AudioCodes Ltd (AUDC) 2015 Q1 法說會逐字稿

Greetings and welcome to the AudioCodes' first-quarter 2015 earnings conference call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Chris Harrison, Investor Relations.

Thank you.

Mr. Harrison, you may now begin.

Thank you, Rob.

I'd like to welcome everyone to the AudioCodes' first-quarter 2015 earnings conference call.

Hosting the call today are Shabtai Aldersberg, President and Chief Executive Officer; Ofer Segev, Vice President, Finance and Chief Financial Officer; and Niran Baruch, Vice President of Finance and Chief Accounting Officer.

Before beginning, we would like to remind you that the information provided during this call may contain forward-looking statements related to AudioCodes' business outlook, future economic performance, product introduction, and plans 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 the term is 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 effect of current global economic conditions and conditions in general, and in AudioCodes industry and target markets, in particular, shifts in supply and demand, market acceptance of new products, and the demand for existing products, the impacts of competitive products and pricing on AudioCodes' and its customers' products and markets, timely product and technology developments, upgrade 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 from acquired companies into AudioCodes business, and other factors detailed in AudioCodes' filings with the SEC, United States Securities and Exchange Commission.

AudioCodes assumes no obligation to update information.

In addition, during the call, AudioCodes 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'd like to remind everyone 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.

The call will also be archived in our Investor Relations app, which is available for free from the iTunes App Store and the Google play market.

With that said, I would now like to turn the call over to Shabtai Aldersberg.

Shabtai, please go ahead.

Thank you, Chris.

Good morning and good afternoon, everybody.

I would like to welcome all to our first-quarter 2015 conference call.

With me this morning are Ofer Segev, Chief Financial Officer and Vice President of Finance; and Niran Baruch, Chief Accounting Officer and Vice President of Finance.

Niran will start off by presenting a financial overview of the quarter and an updated annual guidance for 2015.

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, we will be referring to both GAAP and non-GAAP numbers on the call.

The non-GAAP P&L metrics exclude recurring non-cash items.

Today's earnings press release contains a reconciliation of supplemental non-GAAP financial information.

Revenues for the first quarter were $37.5 million, up 4.3% year-over-year.

Approximately 15% of our revenues in the first quarter were denominated in euro.

As the euro/US dollar exchange rate declined more than 11% in Q1 2015, sales in the euro zone were impacted and resulted in a decline of $0.5 million to $1 million from our original target plan.

Revenues from networking products and services were up 7.3% year-over-year, accounting for 88% of revenues for the first quarter.

Revenues from our legacy technology products, which we model to decline 10% on an annual basis, declined 14.5% over the year-ago quarter.

Services revenues were up 20.2% over the year-ago quarter, accounting for 23.7% of total revenues.

Revenue by geographical region for the quarter was split as follows.

Americas, 52%; EMEA, 33%; and Asia-Pacific, 15%.

Our top 15 customers in aggregate represented 51% of revenues in the quarter, of which 32% are our six largest distributors.

Non-GAAP gross margin for the quarter was 59.7%, up 20 basis points from the year-ago quarter.

Operating income for the quarter was $1.1 million, up from $157,000 in Q1 2014.

On a non-GAAP basis, quarterly operating income was $2.1 million or 5.5% of revenues, up from 3.1% of revenues a year ago.

Net loss for the quarter was $378,000 or a loss of $0.01 per share.

On a non-GAAP basis, quarterly net income was $2 million or $0.05 per share, up from $1.1 million or $0.03 per share for Q1 2014.

Our balance sheet remains strong.

At the end of March, cash, cash equivalents and marketable securities were $84.1 million.

Days sales outstanding as of March 31 was 76 days compared with 69 days at the same time a year prior.

Operating cash flow was $4.7 million for the quarter.

We bought shares for $5.2 million in the quarter and we continued to buy shares under the approved buyback plan.

Now, to provide an update on our guidance.

As a result of the lower euro to US dollar exchange rate in 2015 compared to 2014, and based on our working assumption that the euro will remain at its current level in the short-term, we are updating our guidance for 2015 as follows.

