AudioCodes Ltd (AUDC) 2014 Q3 法說會逐字稿

Greetings, and welcome to the AudioCodes third-quarter 2014 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Shirley Nakar, Director of Investor Relations. Thank you. You may begin.

Thank you, Jesse. I would like to welcome everyone to the AudioCodes third-quarter 2014 earnings conference call. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer, and Guy Avidan, Vice President of 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 plan and objectives related thereto. And statements concerning assumptions made or expectations as to any future event, conditions, performance, or other matters are forward-looking statements as determined -- defined under US federal securities law.

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 effects 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. Time reported and the current development, upgrades on the ability to manage changes in market conditions as needed, possible need for additional financing, the ability to satisfy covenants in 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 obligations 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 reconciliation of non-GAAP net income and net income per share to 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 website at the conclusion of this call. The call will also be archived on our investor relation app, which is available for free from the iTunes Store and the Google Play market.

With that said, I would now like to turn the call over to Shabtai Adlersberg. Shabtai, please go ahead.

Thank you, Shirley. Good morning and good afternoon, everybody. I would like to welcome all to our third-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 summaries for the quarter and 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 third quarter, I would like to remind you that the following discussion will include GAAP financial measures as well as non-GAAP pro forma results.

Our third-quarter non-GAAP pro forma results reflect adjustment for the following three non-cash items: stock-based compensation expenses, which start at $648,000; amortization expenses related to the acquisitions of Nuera, Netrake, and the MailVision asset, which totaled $339,000, and utilization of deferred tax assets in the amount of $1.3 million. 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 third quarter were $38.9 million, a year-over-year increase of 11.2%. Sequentially, third-quarter revenue increased to 3.7% from the prior quarter, reflecting continued demand for our core networking equipment. Our natural care and equipment business continued to benefit from strong momentum and favorable market trends. In fact, networking equipment revenues during the third quarter came in higher than our internal forecast and increased 14.7% compared to the same period last year.

The increase in sales was driven by strong demand for new product lines including enterprise SBC and multi-service business routers. Specifically, significant demand for Lync unified communications and three-pronged services continue to be major growth areas for our business. Now we will break down revenue by business groups.

In the third quarter, our networking business group accounted for 85% of revenues, and our technology business group accounted for 15% of revenues, compared to 88% in our networking business group and 12% in our technology business group in the second quarter of 2014.

Revenues associated with our fast-growing management -- managed and technical service business line in the third quarter grew by 38.8% year over year to $8.3 million and were 21% of total revenues. This compares favorably to the third quarter of 2013, when managed and technical services revenues were $6 million and accounted for 17.1% of total revenues. As a reminder, service revenues are primarily recurring in nature and carry high gross margin.

Our managed and professional service strength, the high-value relationship we have with our customers. We leverage more than 20 years of experience and technical know-how in the voice-over IP and networking industries to provide excellent service.

In terms of the geographical revenue breakdown, as a percentage of total revenues, sales in the Americas accounted for 48%; Europe, the Middle East, and Africa, 33%; and Asia-Pacific, 19%. Our top 15 customers accounted for 54% of total revenues, compared to 51% in the prior quarter. In the third quarter, we had a single distributor in North America that accounted for 13% of sales, compared to 15% in the prior quarter.

GAAP net loss for the third quarter was $708,000, or $0.02 per share on a diluted EPS basis, compared with net income of $935,000, or $0.02 per share for the year-ago quarter.

This quarter, we recognized a non-cash utilization of our deferred tax assets of $1.3 million, compared to $581,000 in the previous quarter based on statutory tax rate. Non-GAAP net income for the third quarter was $1.6 million, or $0.04 per diluted share, a decrease of $177,000 versus the year-ago quarter and an increase of $12,000 to the prior quarter.

In the third quarter of 2014 on a GAAP basis, gross margin was 57.7%; non-GAAP gross margin was 58.4%. The sequential decrease in GAAP and non-GAAP of 59.2% and 60% respectively, gross margin was primarily attributed to product mix. GAAP operating expenses were $21.4 million in the third quarter, compared to $21.9 million in the second quarter of 2014.

Our total non-GAAP pro forma operating expenses were $20.7 million, compared to $21.1 million in the second quarter of 2014. We added net three employees during the third quarter, and our total headcount as of September 30 was 654 employees. Our strategic focus is to take advantage of growth opportunity in our new product and service business to gain market share.

