some of our assumption as to how we would end up this year in terms of our guidance of revenues and profits.

Very good. And Shabtai, if I follow-up on that, when you talk about your products doing more than $30 million this year, just trying to take a look forward into 2015. I would assume the number over there is going to be about $40 million somewhere. But when you think about driving it to that number further, even further into 2015, what is it from either a partnership or a cost structure you need to have in place in order to drive that growth? What are sort of like the obstacles you see here in getting there?

Okay. Actually, I would tell you that I do not see at that point in time any new addition, any new driver that will help do that. Session border control has been maturing for two or three years now. We will end up this year substantially between I would say, I would guess between $25 million and $30 million.

Multiservice router growing substantially, more than doubling this year. And this -- we're just starting out. This is the second year of operation where that segment itself, if look on market services, is about $1.4 billion globally. There's a lot of room to grow here by simply winning more accounts with the service provider.

Then IP phones, we're really just starting out. We have been investing three years in developing the phones. We've been investing another year in certifying the phones into various environments, Microsoft, BroadSoft, Genesys, Interactive Intelligence, and others. I would say that here I do expect even faster ramp up than in other areas. So, all in all, there's no need for anything special to happen. All we need is to execute. And that is where all the focus of the Company is.

Got you. Very good. Good luck guys.

Rick Valera, Needham and Company.

Thank you, good morning. I wanted to follow up on your SBC service provider wins you mentioned, you got your first wins there. Congratulations on that. Can you give us some color on what enabled you to win in the service provider segment? How did you stack up against the competition? And how do you see your prospects in the service provider space for SBC going forward? Thanks.

Right. I think one needs to go to understand how the session border control market is segmented. In the past, it was more about service provider and pairing application where we didn't play at all in and we do not plan to play at all. We are focusing more into other segments, the Enterprise segment and the access. As I've mentioned, in the past 12 months, we've completed a lot of the capacity issues and features that prevented us from participating in the access SBC market.

And also we believe that, in the enterprise market, with the variety of capacities in combination and integration with media gateway technology, I think in that space we shine.

So the fact that we are selected by a large service provider as part of their portfolio is the de facto. SBC is something that comes out of that combination.

Also, I think it's not a secret that since a leader in the space, Acme Packet was acquired by Oracle, we have seen according to market research their market share declining down. And I think both ourselves and competition are capturing space, capturing steam in that space. So all in all, I think this would be the general background behind our success.

Great. And then you mentioned the virtualized version of your SBC in your comments. Can you talk about how that's going, how you see a split of this business maybe this year and as you move out between the virtualized version and the hardware -- proprietary hardware-based versions of your SBC?

Right. So, yes. Actually, we do see increase in ourselves. We started to sell that product nine months ago. Already in the first two quarters of 2014, we have seen growth and did the ability to integrate the SBC seamlessly. Because it's a software solutions makes it a very likable product. So we started to sell it nicely in 2014 already.

Presumably, you see that growing as a percentage of SBC revenue as you move through this year and into next year.

It is growing. It's growing. It is still a very small part. I mean, you know, definitely below 10%. But again, in terms of the future potential for that product, we believe it will grow more. It is simply a process. And as you can imagine, you know, when a service provider move more to NFV and other trends in the industry, software solution will become much more attractive.

Great. And then I just wanted to revisit the OpEx. So it sounds like, from your comments on -- answer to previous questions, that you do expect your quarterly OpEx levels to increase as we move into the back half as you continue to hire. Just wondering if there's any color at all you could give us on next year's OpEx. I know you're going to have a significant increase in your grant, your OCS grant, and presumably some hiring perhaps around that. But is there any color you can give us on how OpEx might grow next year? I know you don't want to give full guidance, but any color on OpEx for next year would be helpful. Thanks.

At this stage, it's a bit premature. There's a very big uncertainty with the ForEx, depending on who you talk to. I think we've seen, at least my personal view, we have seen much of the bottom in that trend might be the downside is certainly limited in my mind, and I would expect that we may see better FX. So, just trying to combine FX with the grant -- it's still not done. That work has not been done. And I think probably we will be in a better position to answer that towards the end of the year.

Fair enough. Thanks gentlemen.

Les Sulewski, Sidoti.

Thank you for taking my questions. Just to revisit the gross margin side and on each business segment, so I understand your Service side is about 75% gross margin. And then what is it on gateway? Is it about 50% and then the legacy product business declining? Is that in the 40% range or so? And then what is it on the new products, if you kind of give a little more color on that?

Right. Again, services are around 75%. Gateways and Technology obviously above 50%, and the new product is -- what I can say is SBC's gross margin is higher than the MSBR and the IP phone gross margin. But the blended gross margin is getting close to the average.

Okay. That's helpful. Thank you. And then just one more. What are you seeing as far as the cloud delivery program? Any feedback there? And then also if you can touch up on mobility.