We now expect revenues for 2015 to be in the range of $158 million to $162 million compared with the prior forecast of a range of $162 million to $167 million.

We are now forecasting non-GAAP net income by diluted share to be in the range of $0.24 to $0.28 compared with the prior forecast of $0.26 to $0.30.

Thank you.

I will now turn the call back over to Shabtai.

Thank you, Niran.

We are pleased to report continued momentum and improved business activity for the first quarter of 2015.

During the first quarter, we saw continued strong demand across our business lines in all of the different market segments we serve, primarily the unified communications market, contact centers, and business services.

We are seeing healthy business and customer activity, and growing demand for our products and services.

Several key trends support the strength of business activity we see in our markets.

The first one is the growing momentum of replacing legacy and prior telephony networks with richer and more efficient unified communications solutions.

Unified communications solutions support better multimodal communications across the enterprise, and are our key in driving enhanced productivity and improved interaction with customers and partners.

Then there is the growing focus of service providers worldwide are moving more rapidly towards SIP trunking and SIP-based business communication, and away from the traditional TDM services, which are generally planned to be shut down in about the next five to seven years.

Lastly, the very consistent trend of moving gradually from on-prem networking to hybrid and PureCloud-centric architecture and operations.

All of these strong and robust trends help to generate more demand and opportunities for product solutions and services.

In view of these global trends, and understanding that the lion's share of these new deployments will be dominated by industry application leaders such as Microsoft, Genesis, BroadSoft and the likes, our strategy of partnering and complementing these leaders' applications, solutions and architecture is a key driver in our success.

We continue to invest, adopt our products, and build our partnerships with enterprise communication application market leaders.

And we saw more success in new developments in this area in the first quarter of 2015.

And so, healthy market evolution and strong partnerships support continued expansion for our business in coming years.

And first-quarter of 2015 has been a milestone in that path of growth and success.

In the first quarter of 2015, our networking business grew 7.3% over the year-ago quarter.

Another substantial indication to the strength of our business is the uptake in two distinct areas of activities.

One is our new products category, which grew about 15% over the previous quarter and more than 60% over the prior quarter a year ago.

That, a group of products that we call new products, combines session border controls, IP phones, multiservice business routers, and related management facilities.

And then the second area of nice growth is the services.

Services activity grew close to 20% over the year-ago quarter.

So, very steady performance in growth in all of our key investments.

Both of those areas, new products and services, help to validate and represent best the success of investments we made in recent years.

And so based on current business outlook, we believe 2015 will exhibit nice growth on the heels of previous two years, delivering the third year in a row of networking business growth.

Before I move on to provide a more detailed review of our operations in the quarter, I would like to stress again that not less important in all of that strategy is the emphasis we make in shifting our focus from a best-of-breed product company to a solution selling company, accompanied by product-led services.

For us, providing an end-to-end comprehensive high-performance network solution, and attaching to it a comprehensive portfolio of services which help our end users to better use and manage their networks, that is key to our success, and prove superior to competition's strategy of best-of-breed product approach.

Now, let me touch on some of the financial significant data points, all of which are non-GAAP numbers.

Quarterly revenue that's indicated by Niran increased 4.3% year-over-year to $37.5 million and declined 4.2% sequentially, which is lower than our stated goal of a decline of up to minus 3%.

The larger decline is attributed mainly to lower revenues from the EMEA region, mostly as a result of a much weaker and faster deteriorating euro/US dollars exchange rate in the quarter.

In the first quarter of 2015, the rate was 1.1 compared to 1.24 in Q4 of 2014, and 1.37 in Q1 of 2014.

So, it is 11.3% down from the previous quarter and above, then, 20% from a year-ago quarter.

As stated by Niran, this is cause for a loss of about $0.5 million to $1 million in the first quarter, and I'll touch that later when I'll discuss our updated guidance.

Now, back to the key business lines.

I've mentioned that networking product and services grew 7.3% over the year-ago to $33.1 million.

