AudioCodes Ltd (AUDC) 2015 Q2 法說會逐字稿

Greetings. Welcome to the AudioCodes second quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. A 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, Collin Dennis, with KCSA. Thank you, Mr. Dennis. You may begin.

Thank you, Rob. I'd like to welcome everyone to the AudioCodes second quarter 2015 earnings conference call. Hosting the call today are Shabtai Adlersberg, president and CEO, and Niran Baruch, vice president finance and chief accounting officer.

Before beginning, we'd like to remind you that the information provided during this call may contain forward-looking statements relating to AudioCodes' business outlook, future economic performance, product introductions 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 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, US Securities and Exchange Commission.

AudioCodes assumes no obligation to update 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'd 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. 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 Adlersberg. Shabtai, please go ahead.

Thank you, Collin. Good morning, and good afternoon, everybody. I would like to welcome all to our second quarter 2015 conference call. With me this morning is 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 or 2015. I will then review the business highlights and summary for the quarter, and 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 earning press release contains a reconciliation of supplemental non-GAAP financial information.

Revenues for the second quarter were $32.4 million, down 13.7% over the year ago quarter. Second quarter results reflect a decline in our business in Central and Latin America, and certain markets in Europe. In addition, we experienced larger than expected weakness in the contact center market, and lower gateway revenues in the areas of low and mid capacity, and legacy residential gateways.

Revenues from networking products and services declined 15.8% year-over-year, and accounted for 86% of the second quarter revenues. Revenues from our technology products increased by 2.2% over the year ago quarter. Services revenues increased by 13.7% over the year ago quarter, accounting for 28.7% of total revenues.

Revenues by geographical region for the quarter were split as follows, North America 47%, Central and Latin America 7%, EMEA 29%, and Asia-Pacific 17%. Our top 15 customers in aggregate represented 49% of revenues in the quarter, of which 35% are our 10 largest distributors.

Non-GAAP gross margin for the quarter was 59.9%, compared to 60% in the prior year period. Operating loss for the quarter was $1.8 million, compared to an operating income of $400,000 in Q2 2014. On a non-GAAP quarterly operating loss was $800,000, compared to operating income of $1.4 million, or a 3.7% of revenues a year ago.

Net loss for the quarter was $1.9 million, or a loss of share. On a non-GAAP basis, quarterly net loss was $500 million, or a loss of $0.01 per share, compared to a net income of $1.6 million, or $0.04 per share for Q2 2014.

Our balance sheet remains strong. At the end of June, cash, cash equivalents, and marketable securities, were $78.6 million. Days' sales outstanding as of June 30 were 79 days, compared to 75 days at the same time a year ago.

Operating cash flow generated during the quarter was $3.4 million, compared to $400,000 cash used during the same period a year ago. During the quarter, we acquired 1.4 million shares, for a total consideration of 6.1 million.

As of June 30, we have acquired an aggregate of 3.5 million shares, for an aggregate consideration of 16.6 million. We intend to continue to buy shares under the approved buyback plan until the end of the year. This intent was discussed and reapproved yesterday at the board of director's meeting, to approve the financial results for the second quarter.

Now to provide an update on our guidance. We now expect revenues for 2015 to be in the range of $137 million to $143 million, compared to the original range of $158 million to $162 million. We anticipate non-GAAP diluted earnings per share to be in the range of $0.09 to $0.12, compared to the original range of $0.24 to $0.28.

I will now turn the call back over to Shabtai.

Thank you, Niran. Good morning. Before getting to the call, I'll just go over the agenda that I planned for the call. I'll start by reviewing reasons for the revenue decline in second quarter compared to the first quarter. I'll analyze that from a regions sales perspective, business segment perspective, and product perspective.

We'll discuss a bit the good developments in the quarter related to the markets of Skype for Business activity, the sales provider activity, and some of the new products. I'll talk a bit more on the bigger picture going forward, and why we are optimistic about the future.

I'll talk about the use in market where we live, and I'll talk about expending our investment in the sales provider in view of the VoIP transformation era. We'll talk about the new revenue target for the quarterly sales in second half 2015.