To that end, we have made investment in our sales and service team. We will continue to add new engineers using grants received from the Israeli chief scientists to further develop our cloud delivery network and strengthen our new product business in line with our research and development plan.

Net cash provided from operating activities was $2 million this quarter, compared to $386,000 cash used in the prior quarter and net cash provided by operating activities of $1.6 million in the year-ago quarter. Short-term and long-term cash balances at quarter end were $89.3 million, compared to $91.8 million as of June 30, 2014. The decrease in cash balances in the third quarter was primarily attributed to $2.7 million share repurchase and $1 million loan repayment. DSO came in at 71 days compared to 75 days last quarter.

During the quarter, we began executing a share repurchase program that was authorized by our Board of Directors. During the quarter, we repurchased 506,000 shares at an average price of $5.4 a share. All cash spent on the program in the quarter was $2.7 million. We are waiting on approval from the Israeli District Court to make additional share repurchase, which we expect to receive in mid-November.

The decision to expand our share repurchase underscores the confidence we have in the future of our business. We expect demand for our new product end solution to continue growing at a double-digit compound annual growth rate over the next three to five years. However, we do anticipate some decline in our technology and legacy product, which accounted for 15% of our revenues in the third quarter of 2014.

We are updating our guidance for 2014 as follows. For the fourth quarter of 2014, we forecast revenue to be in the range of $39 million to $40 million, and non-GAAP earning per diluted share to be in the range of $0.05 to $0.07. We anticipate lower OpEx in the fourth quarter and close to 50% increase in profitability compared to the third quarter as a result of more favorable US dollars to new Israeli shekel exchange rate, a situation which we believe would be the basis for 2015 as well.

On an annual basis, and based on revenues and earning already reported for the first three quarters of 2014 and our guidance for the fourth quarter, we are increasing forecast revenues to be in the range of $150 million to $152 million, and lowering our non-GAAP earnings per diluted share, which are expected to be in the range of $0.15 to $0.17.

Before turning the call over to Shabtai for final remarks, I would like to take a minute to address this morning announcement. After more than four years working at AudioCodes, I have decided to step down from my position as CFO to embark on a new journey. It has been a pleasure working here, and I would like to thank Shabtai, the Board of Directors, the finance team, and the whole AudioCodes family for providing me the opportunity to grow professionally and be part of such an outstanding organization.

I had opportunity to work with Shabtai and the Board to help identify my successor, and I have complete confidence that Ofer Segev is the right person at the right time for the job. We have an efficient transition process in place, and I am certain that AudioCodes will be in good hands moving forward. And there is a significant opportunity for the Company to continue its strong momentum and create additional value for all its stakeholders. I would now transfer the call to Shabtai.

Thank you, Guy. This is the last time for us. We are very pleased to report continued momentum and strong revenue growth for the third quarter of 2014. This is our ninth consecutive quarter of growing revenues.

During the third quarter, we have seen strong demand across our networking business line, which drove an increasing revenues in the networking business by 14.7% over the year-ago quarter. Our networking business is now on track to make 2015 the second year in a row where we plan to achieve an annual growth for our networking business by 12% to 15% annually. And with a steady momentum in our business, we see 2015 as another year with similar such growth and expansion of up to 15% in networking.

The key message -- the key takeaway from the third quarter is the solid progress we are making in our enterprise networking and the business services market, which are at the core of the Company's strategy and go-to-market.

As reported, we have made good progress and achieved new record of sales in the two most important business lines for us: the markets of Lync market segment, and the enterprise SBC market. This progress substantiates all of the shift in the enterprise host networking in the areas of unified communication and collaboration, real-time business communications services, and contact centers. It also serves to further validate the leadership and success of our strategy in the market.

Finally, before stepping to our financial performance, we are glad to see and note that our strategy of placing substantially more focus on solution and services starts to prove itself. We have always been a best-in-class product Company, but -- and this was evident in our second ranking to Cisco in the enterprise gateway space for many years and our ranking among top three players in the enterprise SBC space.

However, focusing more on more complete solutions will and already helps today in two major ways. One, in increasing sales, for example, of SBCs as customers who favor end-to-end complete voice network solutions usually prefer a single vendor situation. Thus, we're not competing in SBC on performance and features only, but we have the full solution backing us. This will also increase the scope of sales at each customer network or site as the total available budget for us will now include more products such as gateways, SBCs, phones, management, and quality management service and services.