At the same time, we saw continued erosion of our technology line, technology revenues declined 17.7% year-over-year.

On the more bright side of things, service revenues increased 20.2% year-over-year to $8.9 million from $7.4 million a year ago.

New products rose 18% sequentially and 63% year-over-year.

Again, that combines revenues from selling SBCs, IP phones, MSBR, and now we'd like to know that new products are above 30% of our networking revenues.

I'd also like to mention that Gateway sales were kind of flat and we do not see any erosion in that.

Now let me touch some other key financial indicators.

Gross margins improved to 59.7%.

We had good OpEx control.

We ended the quarter with operating expenses at $20,300,000 flat year-over-year, and we believe that we'll be able to keep running very manageable OpEx throughout 2015.

So we'll probably not be much beyond the OpEx we had in 2014.

So we'll grow in revenues; we will almost not grow on OpEx.

Headcount grew [full] positions to 665 employees.

Operating income increased close to [100%].

We ended up at $2.1 million from $1.1 million a year ago.

Net income was $2 million compared to $1.1 million in the prior-year period.

Most important, we are generating cash.

Net cash provided by operating activities grew to $4.7 million from $1.9 million in the prior year.

So very strong cash flow.

Now, to some of our business activities.

In the first quarter of 2015, we grew again in the markets of the Lync environment.

We could've grown more.

We did [above] 15%.

We could've grown [about] 20% if we would not have suffered from the euro meltdown.

One of the key regions for us for Lync is EMEA.

We've seen very nice uptake in the DUFF subregion in EMEA.

Record quarter, large projects and high visibility, high profile customers.

We've seen One Box 365 catching momentum, continuing the momentum we had in the previous two quarters.

We've announced in the quarter of two new family appliances that will help increase the capacity of One Box 365, and allow it to be used by our organization that have more than 500 and up to 5,000 employees.

We are seeing very large potential for Lync IP phone sales.

We count now what we could have not count last year and before, a project that contained tens of thousands of IP phones with very large companies.

All in all, I would later on touch on our IP phone managed solutions, but I will just say that we are witnessing very strong demands for the combined solution, which is very efficient and very unique compared to other competition.

We had a nice list of new wins in the quarter, both in the US and other areas.

I would like to mention especially EMEA and Asia-Pacific.

Asia-Pacific has been less successful for us in previous year.

This year, we see growing opportunities in the Asia-Pacific market.

One key area for our success and strategy is our continued focus on transition to selling more complete solutions in a touch services suite.

Key in that strategy is our partnerships with our large application players.

We have mentioned a few names so far.

I'm glad to inform that in the first quarter of 2015, we have developed further growing relationships with two partners whose -- which we did not add any meaningful relationship previously.

So, our strategy of trying to work with the majority of the unified communication and contact centers and business services playing partners is growing.

And that will translate into increased revenues, we believe, already in 2015.

Now to some of our business lines.

The session border control activity continued to show success.

We ended up growing more than 60% of the quarter a year ago.

So, very nice uptake and developments into new applications in that area.

Just to remind us all, we are among the top three providers in that market.

And we believe that, again, that the fact that we provide complete solution for the enterprise market helps us manage competition well for selling into that space.

Getting back to our IP phone activity, we have introduced in the quarter a new managed IP phone solution that is unique and designed to deliver unprecedented efficiency, reliability and high-quality voice network management experience for highly distributed enterprise voice networks.

We have been selling it for a while and we've already got good feedback from new customers.

IP phone activity sales grew in the quarter.

We again are working with several partners ecosystems.

All in all, we grew sales of IP phone in the quarter more than 70% compared to the quarter a year ago.

We are ramping right now into on our ecosystems.

We are investing more efforts on a few more ecosystems.

So we believe that end of this year, we'll support those two ecosystems with another three such new ones.

We have seen also very nice pickup in our sales of the multiservice business router.

We basically will see increases in sales of that product line this year, which was not planned initially at the beginning of the year.

Now to our updated guidance.

As Niran has mentioned, we need to update our guidance as a result of the recent change in the euro to US dollar exchange rate.