We'll be talking about the target revenue and average revenue target of $35 million per quarter. We'll talk about the OpEx redaction plan that we already initiated. We'll talk about continued investment in our solutions and services, which is a growing activity, and fully successful activity for us.

As I mentioned before, we'll talk about the ALL-IP effort. I'll just mention now, we'll not go in to details, but we have a whole initiative that's connected to new cloud managed services program that will take years of all the different technologies, voice technological where we lead, and we'll utilize technological developed internally in the area of mobility and speech recognition.

We'll refer to the MobilityPLUS activity and the VocaNOM activity later only if I'm asked during the Q&A session. I'll touch a bit on the operational highlights, talk about, give more color and detail on the scaffold business activity, and we'll discuss again towards the end, our updated guidance and share buyback program.

So let me begin with discussion of revenues. State in our press release earlier today, we announced that we are disappointed with the financial results for the second quarter 2015, which included a decline of revenues of 13.7% percent compared to the quarter a year ago, and also compared to the first quarter of 2015.

And there have been more than 15% down compared to our stated target plan for the second quarter. Now let me touch first on the key drivers contributing to the decline from the three main angles, sales decline by region, by business segment, and then by product.

Referring to regional sales, following our pre-announcement on June 9th, it was further assessed at the end of the quarter, we experienced weakness in sales mainly in two regions, the Central and Latin America region, and the EMEA region.

Sales in both regions declined about 25% each from the previous quarter. And when combined, the total decline in these two regions amount to about $3.8 million, out of the $5 million decline in the quarter. That represents about 75% of the decline in the quarter.

Sales in North America also declined, but substantially lighter modes. They declined about 7%, or $1.1 million. While sales in the Asia-Pacific region declined about 3% to 4% and were almost flat with the previous quarter.

The Asia-Pacific region was the only region exhibiting nice growth in networking products this quarter. The decline in Asia-Pacific is attributed mainly to residential gateway sales, which is a line that we have already decided to exit back in 2014, excluding residential gateways, the Asia-Pacific region showed growth.

From a business segment perspective, we saw good business momentum in both the unified communication and business services market segments. On the other end, we encountered larger than expected weakness in the contact center market, where we saw a meaningful number of several small hundreds of thousands of dollar opportunities being pushed to the third quarter.

The declining contact center deals compared to the first quarter was substantial. It is important to note that in this market segment, our opportunities tied up to the success before three contact center partners and in their IP offering.

And just to remind everybody, we are not part of their PDM offering. Therefore our ability to generate sales in this segment is substantially contingent on their win rate, meaning we have less control of sales target, and enhanced volatility in sales.

And therefore when projects get pushed from one quarter to another, that will affect our ability to generate revenues. We have seen projects pushed to the third quarter in North America and in EMEA. We have no information yet about the projects in Central and Latin America.

On the products front, we saw lower revenues from sales of CP and [tracking] gateways, SBC, and residential gateway products. The decline in CP and tracking gateways was substantial, mainly in the areas of low and mid capacity.

Our NLO gateway sales were not affected materially. The decline is mainly due to a decline in sales in the contact center segment, shift in shipments to two large OEM customers, and lower than expected sales in the markets of [Link] space, where the announcement for the new Skype for Business release slowed the market a bit in the first half of 2015.

Sales of session border controller products declined about 10%, and can be attributed fully to the decline in the contact center market. And then finally, lower residential gateway sales, sales in that area contributed to the decline in revenues as mentioned before in Asia-Pacific. This is an expected trend in 2015, the result of our decision back in 2014 to exit that line.

In other product lines, we saw good progress, we saw growing number of IP phone sales opportunities in the unified communications market, and in the markets of Skype for Business segment, and similar growth in project wins of unified communication enabled routers, or MSBR online, in the service provider market.

Our services business continued to exhibit solid stability and growth, and demonstrated about 5% increase over the previous quarter.

On a more positive note, we saw encouraging developments in the markets of link business in our service provider activity, both translating to increased success in sales of connectivity and demarcation devices, into the offset PBX market, and in projects related to the ALL-IP transformation trend.