Let me touch on some of the more significant data points relating to the financial highlights. Quarterly revenues, as mentioned by Guy, totaled $38.9 million. This was an increase of 11.2% year over year and 3.5% quarter over quarter. More significant and relevant is our ability to grow the networking business by 14.7% over the year-ago quarter. This is the fourth quarter in a row where quarterly networking revenues is increasing at a rate of about 15% year over year.

Gross margin came at 58.4%. This is a increase of 1.6% compared to the previous quarter. This decline in gross margin is related to a less favorable product mix. It is mostly related to a service provider-related transaction which are not in the Company core or focus. And therefore, we believe that this case will not repeat itself in coming quarters. This decline in gross margin combined with our lower US dollar/new Israeli shekel conversion rate led to less-than-favorable OpEx.

Now let me touch the OpEx front. As reported, OpEx came in at $20.7 million. As planned, we had better control of expenses in the third quarter, and we witnessed about $400,000 OpEx lower than in Q2.

Same with headcount, we had good control of headcount. Headcount grew only three positions in Q3 to 654 employees. We expect similar such small increase for Q4 of about five to six employees. Even more encouraging is the new FX situation in Q4, and it's generally predicted for the whole 2015 as we enter it. At current level, the average US dollar/new Israeli shekel exchange rate is about 7% to 8% higher than it was in Q2 at the beginning of Q3. And thus, as mentioned by Guy earlier in the call, we anticipate lower OpEx in the fourth quarter and close to 50% increase in profitability compared to the third quarter. We believe this will be the basis for 2015 as well.

Now let me touch some of the most promising growing business lines we have. I will touch first on Microsoft Lync opportunity. We continue to expand our business in the Microsoft Lync segment. We have posted growth of more than 10% over the previous quarter and more than 40% over the year-ago quarter. This is in line with our stated plan to grow this segment -- market segment in 2014 by more than 40%. We now expect this business to become close to 20% of Company total sales by the end of 2014. With the momentum we have in that business, we see 2015 following that trend, and we already can see an increase of at least 30% to 40% next year.

The larger verticals One Box 365 provides our partners and customers, an effective solution to bring enterprise voice alongside of this 365 in both pure cloud and hybrid on-prem configurations. This initiative is 100% aligned with Microsoft Office 365 initiative. And based on Microsoft's success in that product, was where they report triple-digit growth, having 1 million users at core. We are sitting in a very nice market space.

One Box 365 provides seamless integration with Microsoft Office 365 and basically allows us to add full PBX enterprise voice features and capability. As reported in our press release this morning, our solution has proven to be a success in the first few months of deployment. We believe that One Box 365 product family will enable further expansion of our Microsoft Lync-related business.

To touch some points, North America again was the strongest region for us. For a good five, six quarters now, our sales of Lync in the North American market exceed $2.5 million. We also saw a nice increase in Lync business in Asia-Pacific and in our Western Europe countries. We have seen One Box 365 creating tons of buzz in the market. We see Microsoft teams actively promoting it, as it helps them promote Office 365 E4 licenses.

We have added during the month of October a North America road show. We went with seminars to eight cities. We've seen big attendance; we've seen a lot of interest. And we obviously will continue to invest in that space.

Another bright point in the Microsoft area was the start of ramping of our IP phones. We have completed certification a few months ago. We can already report nice increase in number of units delivered to the IP phone application in the Lync environment. And definitely for us, this is just the beginning. We already see a pipeline of few million coming at. We have seen notable wins and recurring business, and some of it was mentioned in our press release earlier this morning.

Now let me touch the enterprise SBC space. As mentioned, we have experienced record sales of SBC that grew more than 100% year over year and more than 5% over the previous quarter. We mentioned the Infonetics research report published in August 2014 which recognized AudioCodes to be the fastest growing vendor in the enterprise SBC market in second-quarter 2014.

We've been able to capture the number two position, which is significant. We have been really coming from the bottom. We have been at the market share of only 6.4% a year ago; we're now at 12.2%. We have been able to unseat other players like Sonus from that second ranking.