We now expect revenues for 2015 to be in the range of $158 million to $162 million compared with the prior forecast of $162 million to $167 million.

Earnings we now forecast non-GAAP net income per diluted share to be in the range of $0.24 to $0.28 compared to the prior forecast of $0.26 to $0.30.

To remind us all, we did $0.16 in 2014.

So the new earnings midpoint guidance is still about 50% increased over last year.

And another point to note is that we are profitable -- profitable for a long time.

And I think that is a bit unique in some of our communication equivalent vendor community.

Now, to give you more background on the decision to lower our guidance, here are some data points.

In 2014, we sold about $19 million worth of product in euro -- $19 million in US dollars denominated in euro.

The plan for 2015 is about $25 million.

So, there will be an increase in revenues coming from the euro zone.

Now let's go to rates.

In 2014, the average rate was 1.32.

To quote the number for the four quarters in 2015 has been 1.37, 1.37, 1.3, and 1.24.

However, Q1 2015 rate was 1.1.

That represents 11.3% decline of the euro from Q4, and 20% down from the year-ago quarter.

So, take 15% to 20% rate reduction on $25 million, we expect for the full-year, that gives you a reduction of about $4 million to $5 million on the annual revenue guidance.

That has been the source for updating our guidance with no other business reasons.

And I think that one needs to be very clear, because our business strength shows very good momentum.

Obviously, if we go down in revenues, that will affect our earnings and it will eat also our gross margin.

So, while initially, we had a target of 60% for gross margin, we now believe it's going to be more around 59.5%.

And we've already talked about the profits.

Now, to our share buyback program.

That program has been announced in August last year, when we had authorization from our Board of Directors to buy up to [3 million] of ordinary shares.

In November of 2014, we received a court approval to purchase up to an additional [15 million], which we are in the middle of execution.

Now, for the first quarter of 2015, we have acquired 1.04 million shares in that quarter for approximately consideration of $5.2 million.

At the end of March 2015, AudioCodes has acquired an aggregate number of about 2.1 million shares under this program for an aggregate consideration of approximately $10.5 million.

In March 2015, the Company Board of Directors approved the purchase -- the repurchase of up to an additional [$15 million] of the Company ordinary shares subject to the receipt of court approval in Israel.

An application for approval has been submitted to the courts.

Now, to our announcement about nominating a new Chief Accounting Officer.

As of May 1, Niran Baruch will be our Chief Accounting Officer.

Niran joined us back in 2005 initially as a Director of Finance, and then as Vice President of Finance.

And he is responsible for the management of the Finance Department.

He has more than 15 years of experience in NASDAQ traded companies and is a certified public accountant with a BA in business management and accounting.

And we welcome Niran to our management team.

And Niran will assume responsibility for our financials.

He will be the principal financial officer.

And, together with me, he will help me to assume executive management for the AudioCodes' Finance Department.

Also, I'd like to thank Ofer Segev for joining us, who joined us about six months ago.

And we believe that we have the good fortune of having a strong and capable finance team.

And we are confident that Ofer and Niran will help execute a very smooth transition.

So we wish Ofer good luck in his future endeavors.

Thank you, Ofer.

And with that, basically I've concluded my preview for the quarter, and I'll give the call back to the operator.

(Operator Instructions) Ittai Kidron, Oppenheimer.

Hi, Shabtai.

A few questions from me.

First, on the exchange rate, you reported your first -- your December results on January 27, if I remember correctly.

That was a full month where the exchange rate was well below previous year.

And, in fact, the day you reported it, I think it was 1.10 already.

So I'm kind of a little bit confused why the change in exchange rate, which, frankly, from the time of your conference call to today, has not changed all that much.

Why wasn't this adjustment already made a quarter ago?

Well, if you can -- I don't recall the exact dates, but if you recall the decline in the euro was very frantic, sporadic and fast-moving.

And I don't think we can -- the whole planning for 2015 has been done during the months of November, December and January.

And changing currency in the one to three days before the call is not something that could have taken into account to change a whole year forecast.

