AudioCodes Ltd (AUDC) 2016 Q1 法說會逐字稿

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  • Operator

  • Greetings, and welcome to the AudioCodes first quarter 2016 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 Mr. Collin Dennis. Thank you. You may begin.

  • Collin Dennis - IR

  • Thank you. I would like to welcome everyone to the AudioCodes first quarter 2016 earnings conference call. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer, 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 global current 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 impact of competitive products and pricing on AudioCodes' and its customers' products and markets; timely product and technology developments; upgrade in 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, the 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 on 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 begin.

  • Shabtai Adlersberg - President, CEO

  • Thank you, Collin. Good morning and good afternoon, everybody. I would like to welcome all to our first quarter 2016 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. 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?

  • Niran Baruch - VP Finance, Chief Accounting Officer

  • 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 noncash items. Today's earning press release contains a reconciliation of supplemental non-GAAP financial information.

  • Revenues for the first quarter were $34.8 million, down 2.5% from the prior quarter. Revenue from networking products and services decreased 3.1% from the prior quarter, accounting for 89% of revenues for the first quarter. Revenues from our technology products increased 2.9% from the prior quarter. Services revenues increased by 2.9% from the prior quarter, accounting for 29% of total revenue for the first quarter.

  • Revenues by geographical region for the quarter were split as follows: North America, 43%; Central and Latin America, 8%; EMEA, 31%; and Asia-Pacific, 18%. Our top 15 customers in aggregate represented 55% of revenues in the quarter, of which 41% are attributed to our nine largest distributors.

  • Non-GAAP gross margin for the quarter was 61.3% compared to 60.5% in Q4 2015. Operating income for the quarter was $0.86 million compared to an operating income of $2.5 million in Q4 2015.

  • On a non-GAAP basis, quarterly operating income was $2 million or 5.7% of revenues compared to an operating income of $3.2 million in Q4 2015.

  • Net loss for the quarter was $0.2 million or a loss of $0.01 per share. On a non-GAAP basis, quarterly net income was $1.6 million or $0.04 per share compared to net income of $2.8 million or $0.07 per share in Q4 2015.

  • Our balance sheet remains strong. At the end of March 2016, cash, cash equivalents, and marketable securities totaled $76.9 million. Days sales outstanding as of March 31st was 60 days compared to 65 days in the prior quarter. Operating cash flow generated during the quarter was $2.7 million.

  • During the quarter, we acquired 1.1 million shares for a total consideration of $4.9 million. As of March 31st, 2016, and since we began to repurchase our shares in August 2014, we have acquired an aggregate of 7 million shares for an aggregate consideration of approximately $29.7 million.

  • In January 2016, we received court approval in Israel to purchase up to an aggregate of $50 million of additional ordinary shares. The current court approval for share repurchases will expire on May 19, 2016.

  • On April 5th, 2016, the Board of Directors approved filing a new application with the court in Israel requesting approval for an additional repurchase program for $50 million of ordinary shares when the existing program expires. We filed a new application, and we are expecting a decision in the coming weeks.

  • We reiterate our guidance for 2016 as follows. We expect revenues in the range of $142 million to $149 million and non-GAAP diluted earnings per share of $0.20 to $0.25.

  • I will now turn the call back over to Shabtai.

  • Shabtai Adlersberg - President, CEO

  • Thank you, Niran. We are very pleased to report on-track financial results and continued business momentum for the first quarter of 2016. I'm glad to report that we have met both the top-line and the earnings targets for the quarter, both in line with our guidance provided earlier this year.

  • And thus, as informed earlier by Niran, we reaffirm our guidance for the full year of 2016 as provided. Progress has been made across most business areas, such as Skype for Business markets, the session border control business line, the emerging IP phone business, transformation to all-IP services, and more. But, most important, we continue to grow our UC-SIP business 20% over the quarter a year ago, which is right on our stated strategic goal of growing it by 15% annually.