Our SBC offering continues to lead the Lync space. And as I mentioned, we've been successful by being selected by several of our large enterprises, among them a global auto chain company, a pharma company, a US organization, and we enjoy this mentioned repeated businesses with some other manufacturers.

All that relates to the fact that these days after two or three years of investment, we have a much more complete, broad portfolio in terms of capacity, in terms of targeting both enterprise and access application, in terms of software solutions, a much richer feature set. Also, as I've mentioned before, going into a solution we have much to sell SBCs. And the fact that we are embedded in some leading vendors' ecosystems such as Microsoft being brought off the -- and Genesis helps to ramp up the business.

Highlights in Q3, we have seen records sales for the SBC. Product increased 20% from previous quarter, and support information services increased, too.

Now let me refer to a much broader category that we designate as new products. Basically, this is what represents a proxy for our new growth engines. In the new product category, we combined sales of SBC routers, voice-enabled routers and IP phones. And I'm glad, again, to know that we have grown in the third quarter of 2014 more than 30% over the previous quarter. We are now at a rate that's about $25 million in the first three quarters of 2014.

Just to give you some reference, we did $10 million in 2012, we did $18.6 million in 2013, and right now, first three quarters, we are at $25 million. So we definitely see a large ramp-up in new product sales as a result of huge investments made in the past three to four years.

In the new product category, the enterprise SBC is the leading product. And I should mention that we have seen also some very nice ramp-up in the routers and IP phones.

Patching the routers, this was a record quarter for the MSBR product, increased to a level of few millions a quarter. This is new to us. This increase really comes from the fact that we have introduced through the market six to nine months ago a new, very cost-effective product for that market segment.

On the IP phone front, we have seen a record quarter for AudioCodes' high-definition series IP phones. We grew more than 50% in IP phones quarter over quarter, and I'm glad to report that we also already saw some very nice deals on the Lync -- Microsoft Lync front. This is just the beginning. We do believe that the potential for IP phones in the Microsoft Lync environment is tremendous.

With that, I have concluded my review of the business and the industry, and I will now turn the call to the Q&A session. Operator?

(Operator Instructions) Rich Valera, Needham and Company.

Just wanted to understand the lowering of the EPS. Is that just due to this large transaction that you referenced in the third quarter that brought down your gross margin, or are there any other factors in that?

No, actually -- this is Shabtai. Actually, what we did, fairly simply, we added the first three quarters. And based on the accumulated earnings up to the end of Q3 and based on our projection of about $0.06 in the fourth quarter, we basically came to the conclusion that EPS for the full year will be lower than anticipated.

Obviously, the two key factors for that were, A, the FX issue that pressed us in the first three quarters of the year and will not be there in Q4. And second is that, indeed, service provider transaction mode in Q3 that we see that's a one-off, okay, then we believe that it will not repeat itself in Q4 or any of the coming quarters.

So that was just a single transaction that pressured that gross margin?

It's not a single transaction. No, it's not. It's a combination of transactions.

But you don't expect to have any of those going forward or just less of them?

Much less. We had a particular case -- we cannot go into details, but this is a one-time -- as you can imagine, a decrease of 1.6% in our gross margin, translates in terms of profit margin to a decrease of $600,000, $700,000. This is a fact. This is probably the main reason for coming up with $0.04 instead of $0.05 or higher numbers for the quarter.

So do you still think of the business as -- I think last quarter, we talked about that 60% gross margin as being a pretty reasonable baseline level for the business going forward. Do you still think that's the case, putting aside those one-off transactions?

Right. We -- actually, I think we've run some analysis. I think -- I would probably speak more to about 59%. And then obviously on a quarter-over-quarter basis, this number can fluctuate. But all in all, I think our model calls for 59% gross margin.

Got it. And I just wanted to ask some questions about Lync. So it sounds like you are doing very well there. Sounds like it's at 20%-ish of sales this year. I just want to follow up on your comment -- I think you said you see visibility towards 30% to 40% growth in Lync next year. Wanted to make sure that was accurate. If you could just give some color around what gives you the confidence of growing that business. What do you see in your pipeline to grow it at that rate next year? Thanks.

Yes, sure. Well, there are a few factors for that forecast. First, this is the second year in a row where we grow in Microsoft Lync environment for more than 30% to 40%.