Our Skype for Link, or now renamed Skype for Business, one voice solution, and the One Box 365 solution, continue to gain more market traction. We see large potential, and so good for us with our service provider activity, mainly as a result of targeting our efforts toward the global trend of migrating public telephony and voice service into an ALL-IP network.

In the second quarter, we made good progress toward winning two large multi-year project with leading tier one service provider in EMEA and North America. Additionally, we continue to focus our efforts on developing and selling more complete end-to-end solution, and software solution, bringing more value to our end customers.

We get more and more feedback that the One Voice with Skype for Business approach is gaining us an edge in that market as it brings much more value to the end user.

Finally, as we continue to adapt and align our offering to solid industry trends such as NFV and SDN, and the migration into hybrid and purer cloud environments, we are confident in our ability to prosper in the market in coming years.

Now let's move to discuss the bigger picture, talk about the future direction in markets for the Company, and while we believe that they carry much potential for us, and whether this passing second quarter is at all indicative as to the near future.

First simply and peripherally, we believe we are a top leading vendor, one of the last standing companies in the voice services space, and in front of two fast, and steadily developing huge opportunities that each will continue growth in the next 5 to 7 years in a major way.

We're talking about the unified communications market, where we are leading infrastructure vendor in the Skype for Business solution, the leading solution in that space, and further partnering with more leading vendors in that space.

And then the business services market, and the trend to transform the world's networks into ALL-IP, a trend that is very evident, and is already quite substantial, and will be meaningful in the volume of large project sales between 2015 and 2025, good 5 to 10 years of large deals.

Reference the ALL-IP trend, as a vendor and partner, we have the best portfolio of product and services for the premises demarcation. We are a recognized provider and partner to tens of service providers worldwide. We've worked with many of the leading tier one service providers around the world, we got technology, the expertise and the skills work force to take advantage of these opportunities.

As to whether the second quarter performance is indicative to the near future, I will say the following. In 2015, we will continue to suffer in our sales in several countries, experiencing weaker economy. We have mentioned lower sales in Russia and Brazil as a proxy for that phenomena.

The decline in the second quarter in revenues in the contact center segment caught us by surprise, and we need to do a better job in handling the potential volatility of sales in this segment, but I'm more confident that we've seen one of the worst quarters in that respect, and that we may have seen the bottom of it.

On the other hand, I do not see any near-term rising debt, may jeopardize revenues in the unified communications and business services market segment. On the product front, we are confident in being able to continue to grow our new product category product sales comprising of our SBC user enabled routers and IP funds.

When charting next gen efforts evolution into the cloud, it is clear the history of CP infra devices that provide connectivity, demarcation and terminal, will enjoy very large demand in any developing IP network for the next 5 to 10 years.

Also, it is extremely important to state that while we firmly believe that cloud solution will reign, it is going to be a very long journey over the next 5 to 10 years, and we believe that the transition between on-prem solutions to cloud will be embedding a very long period of good 5-7 years of hybrid cloud and on-prem solution, and that we stand in a perfect position to enjoy this transition.

As to gateway sales, we believe in the healthy demand for gateways, the unified communications, and the ALL-IP trend for coming years. We agree though that we may see consistent trends of lower demand for gateways, but we believe that the growth in unified communication and ALL-IP will be a strong backing for such sales in several years to come.

Taking all of these volatility factors in our revenue basis into account, we now come to setting the new target for our quarterly revenues. And we now trying to chart a more conservative outlook for business revenues in coming quarters, so we believe it is prudent for us, and planning and resetting a lower base of quarterly revenue and plan our stance from that level and upward.

As such, we decided to lower revenue expectation for second half of 2015, and plan on an average level of about $35 million a quarter. This is the basis for the new guidance for 2015 revenue, as provided earlier by Niran. Obviously we plan on growing the fourth quarter on top of the third quarter.

Additionally, in order to compensate for the drop in base quarterly revenue level, and to maintain healthy profitability for the Company, already in 2015 and on, we have initiated an OpEx and cost reduction plan. The plan is expected to generate an estimated annualized savings of 5 to 10% of the Company operating expenses, and to be implemented over the next 6 to 12 months.