  • As we continue our transition from a technology- and gateway-centric company to a UC-SIP solution and services company, the UC-SIP business represents that our success as a company today and in the future. And revenue of UC-SIP should be used as the best metrics to measure our success today and tomorrow.

  • The UC-SIP business now represents about 35% of our quarterly revenue. And assuming we continue this trend of growth, the UC-SIP business should be comparable in size to our gateway business and pass it in 2017.

  • All in all, we expect that increase in the UC-SIP business will more than compensate the decline of the technology gateways and legacy in 2016. The gateway business and technology declined in the first quarter 18% compared to the year-ago quarter.

  • We see accelerated adoption of hosted UC and SIP trunking on a global basis. That phenomena is evident in the US, where addition of IP business line accelerated in recent two years reaching about 40% penetration in the US. Globally, it is estimated the penetration is only 15%. So, the potential overall is very big.

  • We see service providers issuing -- being active issuing more RFI than RFQs. And we see them making increased efforts to migrate their network and services into an all-IP network. We firmly believe in the long-term secular growth of our UC-SIP business and definitely the ability to prosper in that space.

  • There are two key elements in our strategic plan: one, a healthy market; second, execution to our strategy. As far as the market growth, we're seeing a very strong underlying market and transition to hosted UC and SIP trunking.

  • What is further fueling this trend is the ongoing phenomena in North America of incumbent local exchange carriers losing each year around 7% of their existing business line base to hosted UC open-source players who are generally growing at the rate of 20% to 25% annually.

  • And so, we are seeing the incumbents proactively migrating their offering to voiceover IP in order to mitigate the risk of losing additional share to the over-the-top competitors pushing voiceover IP. Our announcement yesterday of a very important and big win with Deutsche Telekom is an example to that trend.

  • Before I proceed to describe some of the developments in our sales in the business lines, let me touch briefly on some significant data points on the financial front. I will mention data which is all non-GAAP numbers.

  • All in all, performance in the first quarter was in line with our plan. Quarterly revenues were $34.8 million, a decline of 2.5% from the fourth quarter of 2015, as planned. Service revenues were $10.2 million, an increase of 2.9% over the previous quarter and almost 15% from the year-ago quarter.

  • Most important, and that is a very important point to make, while services revenue from gateway business declined about 8% compared to the first quarter of 2015, service revenues related to UC-SIP grew above 50% over the year-ago quarter, so meaningful increase in UC-SIP versus mild decline in gateways, in the services front.

  • Quarterly gross margin was a record 61.3%. Increase in gross margin is related to higher service revenue and better mix of product sales where our software product content keeps growing. On the OpEx front, we were right on our plan, with operating expenses at $19.3 million, exhibiting good control of operating expenses.

  • Headcount grew to 659 employees, an addition of 18 employees over the previous quarter. We added seven employees in connection with the acquisition of Active Communication, which we announced early January 2016, and then added new positions, mainly in sales, customer-facing position, and R&D.

  • Quarterly net income was $1.6 million or $0.04, as planned. Cash flow from operating activities was $2.7 million, very much in line with previous series of quarters with positive cash flows, a very important result which supports our ongoing buyback program.

  • Now, to some good news. In late 2015, we applied and submitted to the Office of the Chief Scientist in Israel a new development program of Cloud product and services with an overall budget of above NIS100 million. That is equal approximately $27 million based on the current exchange rates.

  • Two-thirds of that budget are to be supported by the Chief Scientist. The program targets to continue the development of innovative products in our research and development center for Cloud technologies that we have established in Beersheba in in May 2014.

  • Currently, this R&D center employs close to 90 engineers and has already yielded new design and products which are already selling in the market. Yesterday evening, we received a letter from the Office of the Chief Scientist notifying us that our program has been approved in principle as a three-year program for 2016 to 2018.

  • More specifically to 2016, according to this letter, an additional budget of about $1.8 million is approved for the year, of which nearly two-thirds will be funded by the Office of the Chief Scientist.