So that, I would assume, was the process in what happened.

Okay.

Now, from your comments, can I understand then that you have no intentions of hiring a CFO?

Is this the new structure of management then?

Yes.

At this stage, all financial and accounting issues will be handled by Niran, which will lead that.

He has been doing that for many years.

All investor relationship will move over from Ofer to myself.

And together with Lior Aldema, our COO, Niran Baruch and Shirley Orgad-Nakar, we will have that mission.

So, yes, at this stage, we do not plan on hiring a new CFO.

Okay.

And then regarding new products, you gave us some color on SBCs and phones.

Can you talk a little bit about routers, which you haven't mentioned?

And also the box solution, which is very interesting, the One Box, where does that fit in your product characterization?

Is that basically a combination of routers and IP phones?

How do I think about that in the way -- characterization where that product falls?

So let's take one at a time.

Referring to the routers, actually, I have referred to it in my preview -- we call that MultiService Business Router, MSBR.

It's been growing in the quarter, and we have good pipeline developing.

The reason for it very simply, if I go back to my initial remarks on the call, this is very evident, a very strong trend of shutting down the PS10 and TDM networks by 2020 or maybe two or three years after that.

And there's a very strong activity taken by all the major service providers to move their solution into IP networks.

Basically, that means that for telephony on-prem, it has to move rather quickly from TDM to IP.

If you want to communicate with Voice over IP from the premises, the use of MultiService Business Router will grow.

So we anticipate growth in that type of product in coming years, and that's -- that, I believe, a source for transitioning and growing that line now.

So instead of gateways, which help connect IPPB access to PSTN, you will see growth of routers, which connect IP networks to IP networks.

So that's on that side.

As to One Box, One Box is part of our portfolio for One Voice for Lync and now One Voice for Skype For Business Solution.

Primarily, it is a Lync-related product that helps to connect to Office 365 in the cloud, and basically acts as a PBX replacement on-prem, and allowing to add communication capabilities on top of the usual office capabilities.

The nice thing about it is that it is a wholly contained unit, which gives us substantially the ability to deploy it with not going to two complex projects.

So right now -- and we've seen already such projects -- when we offer a complete solution and complete voice network architecture to our end-users, we use One Box more and more lately with connection to the cloud and to IP network, rather than the gateways that used to connect to PSTN for survivability.

So that's One Box.

Okay.

Now just to clarify my question, though, what did routers grow year-over-year?

And then the One Box (multiple speakers) -- did you include that in the Gateway, then, revenue?

Or that will be part of new products going forward?

No.

No, no.

It's a separate -- okay, MSBR is separate.

Last year, just to give you a sense, last year, I think we had sales of -- it's a new line for us.

So, last year, I think we sold around $7 million.

We already have seen in the first quarter of this year that product ramping almost 100% over the year-ago quarter.

So we believe we will grow more than 30% or 40% this year.

And this new -- and this is just coming from several accounts.

We do believe that we will be able to deploy it more.

One very important point is that that product is supported by embedded SBC, and then by management tools like our Element Management System, EMS, and SAM, which provides further value to that product.

Got you.

Thank you.

Good luck.

Thank you.

Rich Valera, Needham & Company.

First, just wanted to clarify a couple of growth numbers, Shabtai.

Did you say new products grew 63% year-over-year?

Yes.

And Lync grew 15%?

Is that right?

Above 15%.

Okay.

And so I'm just curious -- I thought there was quite a bit of overlap between these two product categories.

Can you give us a sense of what drove the huge differential in growth for new products above Lync?

Like what specific product was driving that?

Yes.

Two products basically help growth in new product category.

One is -- which I just mentioned with my question with Ittai -- is the MSBR.

So MSBR grew almost 100% over the year-ago quarter.

Second is The IP phones category.

There, we definitely see very nice pickup.

Just to give you some more background, IP phones are fairly integrated in highly featured devices.

However, in order to make them work in specific partner ecosystems, there is a huge amount of work to customize, to add features, to enter work and to certify it within the partner environment.