We expect the initial steps we already took in the second quarter to reduce our operating expenses by approximately 5% below the first quarter OpEx level, as soon as the fourth quarter of this year. In addition, we have solid a full review for our business lines activity, in order to support our plan to return to stronger profitability and growth already in the second half of 2015 and beyond.

Now to some of the second quarter operational financial highlights, we saw good gross margin improving to 59.9%. We had good OpEx control at $20.2 million, declining $100,000 from the first quarter. As I mentioned before, our plan is to reduce OpEx to about $19.4 million in the fourth quarter of 2015.

Headcount grew one person to 666. We have reduced about 15 positions in the quarter, and the effect will be felt in the third and the fourth quarter already. One positive result, very important to note, is that we keep generating cash out of operations.

In the second quarter, we have generated net cash provided by operating activities at a level of $3.3 million. If we look backwards to the last 12 months, we've been able to generate net cash from operating activities in the amount of $12.5 million. I believe this is a very important financial parameter to recognize.

Now to sum the description for activity in the field, let's move to the main area, which is the market of Skype for Business activity. Revenue grew 18.8% year-over-year from second quarter of 2014, and grew 10.5% from the first quarter of 2015.

While revenue grew in this area, it grew less than our stated goal of growing 30% year-over-year. Based on market feedback, general partners and solution partners, we've risen to believe that the Skype for Business latest announcement, which puts clear emphasis on migrating the solution to cloud operations, versus the previous releases which focuses on parameters, has slowed down the market in the first half of 2015.

But all in all, we experienced relatively good market, and continue to grow, as I've mentioned, 18.8% from last year, and 10.5% from previous quarter. One product that is becoming a very important product for the Company, is the One Box 365.

The momentum around One Box 365 continued in second quarter. We grew substantially, about 50% in that specific product take rate. We're also happy to say that we've been able to acquire new very large potential customers for the product, and we believe that we will invest substantially more into that product, making it a leader in that space.

With a solid run of sales of gateways SBAs and SBCs as part of the continued roll out of our large global customers, we have repeated business of large purchase orders with large enterprise accounts, whom we won in previous years, and we saw increase in sales of IP funds in several countries.

One more important enterprise player in the second quarter, we have been successful in growing and strengthening relationship with a top telephony vendor. We signed agreements, we already had first purchase order from that player, and we believe that in coming years, we'll see increased revenues from that account.

Now let me go to the updated guidance provided earlier on the call. We now expect revenues for 2015 to be in the range of $137 million to $143 million, compared to the original range of $158 million to $162 million.

In the first half of 2015, our revenue totaled about $70 million. Targeting average revenues of about $35 million for each third quarter and fourth quarter, we have set the revenue target to be $137 million to $143 million.

We anticipate non-GAAP diluted earnings per share to be in the range of $0.09 to $0.12 compared with the original range of $0.24 to $0.28. In the first half of 2015, non-GAAP earnings per share totaled about $0.04. That is the new revenue plan for second half 2015, and taking into account the OpEx reduction plan, we believe each of the coming quarters in 2015 will be profitable, and will bring the full year earnings to a range of $0.09 to $0.12.

Regarding the share buyback program during the quarter, we acquired 1.4 million shares for a total consideration of $6.1 million. As of June 30th, we have acquired in aggregate of 3.5 million shares for an aggregate consideration of 13.6 million.

During the month of July, we kept buying, and we have purchased more shares, close to 300,000 of shares. As stated earlier on the call, we intend to continue to buy shares under the approved buyback plan until the end of the year. The approval we got from the court.

This intent was discussed and reapproved yesterday at the board of director's meeting, which convened to approve the financial results for the second quarter. And with that, I've completed my introduction to the call, and we'll go now for the Q&A session.

Operator?

Thank you. At this time we'll be conducting a question and answer session. (Operator Instructions).

Thank you. Our first question is from the line of Ittai Kidron, with Oppenheimer. Please go ahead with your questions.