  • Now, let me move to describe developments in our business line side. We saw very nice progress in several areas. Let me start with Microsoft Skype for Business. Revenue in the Skype for Business market activity grew 20% over the year-ago quarter. We saw good traction of new customer wins with our One Voice for Skype for Business solution.

  • A key growth area was CloudBond 365, a newly introduced solution in late 2015 which is best for supporting hybrid implementations of Skype for Business, Cloud PBX, and on-premise solutions.

  • We saw an increase of above 50% compared to the first quarter 2015. We also saw nice progress with CloudBond 365 with several large service providers with which we won several opportunities. And we see the trend growing in size.

  • In addition, we announced support for a new Microsoft Cloud Connect Edition product which simplifies PSTN calling in conjunction with their Cloud PBX solution.

  • One more important point that should be mentioned here, we saw very nice ramp up to our phone business in the Microsoft Skype for Business market. We saw more than 50% increase in phones sold in Microsoft for Business -- Skype for Business markets, above 50% compared to the previous quarter. And in dollar amounts, that is equal to about 40% of overall 2015.

  • Other business and product developments in the quarter, session border control sales of product and services grew 18% over the quarter a year ago. We have announced our SBC business line offering with new products for both hosted and virtualized environments. We also announced that our virtualized session border controller was selected by Interactive Intelligence for its CaaS Cloud solution.

  • On the IP phone front, already mentioned our success in the Microsoft Skype for Business ecosystem. We enjoyed a very good quarter in our emerging phone business. We saw growth of more than 35% compared to the year-ago quarter.

  • Similar success was seen in the network management server solutions, our One Voice Operations Center, which grew above 50% compared to the quarter a year ago. We have also introduced a new innovative session routing manager called ARM, a solution that enables system administrators of large and multisite voiceover IP networks to manage call routing and policy enforcement for their enterprise companies. ARM has already generated much interest and good feedback in the market.

  • Now, to our announcement yesterday regarding the very substantial project win with Deutsche Telekom. As already discussed on previous quarterly calls, we see intensive activity among service providers to migrate their network and services to all-IP or what other people call transformation projects.

  • We see those service providers very active. We are engaged these days with between 10 to 20 different new service provider RFIs and RFPs. Those are large multi-million-dollar projects which will generate -- generally translate to projects between now and 2020.

  • Yesterday, we announced one such megaproject. Deutsche Telekom has selected AudioCodes' MSBR, multiservice business routers, for its main SIP-trunk transition project. AudioCodes' routers will be used to deliver SIP-trunk connectivity over broadband for their Deutsche Telekom all-IP migration from ISDN.

  • The router will be deployed with rapid selection and full remote management of their business customers. It will feature connectivity routing, session border controller, and more. This project is planned for delivery already in 2016 and to extend until 2019. We believe that this second win on the heels of another all-IP win made in Asia-Pacific in 2015 is just the beginning of a series of large transformation projects in the next five years.

  • Regarding sales, generally, sales performed according to plan. We saw good performance in North America and Asia-Pacific, in Latin America, parts of Western Europe, and in other areas. We believe that, on our sales front, where we added more resources to boost sales team, we have reinforced our salesforce in more than four or five countries in the past quarters.

  • We have invested heavily, and we mentioned that, in partnerships. We now have and feel stronger relationship and partnership with some of our leading partners, such as Microsoft, Genesis, Interactive Intelligence, and others. And more important, we have added more global system integrators to our winning [gigs]. So, we have won two big global system integrators that now sell to market with us our One Voice for Skype for Business solution.

  • With that, I have concluded my presentation. Give the call back to the operator.

  • Operator

  • (Operator Instructions). Dmitry Netis, William Blair & Co.

  • Dmitry Netis - Analyst

  • Thank you. Shabtai, good morning. Niran, good morning.

  • Shabtai Adlersberg - President, CEO

  • Hi, good morning. Sure.