Second, anyone operating in that segment can specify that deployments are really just starting out. Much of the deployments are either initial, either partial, those that already built on Microsoft Lync, are in the process of increasing the deployment. It's an enterprise; could be nationwide in our global deployments, so there's more phases to it.

Then just add to the fact that we are growing on several very important components in our solution. SBC is growing very fast for us in Microsoft Lync. IP phone just starting to ramp up. So -- and services, which I haven't mentioned so far, which is very solidly growing on a steady base.

All of that basically in the last two years experience tells us that this is going to be a great year. And add to that the new deployment and launch of the Office 365 One Box solution, which also provides a lot of confidence in continuing ramping up of our sales in that space.

Okay. Thank you. That's it for me. Guy, best of luck in your future pursuits.

Ittai Kidron, Oppenheimer.

Shabtai, I think you mentioned on the call that your networking business exceeded your expectations in the quarter. Although, from just a pure dollar standpoint, correct me if I'm wrong, this was a flat quarter-over-quarter performance for the unit. So was your regional expectation for a decline quarter over quarter in networking? That's question number one.

And question number two, clearly you are seeing strong growth in the new products, and you are certainly on track to deliver on your more than $30 million target for the year for that group. But can you talk about the media gateway business? Is that declining at a faster pace than you've expected?

Okay. I think regarding the first point, my comment was on the growth year over year. Indeed, quarter over quarter, networking business was flat. But, again, we have been growing [50%] in each of the previous quarters, so we take it as natural that this quarter, we did not grow compared to the previous one.

Now -- I'm sorry, the second question was --?

The media gateway business, is it declining at a faster pace?

Sure, yes. Okay. So we have compared the first three quarters of 2014 to those of 2013. It's flat. We have seen slight decrease in the third quarter of 2014. So all in all, we had stronger Q1 and Q2 in 2014; we had slight decrease in 2015. But compared to the previous year, it's flat.

Okay. And then when you quote the revenue for new products, the $10 million, the $18.6 million, and $25 million, is that product and services or just the product revenue?

Product and services.

Product and services, all right. And then as you think about 2015 -- I don't know what would be your philosophy. For this year you gave a full-year guide. I would assume that you will do the same for 2015. But maybe you can help us think about the priorities that you see in your business. And where is the focus going to be, do you think, in 2015?

And I'm trying to compare that between top-line growth and margin and bottom-line leverage. That was the main challenge for you this year to show operating leverage. And you clearly invested a lot from a headcount standpoint at the first half of the year. It seems like that that's decelerating.

Would it be fair to say that operating leverage and bottom-line leverage are going to be a much greater focus in 2015? How do we think about your investment priorities next year?

Okay. It's good question. As I've mentioned before in terms of revenues, we do expect momentum in the business to continue, and we believe that we will see another good year growing between 12% and 15% on networking.

In terms of focus, we definitely -- as you can imagine from this call, a lot of emphasis -- most of the emphasis would go into the Microsoft Lync environment sales; would go into the enterprise sales; would go into complete solutions that span gateways, SBCs, IP phone, network management, quality management, and services as a full solution. And services; services is very steady growing. So that is the focus. It's not focused compared to 2014, but it will be probably much more concentrated on Microsoft Lync and SBCs.

Now, indeed in 2014, you know, we've been great on the revenue side. And as you recall, we just upgraded our guidance for the year from $1.47 to $1.52, to $1.50 to $1.52.

But we had some headwinds from the exchange rate. We had some headwinds from the new investment. We were notified about the approval for our cloud delivery network architecture only during the period of March, April. So originally, we did not plan investing that much in 2014.

But since the budget was approved, we're looking to build for the future, so we took a hit in terms of more headcount about 20 positions in 2014. That will not repeat itself in 2015. And then we believe that the fruits of the investment we've made with that project in 2014 will start to see more sales -- increased sales in 2015.

So for us, FX, the cloud program, and the unfortunate gross margin issue in the third quarter, those are the factors that lowered our ability basically to come up with the guidance for the OpEx as the result for the bottom line. I will just say that we believe that the projection for Q4 for about $0.06 is something that we believe is the basis -- a good basis for starting 2015. So as you can imagine, we believe that 2015 is going to be a substantially better year.

Very good. Good luck.

Dmitry Netis, William Blair.