Good morning. This is George Iwanyc for Ittai. Can you give a sense of the type of visibility you have into the $35 million target, and how we should look at seasonality this year, and when we get back to 2016?

Okay. So we already are almost past one month in the quarter, and the backlog of purchase order at hand is substantially better than the one we had in the previous quarter. We have done [bottom] up analysis, we believe that the drop in gateway can be recovered partially.

Services will keep growing. We believe that three of the new product category, SBC, IP phones, and routers, will keep growing, and as a matter of fact, the decline was major in the contact center, which contributed to almost half, or more than half of the total decline.

We believe that many opportunities were pushed to third quarter. Just to give you an idea, we already got the beginning of the quarter a purchase of $500,000 that was supposed to be received in second quarter, and now is in the third quarter.

So all in all, we feel pretty confident about prospects for third quarter. I think in terms of our Central and Latin American activity, we have seen some of the worst quarters, and therefore we have good confidence to assume that we'll see a good quarter ahead of us.

I believe that the same discussion can be applied towards estimating our ability to continue that growth in Q4 and into 2016. All in all, Skype for Business activity is growing, successful, we see a lot of activity on the service provider go to market. So all in all, yes, we believe $35 million is definitely a revenue level that we should be able to attend in coming quarters.

Okay, and following up on the pushed out opportunities into third quarter, do you have any visibility into what's going on in Latin America at this point, and do you expect any of those pushed out orders to return, or is it just the European and North America opportunities?

Okay, so as I mentioned before, one big PO in North America of $500,000 already in house. Based on internal exploration with people who are in charge, managers who are in charge of that activity, we know of two large POs in EMEA that should happen in the third quarter. Also we know about another 4 or 5 in North America that we intend to complete in the third quarter. I've, at this stage, less visibility into the [color] region.

Okay, and just switching over to the restructuring that you're going through, can you give us an idea of the areas you're looking at, and then just the pace when we move into 2016, is it a linear pace over the next 6 months - or over the 12 months?

Yes. All in all, what we have initiated is a business review of the top major activity where we put most of the investment. Clearly it's the SBC and the demarcation devices, and a few more activities. The intent really is to look at the three-year financial plan, understand where we need to increase resources, where we may need to reduce resources.

And we intend to complete that work within the next two months, already decided and initiated. We believe that put aside the volatility, we have mentioned before, we suffer from both weaker economy countries, and the volatility in one business segment.

Contact center really again, just to make that point again, contrary to two other business segments, the unified communications and business services, where the revenues is a combination of tens if not hundreds of purchase orders, in the contact center market, there are two key factors.

One, our success is tied up to the success of our partner. If they win a deal, we get to sell, if they lose a deal, we do not sell. And second, each of those accounts usually is not a small account, usually it's between $50,000 to could be $300,000, $400,000, sometimes $500,000.

And there's substantially smaller number of those. So the [low] of the big numbers is not working here, and therefore perceive volatility, and this is why we've lowered the base revenue target, just to try and build some cushion for that type of volatility.

Thank you.

Sure.

Our next question is from the line of Richard Valera, with Needham & Company. Please proceed with your questions.

Thank you. Shabtai, you referenced Microsoft pushing harder on the cloud implementations of Skype for Business, than the on-prem base, and that seems to have had an impact on your growth rate in that product area. I mean do you think that's going to persist? And if so, what do you think is the new longer-term growth rate for the Skype for Business part of your segment?

Okay, so our stated growth target for the year was 30%. In the first two quarters of 2015, we have not been able to reach that goal. I think we grew about 10% in the first quarter, and 18.8% in the second quarter.

There was initially confusion in the market. We know plans that were put on hold, until people, end users, would understand better the recommended new architecture coming from Microsoft. That has, as I mentioned, delayed and slowed the business.

I think now, as time goes on, I think there's some realization that the shift to cloud is not going to happen overnight, and in fact I think some of the overall plan for such a shift will be provided only towards the end of this year.

So I think what you will see in next years, and that's not a short period, we'll see hybrid solution basically becoming the majority of the solution in the market, being supportive of both on-prem and cloud implementation in one company.