  • Dmitry Netis - Analyst

  • A question on the guidance. You reaffirmed the guide. You posted upside in Q1. How should we think about the quarters as we go through the year? Is that just going to be just a straight line? Should we assume more of a backend-loaded year? Can you give us a little bit of maybe -- now that you've been sort of one month into the quarter, can you give us some visibility into June as well, or should we just thinking more of a ramp in the September/December quarter?

  • And then maybe secondly, I'm sorry, on the OpEx, now with the grant that you received, does that -- how should we think about the OpEx in light of that grant? Should the OpEx basically remain steady, or will you actually see some benefit out of the OpEx now that you have some money coming from the government?

  • Shabtai Adlersberg - President, CEO

  • Right. Generally, I think we should not look for a backended year. We do believe we will see some linear ramp through the quarter. We're not publishing quarterly guidance. But, I -- we can -- our plan calls for growth sequentially of about 3% to 4% in the second quarter. And we envision a similar such trend in each of the following quarters. So, that's on that.

  • Regarding whether we will benefit from the new approved [firm], I will leave it to Niran to comment on that.

  • Niran Baruch - VP Finance, Chief Accounting Officer

  • Yes, hi, Dmitry. With regard to the OpEx, we assume that we will have higher expenses, but not more than our expected increase in our revenues. A part of it will be a benefit from the OCS, which we just got the approval yesterday and will decrease our expected operating expenses.

  • Dmitry Netis - Analyst

  • Okay. So, the grant will go to cover some of the R&D expenses. Is that correct? And can you just remind us exactly how much of that money will we see in 2016? And I don't know if you want to say 2017, 2018 as well since that's a three-year program. I've heard something on the order of $1.8 million for this year. Is that correct, just -- and two-thirds will be paid out. So, you are actually going to get two-thirds of that money. Is that the way to think about this?

  • Niran Baruch - VP Finance, Chief Accounting Officer

  • Right. We got the -- yes, we got the approval yesterday. The first-year approval was for a budget of $1.8 million. And we will be -- we will receive from those years two-thirds of that investment.

  • Dmitry Netis - Analyst

  • Okay. All right. Fair enough. And then what about 2017, 2018? What -- how much do you think you'll get there from that program?

  • Niran Baruch - VP Finance, Chief Accounting Officer

  • No, the total budget requested was for more than NIS100 million, which is approximately $28 million. We will receive two-thirds of the approved budget in the next two years, for 2017 and in 2018.

  • Dmitry Netis - Analyst

  • Okay.

  • Niran Baruch - VP Finance, Chief Accounting Officer

  • The total is three years and will be more than NIS100 million.

  • Dmitry Netis - Analyst

  • So, I'm just ballpark getting to maybe roughly just under $20 million that you will get. But, you're only going to see $1.8 million in 2016. And then that probably implies a pretty substantial ramp in 2017, 2018. Is that how I should be thinking about it?

  • Niran Baruch - VP Finance, Chief Accounting Officer

  • The total will be $28 million less the $2 million or $1.8 million approved for 2016. The remaining will be in 2017 and 2018. And out of it, we will be reimbursed two-thirds of this amount.

  • Dmitry Netis - Analyst

  • I got you. That's a pretty big step up. Okay. Very good. And then on the gross margin, guys, what's -- the 61-plus percent was sort of a nice number there. What actually drove that? Was it just the contribution of higher-margin product, and if so, which ones? Did you see any software, virtual SBCs in the quarter? And if not, do you expect to see that in 2016? And how should that gross margin trajectory look like for the remainder of the year?

  • Shabtai Adlersberg - President, CEO

  • Right. So, basically, services went up. And in our services business, we enjoy a gross margin of 75%. So, as the percentage of services versus product increases, we will enjoy higher gross margin.

  • At the same time, as we increase the number of products on our portfolio, including virtualized SBC as you have mentioned, also the One Voice Operating Center of solutions, which is all software, as I have mentioned in the call, that has increased more than 50% compared to the year-ago quarter.

  • So, all in all, we believe we will see continued strength and, as mentioned, that if you go back a few years, you'll see that we have been setting up gross margin in the past three, four, five years from a level of 56% up to what we are in that quarter. So, we expect that trend to be fairly solid and basically improving.