I apologize if these questions have been asked; I joined a bit late. But I did catch Rich's question, which I wanted to follow up on. And that's -- on this gross margin issue, what -- and I think the way you answered it, Shabtai -- as you said, there were a combination of different things. Could you walk us through those things, explain exactly -- well, you don't want to give exact details, but give us some of the drivers that went into that gross margin pressure and what gives you confidence that will not recur in the next quarter or 2015? Because you are guiding -- or you are saying that 59%, it sounds like, I think -- correct me if I'm wrong, but 59% is now the going rate in gross margin. Just want to clarify that. Thank you.

Sure. Yes, yes. Indeed, we do plan on targeting 59% as our ongoing average gross margin. Coming back to the slipping gross margin in the third quarter, we have several -- we had several non-core service provider-related transactions in which we had lower gross margins, and that relates to two products that we have. So that has hit us in the third quarter.

When you see non-core, what exactly do you mean? Usually you give a discount to core customers. So this was not related to any specific discount to a service provider customer and --

No, no, no. Gross margins either in the gateway and/or the SBC, and/or in the Lync space -- nothing has been moving. The needle has not moved there. It's really much more high-volume service provider-related transaction in which the resulting gross margin was lower.

And pardon me, but was it related, then, to gateway business?

No. Well, one of them is the residential gateway business, if you will.

Okay, understood. Okay, thank you. Moving on. A couple more questions. How many people do you have in this new facility right now, and what is the plan for the fourth quarter for that, Shabtai?

Okay. So we have already -- we have there about 45 people. Until the end of the year, the plan is to grow by another three to five employees there. For all 2015, I think we will add about 20 employees, some of which will be moved from the facility in Lod. So as I have said before, we have done most of the hiring and the expense in 2014, and we do not expect that to impact us in 2015.

Okay. And that's how many did you say, Shabtai, for 2015?

I believe we will add there about 20 employees (multiple speakers).

Got it. Okay, that's helpful. And then, Guy, for the grant, is there any update as far as how much money you have gotten from them year to date and what you're expecting maybe in the fourth quarter and then next year? Is there any update to how that's progressing? Are you getting much --

We are not really changing the forecast. When we started the plan, we said we are expecting, over three years, grants in the amount of $4 million, $6 million, and $9 million, and that echoes for 2014, 2015, and 2016, respectively. And Shabtai mentioned, again, that we advanced some of the personnel recruited to that side. However, in terms of grant, this is still the expectation.

Okay. It's helpful. And then since I have you on the phone, Guy, can you talk to your decision or the Company's decision to -- for separation? Is there any color you can provide of what drove your separation from the Company here?

As I mentioned in the prepared remarks, I think AudioCodes is a great place, perfectly positioned to compete with the -- I would say other company you cover in our space, I think the solution type of approach in the market will be killer and definitely will win the other companies. And this is basically it.

Okay. Best of luck to you, and thank you very much for the questions.

Mike Latimore, Northland Capital Markets.

I guess just one more on the gross margin. I guess if these transactions are not going to repeat, why would you have a little bit lower gross margin on (technical difficulty)?

Okay. Very simple answer is that gross margin is changing naturally quarter over quarter. In the second quarter of 2014, we had a favorable mix of more software solutions that helped raise that gross margin. It may happen again, but we cannot plan on it. So we prefer to be more conservative and basically plan on 59%.

Okay. And then is your mix of enterprise versus service provider -- has that changed materially in the last six to nine months at all?

Yes, we believe that the needle moves more towards the enterprise market, our emphasis on Microsoft Lync, emphasis on enterprise SBCs and the IP phone and services. I think all that points to us investing for potentially more in the enterprise market.

And just to segment out SIP trunking, SIP trunking as a driver, has that accelerated, slowed, stayed the same relative to six to nine months ago?

Actually, we see very nice developments in that area. I think that our superiority in SBC and SIP transactions -- SIP-related transactions will definitely help push more sales of SBCs, of voice-enabled branch office routers, et cetera. So, yes, SIP trunking is growing. We see it in the field, and we believe we are fitting fairly well, so it's a development.

And just last question, if the One Box for 365 is successful next year, what would they be? Would that be $1 million to $2 million? Be sort of $5 million of revenue? What would be success with that new product?

Well, it's too early to provide an answer, but I would say it probably falls in the middle of what you just mentioned.

Okay. Thank you.

Abba Horwitz, Old School Partners.