I think that compared to other players, we are built best to be on the hybrid mode. We have both ability to provide demarcation and still have ability for the current PSTN network. At the same time, we have strong crowder line that will be able to connect premises to the cloud through wide area network in to the ones.

So I think we will enjoy it. Obviously I don't think we can commit or restate the target of 30% growth this year. I think we should plan more somewhere between 15% and 20%, or maybe above 20% this year, but we still need to live through the third and fourth quarter, because I think we've seen in the second quarter business coming back better than in the first quarter.

Okay, so it sounds like your new target, call it 15% to 20%, maybe over 20%, depending on how things go in the back half. Is that fair?

Yes.

Great, thank you. And just wanted to touch on the media gateway business, and your thoughts on that business longer-term. It sounds like you have some - a reasonable amount of optimism that there will be some rebound, and that over the near term, from what you're seeing out there, I guess in the current quarter, it may be your outlook beyond that. So if you could just give a little color on that business, and how you see the trajectory of that over the medium to longer-term, I'd appreciate it. Thanks.

Right. So A, let's put aside the smaller and less important part of that line, which is the residential gateway line. That has been very minor for us in terms in 2014 about $7 million, this year it will go down to $5 million, according to estimation $5.5 million, but all in all, that line will decline, but is less important this year.

Let's talk about the major stream gateways here. The first, just to mention that in the second quarter, the majority of the decline came from the same phenomena we felt in the contact center. More than 50% of the decline in the contact center caused lots of - huge amount of gateway sales into that market. So the decline going forward should be substantially lower on that front.

Secondly is that we believe that since Skype for Business hybrid cloud mode is very firm and strong in coming years, and just going immediately to an important ALL-IP project that we believe we are in great shape to win, that will just give you an idea, Okay, the ALL-IP transformation trend is something that exists with the large players, and AT&T and Verizon and some European tier one service provider, those parameters have been announced back already probably in 2011 or '12.

The key thing here is that networks, old TDM networks will be retired between 2015 and 2025. And they will be replaced by ALL-IP networks. However, we know for a fact that in the years 2011 to 2015, there has been much more a leap service, nothing really happened in a major way.

I think some of the tier one service providers at this time are pressured to spit up their plan in the ALL-IP era, simply because as some of the new upcoming over the top players are able to grab market share from them. So there's a very strong incentive for the tier one service provider to get fast on the ALL-IP train.

Now, ALL-IP train meaning majority of the larger businesses, E1s and E3s and above, some of - majority of which already did that transition, and went into [feed tracking] solution long time ago, now we're talking about the mid and lower segment of the market, which remains a segment that was not preparing itself for the ALL-IP.

So we were involved, and we are towards - hopefully we are in the last stage round of negotiation of a big project with a very large tier one player, who would replace his old TDM infrastructure with gateways and routers.

And of that project, which is multi-million over the next 3 to 5 years, the majority of the product that will be sold will be gateways, which allows old key systems and small CDM PBXs to get an ALL-IP network, and that represents only one service provider who needs to replace his infrastructure.

So just think about the tens of large [POR] service providers, some of who may have delayed their plans. So the future for that is huge. And therefore, you know, we feel confidence that gateways will continue to be sold for both of these applications.

Okay, that does it for me. Thanks, Shabtai.

Thank you.

Our next question is from the line of Dmitry Netis, with William Blair. Please go ahead with your questions.

Okay, thank you very much, gentlemen. Lots of moving parts here, and lots to digest. I want to build up on Rich's questions as well. First of all, on the legacy, what would you classify as legacy? And maybe even the better way to address this question is what's the total dollar amount for the media gateways, the residential gateways, as you call legacy, what would that account to? I don't know how you want to look at it, maybe on the annual basis, or quarterly basis, but just can you give us a sense what that number might be, or what that percentage might be?

Right, thanks for the question. Actually it helps, indeed it's important to clarify those things. In the past, we called legacy one line, which was the technology line, and we meant basically [chips and plates]. That used to be legacy for us in previous years.

Now in the gateway business, we also have two areas which we consider to be kind of legacy and declining. One I mentioned already is the residential gateway, which we intend to retire off in 2016 completely, but it's small enough. I mentioned it to be about $5.5 million this year.