So, deploying an IP phone in each new ecosystem takes a lot of time.

It could take 12 to 18 months.

What drove our increased sales of IP phones is the fact that in two such ecosystems, we passed all of the stages needed to start selling it, and we start to sell it.

Second most important factor is the fact that we have -- we announced a very unique solution, which we believe does not exist in the market today with any other IP phone supplier.

And that is our IP phone managed solutions.

In that solution, we combine IP phones with Element Management System and our Voice Quality Solution.

Now one needs to acknowledge that when you deploy unified communications solution over a wide network, and that wide network could be either national and/or global, the ability to control the switch to add, to delete, devices from the network on a global basis is basically very costly if you do that without a good management solution.

This is what we brought to the market this quarter.

And this is part of the success we'll start seeing in that market.

So, IP phones and MSBR help increase the new product category.

That's great.

And then with the revenue in the quarter, you missed our top line estimate by $1.3 million, and it sounds like you -- $0.5 million to $1 million of that was due to the currency.

So was there something else that was weaker than expected during the quarter other than the currency hit?

There's nothing specific I can put my finger on.

I will just leave that the first quarter has been fairly difficult to close this year compared to previous years.

And we've seen that with other companies reporting their revenue for the quarter.

So, I think we did fairly well in that environment.

Got it.

And then last couple of years, you've seen about a 4% -- 4% to 5% quarter-over-quarter sequential improvement in the second quarter versus the first quarter.

Any reason we shouldn't expect that historical seasonality this year?

That would be our plan.

I don't foresee any change to that.

We're making all our first, indeed, to make this year a growth year.

Yes.

Okay.

And finally, just want to get any update on your relationship with BroadSoft, you know, business activity levels with BroadSoft and how that's going.

All I can tell you that -- is that we've got a very close working relationship.

And I think we're trying to help each other in making our business successful.

Okay, that's great.

Thanks very much.

Sure.

(Operator Instructions) Mike Latimore, Northland Capital.

On Microsoft Lync, I think historically you talked about that growing 30% or so.

I guess were there some, I don't know, delays around the relaunching of Lync -- Skype for Business?

Or any thoughts on kind of the Lync growth rate there?

Right.

Well, it's still early in the year, so indeed we grew above 15%, but indeed the annual growth is expected to grow 30%.

Q1 is usually either flat or lower.

So that is not a big surprise.

But to your comment, yes, I think I've heard from at least two sources in our Company that for some reason, there's some maybe hesitation and/or delay in the market.

People related to the announcement of Skype for Business, that could be the case.

It's a bit more a new architecture which puts more emphasis on connecting to the cloud to IP network rather than connecting to the PSTN.

So, that could have happened, and at least I've got two such indications from, internally.

Got it.

And then I'm just trying to think of some of the numbers up here.

You talked about new products growing 63%.

But then when you talk about the individual categories, you had SBC at 60%, [stronger] at 70%, and MSBR at 100%.

So, is there some other category that was below the 60% that would pull the total category down to 63%?

Yes, we combined here some other products, new products such as the management tools and the -- basically not -- the growth is not that big there.

Okay.

And then just to be clear, on One Box 365, does that go into the new products category or Lync or both?

No, it's not counted within new product category.

It's part of Lync, yes.

Part of Lync, okay, got it.

And then, for the year, what kind of growth rate are you expecting out of your SBC category?

We roughly plan to grow more than 40%.

Okay, got it.

All right.

Thanks very much.

Sure.

Dmitry Netis, William Blair.

Just a couple of quick ones for me.

I just wanted to see how you think about this kind of Lync or Skype for Business transition as it's being brought on to the market, and how carriers react to that.

Are you seeing greater propensity for carriers to move away from Lync, as Lync or Skype's business is bringing this voice capability onboard?

And also specific to this One Box offering that you have as a PBX replacement, how does that change your situation on the market with Skype for Business -- or Lync online now having voice capability as well?

Right.

So, A, it's really too early to call as to the fact and/or the trend of service provider with relation to Skype for Business.