I was just wondering, on a different note, you have announced another share repurchase program, to extend it. And I'm wondering how much of that do you want to complete at these levels? And also, given the fact that the business itself is actually quite healthy, would you have any insight into as why the -- your Company is selling at such a discount to any of the competitors to effect of almost a 50% discount in comparison to the valuations of anybody else out there? And I'm just wondering would it not even behoove you to be more aggressive with this share repurchase program given the valuation?

Well, simple answer to the first question is that we are -- we have been active at much higher levels of the share price previously, and therefore we see the current price level as very attractive. We have allocated, as we have mentioned on the press release, more $15 million for it.

And, again, based on market conditions, share price, and our business momentum, our Board of Directors will take decision. But I think the fact that we took such a decision a few months ago tells you about us believing in the future of the Company and the potential we have and the fact that current share price is attractive.

Thank you. Do you have -- yes.

Okay. Now as to -- yes, hello?

Yes.

Okay, so as to the second question, compared to the other companies right now, if you'll take a look into the institutional ownership, you'll find that there is a big difference between AudioCodes and the other companies. All of the other companies in our space do enjoy an institutional ownership base of about 50% and above. At AudioCodes, we have currently only 20%, meaning the share is usually traded by retail. I think that gives you one part of the answer.

The second answer is that AudioCodes is a much more complex Company. We have went through some transition from the old business to a new business that is just ramping. You know, the new product category gives you an idea coming out for the past three years of investment. The Company value will probably be seen much better. It should have been seen in 2014, but then we were hit by the FX issue and the fact that we decided to invest in the cloud program.

But put aside those investments, AudioCodes has been a profitable Company for the past 10 years. I don't recall any other competitor in our space that even got close to us. So the Company is very strong, it's very profitable, it's investing on a constant basis in its user, and we're not in a rush to capture the fruits momentarily. So I believe that's us being able to grow an institutional -- perhaps I'm sorry, investor base that will understand those basic fundamental ingredients of the business will probably help cure that share price issue.

Now, is there an initiative to get this -- get the Company in front of fund managers and wean the brokers off the stock? Certainly the volatility and the huge trading volatility of the stock is due to the brokers or retail. What is being done to make sure that fund managers see this idea and get it on their desks?

Okay. So, again, thank you for the question. Until March of this year, we really had no analysts. We did the secondary during the month of March. That helped raise funds, but even more important, that helped bring three new analysts on board. Since then, we had another analyst joining.

We do believe that the addition of now analysts covering the stock and the fact that AudioCodes is the leading company in the Microsoft Lync environment and growing to second place in SBCs, think we will -- people will have to start acknowledge that AudioCodes is a stronger Company than as seen by share price. And we have been here for a long time, myself the past 21 years, and I'm confident that this time AudioCodes is stronger than ever in the Company history. So, yes, we will invest in growing our investor days and in supporting stock price.

Perfect. Thank you very much, Shabtai.

Dmitry Netis, William Blair.

I just wanted to quickly follow up in that $0.05 to $0.07 guidance you gave for Q4, what are you assuming for foreign exchange? Are you baking in any shekel depreciation here?

Q4 is already almost completely, from a budget point of view, secured. So that gives us the basis for quoting that wedge.

So you are not including any -- that $0.06, if you take it at mid-point, does that --

We have already -- at the current level, the Company has already edged at the current levels of the US dollar exchange rate. So therefore, we have secured OpEx range for the quarter. That allows us to quote that $0.05 to $0.07 earning range.

So you are using current rates basically to come up with that guidance.

Correct. Yes.

Okay. Thank you.

Thank you. It appears there are no additional questions at this time. I would now like to turn the floor back to management for any additional concluding comments.

Thank you, operator. Before we conclude the call, I would like to take this opportunity and thank Guy Avidan for his tremendous contribution to the Company. Guy has played an important role in the development of the Company in the past four years. He has done an excellent job leading our financial activities and has built a strong and capable financial team. Myself and the rest of the AudioCodes management and Board of Directors wish Guy good luck in his future endeavors.

I would like to thank everyone who attended the conference call today. Based on good business momentum and execution in the third quarter, we believe we are on track to achieve our business growth objectives for the full year and continue to be a sustainable, profitable operation for coming years. We look forward to having you on our next quarterly call. Thank you very much. Bye-bye.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. And you may disconnect your lines at this time.