We do have an initiative here. We are already deploying an initial application. We usually do those pilots in Israel. We have a voice dialing application. We have more services planned. We have a remote monitoring -- actually we do have a remote monitoring service already ran from the cloud. We do intend to introduce a few more. So, we started to deploy already existing application and we will work to add more, but this is really in the beginning of the process.

Okay. Thank you.

Catharine Trebnik, Dougherty and Company.

Thanks for taking my question. Can we go back to this SBC just so I have it clear in my -- that your traction really in Europe is more through the enterprise, and that would be through your resale channels, or is that through the carrier channel into the enterprise?

And then the follow-on question is it doesn't look like you have products or going to develop products for pairing or more the core of the network. So basically my understanding is you are really targeted at SIP trunking in the enterprise with the SBC products?

Yes. I'm sorry, the latter part of your question, yes. We are focusing on the enterprise and the access application. We are not focusing on the pairing application. That's first.

Second, most of our sales of session border controls go through our distribution. And those are usually enterprise disposition channels, not service provider channels. But our wins as of late, our service providers in EMEA, may open a new channel for us through those service providers too.

And then where would you say the penetration for IP trunking in Europe is versus North America? Because ever since I have covered Acme in 2009, that's always been almost there. And I'm pretty curious to see now with them out of the picture through Oracle where you are seeing IP penetration in Europe?

Actually, we do see a nice pickup. As I've mentioned, we have been selected this second quarter into three large Tier 1 service provider in Europe which tells you that SIP trunking services are starting to ramp up there. Yes, there is much activity I think this year more than we have seen last year.

Is that like 10%, 20% up, would you say?

I don't have the numbers with me but EMEA is very strong for us, yes.

And then how about your resale partner with BroadSoft? Is that pacing pretty well in North America and Europe?

Yes. It's not really a resale. It's really meeting the markets type of arrangement. But yes, I can definitely say that, in the second quarter, sales into the BroadSoft ecosystem grew substantially over previous quarters. That would be correct.

Good quarter. Thanks for taking my questions.

Jesse Katz, Oscar Gruss & Son.

Hi guys. Thank you for taking my question. I wanted to ask a bit (technical difficulty) about the competitive landscape, especially in SBC. How do you see Sonus operating in the market? Maybe you could give us some color about that.

Sure. We actually think we are focusing on enterprise. We see competition substantially in the Microsoft Lync environment. We see less of that in other partners simply because, in other partners, it's kind of a very unique position that we have with them in terms of collaboration. So the main area where we meet our competition, as you mentioned, Sonus is mainly Microsoft Lync.

If we are talking about the Microsoft Lync environment, could you break down how much revenue you see from that environment? Or you don't break down that and why could you please explain why you don't break it out?

Again, I'll just talk generally about Microsoft. Last year, we sold north of $20 million. This year we plan to sell 40% above that, close to $30 million. Substantially most of the sales were media gateway and SBAs. We've seen very little but this year substantially more sales of session border controls and we now look for IP phones to be sold too.

Okay, good. Thank you. That's from my side.

Dmitry Netis, William Blair.

Thank you. Two quick follow-ups, guys. One, on the previous question around software, how much did the software applications contribute in the quarter, and what's your expectations there for the remainder of the year and maybe 2015? So that's one.

And then, Guy, on the receivable side, DSOs were up to 75 days. Can you explain what's driving that? Is that the distribution channel or is there something else in there? Thanks.

So, in the applications area, I think we take into account all of the various components. We have VMAS, which is mobility for service providers. We've got a smart app which is recording solutions for the Microsoft market. We've got the element management system and SAM quality solution. And a few more applications. I think all in all, we will see this year about $5 million, but I don't have that accurate number with me here, so I'm just mentioning that number off the top of my head. But about $5 million, I would say.

And regarding DSO would mentioned that before we had sort of a back-end loaded quarter and we believe next quarter we will go down back again to the 69, 70 days. Obviously it will help our cash flow.

Thank you.

Rick Valera, Needham and Company.

Thank you. A question on the technology business. It was down pretty meaningfully quarter-over-quarter, and you mentioned you expected about $18 million from that this year. So that would actually imply some pickup in the technology business in the second half. So I wanted to gauge your visibility to that business actually picking up a bit from the second quarter. And then should we think of that as about a $4 million per quarter business more or less going forward and perhaps into 2015?

Yes. Actually, it's not really picked up, but it's really more seasonality. In some of the lines, third quarter and fourth quarter are better than the previous ones.

As to the rates, yes. I think, at this stage, we are at right $4 million to $4.5 million a year, yes.

Per quarter.

At quarter, I'm sorry. My mistake.

Perfect. Okay, thank you.

At this time, I'll turn the floor back to management for closing comments.

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

Based on the strong business momentum and execution in the second quarter, we believe that we are on track to achieve substantial growth and success in the year 2014 and continue to build a sustainable, profitable operation for coming years. We look forward to have you on our next quarterly call. Thank you very much. Bye-bye.

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