Second, is the segment of high and mid density gateways, which used to be used more in class 4 application, connecting switches, and that line has been very strong between 2005 and 2010, and is now declining. So we basically refer to it as legacy gateways, and again, it's the residential and the high-mid density. The one part that keeps selling very nicely is the mid market and the low end.

Now as to your question about the size of the business, in 2014 we sold about - I don't have precise numbers with me, but in terms of products, I believe we sold about 60 million to 65 million, and in terms of services, which is not expressing any decline as of now, we sold more than 20 million. So all in all, gateway business including all of the different flavors of it, was about 80 million to 85 million in 2014.

Okay. So Okay, I'm just trying to digest this as well. So low-mid you don't classify as legacy, high to mid is legacy, residential would be legacy of $5.5 million, and also technology which we know already, that's about $18 million annual run rate, that's also legacy for you.

Correct, except for the fact that, one point, technology legacy will be $16 million this year, not $18 million.

Okay, that's fair. And then if you were to exclude - well how much is the low to mid density which isn't legacy? How much is that approximately in the annual sort of numbers?

I don't have the number with me, but I'll do a guesstimate here. I assume that product-wise, it's between 50 and 60, that's the major part of the gateways, and also services attached to it. So the mid density is I think now at a level of between $10 million to $15 million, and I mentioned already the size of the residential gateways.

That's the annual number, $10 million to $15 million?

(Technical Difficulty)

Okay, and how fast is that low to mid density gateway growing?

They're not growing. I think right now we're selling them mainly to the business services and to the Skype for Business area, and they are either flat or growing between 5% and 10%. However, I think that in coming years, definitely 2016 and beyond, you'll see substantial contribution by the ALL-IP trend.

Okay. All right, thank you Shabtai, that's helpful. And then if I may touch - I want to touch on contact center real quick, but before I jump on that one, maybe talk a little bit about service provider. I mean we all considered you as an enterprise company.

Obviously you have some kind of legacy history with service provider vertical, and you may be reselling through them for Skype for Business. But how important is that vertical for you going forward? It sounds like you're putting a lot more emphasis on it.

And what would you say total percentage of product that goes through that vertical? Is it 20%, 30%, 50%? I mean what is it today, where is it you think is going, kind of give us a sense of how important, how much growth expectations are you actually placing in the service provider end of the business?

Yes, it is a very important market for us. Put simply, Skype for Business is the most important business in the Company. We have mentioned BroadSoft to be the second strong partner for us, which is mainly active in the market of service provider, they claim to own 600 service providers worldwide, and more than 20 of the top 25 tier one service providers.

Beyond that, you can imagine that as we fail the volatility on the contact center market, just based on the fact that we work with three partners and a small number of deals and volatility is high, when you go to the service provider market, you can imagine that selling to tens and sometimes hundreds of service provider makes your business much more sound and stable, so that's very important.

Also, one very important thing to say is that in the emerging cloud era, a lot of the premises equipment will disappear slowly. We say that gateway will still play an important part between 2015 and 2025.

However, if you think about routers, unified communication enabled routers, and IP phones, we believe that we have today the best portfolio next to Cisco to provide the needs of service provider for connectivity and demarcation.

And all the new evolving networks will be one way or another cloud-based over the top type of services, and for those, [RSBCs] and routers and phones are best. So that gives us confidence that we will prosper in coming years, and that's important.

Therefore, service provider, one more - you asked also about percentage. So in the past it used to be 60% enterprise, 40% service provider. I think lately it was more 70-30%. I need to recheck the numbers.

I'm sorry, 70% was the enterprise, and 30% was service provider.

Correct, yes.

Okay, but you feel that's going to grow from here?

Yes.

Okay, all right, thank you. I appreciate it. So it sounds even on the service provider side of the spectrum, things that you're selling into are pretty much business services opportunities, they're not for kind of core network, right? I mean the IP phones and the ...

Yes, absolutely.