All in all, I would assume it's a new architecture that is meant to be more efficient and capable.

But I think it will take time, especially for enterprise large companies and midmarket companies to study, analyze and understand the implication of the new architecture over the previous one, which advocated on-prem deployment.

So, it's still too early and we can't refer to that.

As to One Box 365 and comparing it to Lync online, One Box 365 is part of our Lync offering.

Lync, traditionally, was targeting -- and still is targeting -- more large enterprises and midmarkets, and never been targeting the SMB market.

It's too expensive solution.

Lync is too expensive solution for the SMB.

So, the whole idea behind One Box 365 is two-fold.

A, allow to connect facilities -- small companies, small businesses -- to Office 365.

So, in that regard, basically, it helps enrich our portfolio for Lync.

The other target we have is really bringing the Lync or Skype capability to the SMB, which has never been the target initially, but now, with the very cost efficient solution of One Box 365, that is enabling SMB to get it.

And I think we will be helping organizations to all our channels to use it.

So it's not -- in any respect, it's not being perceived as a competitive product to any of the Lync solutions.

Okay, great.

And then just another question on Lync.

I think you said you expect 30% annual growth in that business line.

Are you seeing any large deals in the pipeline in home runs or you mentioned one in EMEA, as far as the IP phones business goes.

So, are there large deals primarily?

Or you think it will be more kind of singles than doubles as you go after this business?

Well, you know, judging from our own internal data, our sales force and CRM, we are seeing large projects.

We are seeing a growing number of larger companies, international companies, with many facilities, tens of facilities, studying to pass to proof of concept and deploy Lync.

We are confident that Lync is the winning solution in the market, and I think we'll definitely see it growing going forward.

Okay, great.

Thank you.

And then the last one is on the OpEx side.

I think you said on the topline 4% to 5% sequential improvement is reasonable.

Should we expect the OpEx to kind of remain flat as you sort of projected it through the year for the Q2?

So should we be expecting it flat?

And can you just comment quickly on the foreign exchange, whether that's helping you and how much of the OpEx is potentially denominated in euros?

Okay.

So, at this stage, we forecast OpEx to be ranging in the $20 million to $21 million in coming quarters.

So, all in all, we believe that OpEx will be fairly managed and contained within what we planned.

With regards to currency, we can talk about two.

We can talk about the US dollar versus the new Israeli shekel, and then we can talk about the US dollar versus the euro.

So, on the expense side, obviously, we are talking about the US dollars to new Israeli shekel, I think we are in a much better position than last year.

We basically have hedged all of our expenses for the year going forward.

And we believe that we've got a great exchange rate for that.

On the income side, referring to the euro, we are now seeing it in the range of [1.1 to 1.08].

Obviously, it's hard to predict its behavior.

And in view of the large decline that we have witnessed so far, we're not sure on our strategy as to hedging that.

So, that's our position as to the currencies exchange rates.

Okay, excellent.

Thank you very much.

Very helpful.

Sure.

Rich Valera, Needham & Company.

Shabtai, a follow-up on Lync.

Can you give us a sense of the relative revenue that you would expect to see in a traditional prem-based Lync installation versus a relatively new sort of Skype for Business cloud-based installation?

Do you guys potentially see the same amount of revenue?

Less revenue?

Sort of how should we think about that?

Okay, that's a very challenging question.

Frankly, it's too early in the game to understand the evolution and the pace of adoption and transition to Skype for Business.

So, if I would have to predict, I would say that the majority of our revenue is probably north of 80% to 90%; this year, will still come from mainly Lync on-prem.

We understand that going into 2016 and beyond, that will change.

But at this stage, we still have no ability to forecast that.

Okay, thank you.

Sure.

At this time, I would like to turn the floor back to management for closing comments.

Okay.

Thank you, operator.

I would like to thank everyone who attended our conference call today.

We enjoyed good business momentum in an environment for Q1 2015, and we look forward to continuing our growth and momentum in the next coming quarters this year.

We look forward to have you on our next quarterly conference call.

Thank you very much.

Have a good day.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time, and thank you for your participation.