  • Dmitry Netis - Analyst

  • So, Shabtai, was there virtual SBC revenue? You said it increased 50%. Can you give us a bit of what that revenue was in -- with respect to maybe the total SBC number?

  • Shabtai Adlersberg - President, CEO

  • There's a bit of confusion. I mentioned 50% increase regarding the One Voice Operations Center products, not the virtualized. The virtualized, as been told, I don't have the number with me. But, again, we're growing on both virtual SBC and the [OVOC].

  • Dmitry Netis - Analyst

  • You're actually getting revenue on the virtual SBCs now. And do you mind -- ?

  • Shabtai Adlersberg - President, CEO

  • -- Oh, yes -- .

  • Dmitry Netis - Analyst

  • -- Telling us who the customers are or how many customers you have on that product. And where does that product fit actually? Does it go into the Cloud deployment? Does it fit on-premise, customer premise, and just kind of a way of server format, appliance format I guess? What's the typical use case of that SBC?

  • Shabtai Adlersberg - President, CEO

  • Okay. Usually, it's being used in conjunction with access application, meaning the virtualized SBC. It's part of a overall virtualized solution that resides in the datacenter in the Cloud, not on-prem. So, as for SBC business growth on the access side of the network in Cloud environments, you will see more sales of virtualized SBC. The virtual SBC is not sold on-prem.

  • Dmitry Netis - Analyst

  • Understood. And how many customers or how many Cloud sort of deployments do you have now on that virtual SBC product?

  • Shabtai Adlersberg - President, CEO

  • I don't have the number with me. I'll mention just that, last year, we sold -- if I'm not wrong -- just trying to pull it off the top of my head, I think we sold about 2 million of software SBC in access application. We target growth substantially this year. But, I do not have yet any percentage on the virtualized portion of that.

  • Dmitry Netis - Analyst

  • Okay. Fair enough. My last question is on the transformation projects. It seems like you're starting to focus more on the service provider side as you see these -- potential opportunity there on the IP transformation. Just wanted to kind of gauge if that is indeed correct and maybe what percentage of revenue is coming from the service provider. Has it improved? I think, in the past, there was always maybe 30% or just under 30% of total.

  • And then in those 10 or 20 engagements, who are -- basically, who you seeing on the voice application server side? Are you partnering with some of the [VaaS] vendors to enable that transformation? And if so, maybe you can talk about some of the typical projects you have seen there.

  • Shabtai Adlersberg - President, CEO

  • Okay. So, basically, in the past, we were much more enterprise focused. I think percentage division between enterprise and service provider was generally 60%, 70% for enterprise, 30%, 40% for service provider.

  • Lately, in the past year, our offering for service provider, including that very visible trend of migration to all-IP transformation projects, this is all the service provider in the world, that is moving more the needle. And we believe that, in coming years, we will enjoy more business coming from service provider.

  • Specifically, our offering for the all-IP migration is very comprehensive. We believe that, in the midmarket -- put aside high density, where usually Cisco is the winner, and very low end, where we compete less -- in the midmarket, we believe that our portfolio of gateways, SBCs, routers, the unified CPE, we don't find many companies, maybe Cisco, who have a very strong unified CPE offering. And the combination of those three makes us very unique. So, we are fairly successful and get a lot of interest when a service provider is planning its transition to all-IP.

  • Now, as I've mentioned before, that has been more [of a lead] service in early 2010. In 2015, we saw that increasing. Now, we have more than -- as I've mentioned, more than 10 to 20 active projects going on. We are in various phases, not won all of them, but we are in very good position to win substantial number of them.

  • We believe that competition is less strong than us. We believe that the only impediments would be that one or two of those competitors are already suppliers in several of those service providers. So, our key mission is to unseat them.