Okay, very good. Thank you for that clarification. And then maybe last question on the contact center space, I'm just trying to sort of gauge the dynamic there. Has anything structurally changed with the way contact centers are being deployed?

Are there maybe also going to cloud, which is what's pushing some of the delays here, or - I know you had said you received that $500,000 order in Q3, which you were expecting in Q2, but there are hundreds of other opportunities, and why the slowing? Is it a structural change in the business? Is it premise going to cloud with those top three guys?

I know interactive is one, genesis might be the other one. I know they've been pretty sort of heavily focused on the cloud opportunities. What's the exposure for you there as it comes to cloud, versus maybe premise where you've been all along? So if you could discuss that, that would be really helpful.

Yes. Dmitry, I think you're right on the pony. There's a clear shift to cloud. If you know some of our partners, they've been investing heavily in moving their solution. Again, but it really depends on the specific segment of the market they were trying to attract.

Companies that focus on the mid market went much faster to cloud. Companies that focus on large enterprises, I think the shift there is slower. But as you have mentioned, indeed the lower volatilities in changing architectures and type of solutions, and indeed we need to sit on top of those? And as we accompany those transitions, you may see, as we've seen in this quarter, fluctuation in our revenues.

So is one of your larger partners, interactive, goes - I know they're launching this pure cloud product in the Amazon environment. How much of the opportunities there for you? Is there a session border control ...

Definitely. Okay, I cannot go into details, but we definitely got an opportunity there.

Okay, and IP phone...

Can't disclose.

Okay.

I cannot talk too much about it in that color...

Okay, fair enough. And then a quick clarification, the session border control, as you said, were down 16%. Was that an annual number, or was that the quarter over quarter number?

No, that was 10%, and that was quarter over quarter.

Oh sorry, 10% Q over Q. Okay, thank you very much, Shabtai. I appreciate the color.

Sure. Thank you, Dmitry.

Our next question is from the line of Mike Latimore, with Northland Capital. Please go ahead with your question.

Yes, thanks a lot. Yes, I guess just on that SBC question, if it was down 10% sequentially, what was it year-over-year, the SBC business?

We still haven't done the full year, so - oh, year-over-year, I think we grew, but actually Niran now shows me we went down 2% year-over-year.

Okay. And then your services business I think needs to grow, is this mid teens percent growth still reasonable for services?

Yes.

Okay. And then third quarter here, you talked - or I guess second half you talked about $35 million average per quarter. Assuming that kind of rate in the third quarter, are we more front end loaded than normal for our third quarter at this point?

The beginning of the quarter is good, so hopefully we'll see less back end, but still we stand in front of the focus, which is the second part of the summer, so we pretty much already staged to make [two bold destinations].

Sure. And then on the contact center business, I don't know if you have this revenue breakup, but do you have contact center as a percent of revenue in 2014?

I'm sorry again, can you repeat the question?

Yes, the contact center vertical, what percent of revenue was that in 2014?

Oh Okay, yes, according to the numbers I have here, I think contact center was about 16% of revenues in 2014.

Yes. And then I mean this change to the cloud, and in the contact center segment, does that slow the growth opportunity for you guys, does it increase it, does it not make a difference? I mean the shift to the cloud and the contact center, is that good overall, or neutral?

All in all, in the contact center market, it means less gateways on premises, but it means more SBC's on premises, and SBCs in the [access]. So there's a shift, it's hard at this stage to say how it will translate, whether we will see consistent decline or not in that market. But obviously it's less gateways, it's more SBC's.

Okay, and then just in terms of your EPS forecast for the year, what are you assuming share count to be for the year then?

It will be 40 million shares by the end of the year.

Okay, thank you.

Thank you. At this time, I will turn the floor back to management for closing comments.

Thank you, Operator. I would like to thank everyone who attended our conference call today. As discussed on our call, we encountered challenging business environment in the second quarter of 2015. Now with better understanding of the developing trends, and adapting our operations plans to tackle the issue we incurred through the second quarter, we feel we are in a better shape.

We have full confidence in our ability to recover our business success in the second half of 2015 and beyond. We look forward to having you on our next quarterly call. Thank you all. Have a good day. Thank you.

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