  • But, given our scale, given our portfolio and expertise, and the Deutsche Telekom project demonstrates it all. We are by far very successful. Our SBC, which none of our competition is close in performance, and SBC is important because, once they transition to all-IP, they move first to SIT-trunk, and then they plan on moving to hosted UC. In hosted UC environment, the SBC is key.

  • So, we're very optimistic. We are right now active discussion on a weekly basis with many of these operators. So, we believe that that will become a winning factor for us in coming years.

  • Also, just to mention, as I mentioned before on the call, that our Microsoft Skype for Business CloudBond 365 has generated interest within the service provider community. And we see nice progress there. So, overall, better fit portfolio allows us to be more successful on the service provider front.

  • Dmitry Netis - Analyst

  • Okay. And just on the VaaS side, is BroadSoft one of those kind of typical partners you're seeing in those transformation projects? Is it somebody else? If you just kind of quickly comment there, that would be great.

  • Shabtai Adlersberg - President, CEO

  • Yes, partnership with BroadSoft is very important. That definitely helps us. Working in conjunction with BroadSoft helps us. But, at the end of the day, the decision made by the service provider is really more direct to the abilities that you bring with your portfolio. And so, we enjoy the partnership. But, we win those projects on our own.

  • Dmitry Netis - Analyst

  • Okay. Got it. Thank you very much.

  • Shabtai Adlersberg - President, CEO

  • Sure. You're welcome.

  • Operator

  • [Jay Berningo].

  • Jay Berningo

  • Thank you. I have a question on the share purchase -- repurchase program. As of the repurchase, started back in August of 2014 according to this press release, we've picked up 6.9 million shares, and we spent $29.7 million to buy those shares.

  • I'm a little concerned. I don't understand why the Company is so aggressive on these repurchases. $29.7 million, I'm not sure why we didn't use those funds for maybe an acquisition or something other than the repurchase. The repurchase doesn't seem to be working as a good investment. I was wondering if we could talk about the why behind that.

  • Shabtai Adlersberg - President, CEO

  • Very simply, A, we do look for acquisitions that will help us grow our business. And we just announced one three months ago, and we acted on acquiring more. However, we found out that, currently, where we look for good use for our capital, we believe that the investment in our shares at the current price and the value that we believe they -- we represent, that is the best investment we can make. And this is why we're so active. There's no other reason.

  • Jay Berningo

  • So, a year ago, the price was $4.55, if I'm not mistaken. And according to preopening, $4.28. How's that a good investment?

  • Shabtai Adlersberg - President, CEO

  • Well, sometimes, I'll turn your attention to the fact that the stock price, as you have mentioned, is below $5. If you watch the volume of trading on our shares, you'll see that is not high. That will basically tell you, for the general investor, that it is very tough for an investor to develop a meaningful position in our shares because of the low volume. And that is I believe the key reason for the price not to go up. But, that does not tie in, in any way to a buyback program.

  • Jay Berningo

  • The reason it didn't go up is because of what?

  • Shabtai Adlersberg - President, CEO

  • Because the trade volume is very low. And as you know, it would be very tough decision for an investor who likes the Company to develop a reasonable position.

  • Jay Berningo

  • How does an investor do that?

  • Shabtai Adlersberg - President, CEO

  • I'm sorry?

  • Jay Berningo

  • How would an investor be able to do that because you said there's not enough volume?

  • Shabtai Adlersberg - President, CEO

  • That's -- I'm describing to you the current situation. You asked me about why the price has not moved up. Usually, the price move up, it's a result of investors investing in the stock. And I'm trying to give you one reason for why we're not seeing an increase in the stock price, at this point. And this is a personal opinion, of course, as an investor.

  • Jay Berningo

  • And you went back to the courts to buy more stock, correct?

  • Shabtai Adlersberg - President, CEO

  • Yes.

  • Jay Berningo

  • And you continue to think that, at this level, this is a great investment versus acquisition.

  • Shabtai Adlersberg - President, CEO

  • Yes. Let me give you another point of view. Look at the multiples that our -- other companies enjoy in the market. We're enjoying a much lower multiple. That's a good reason for investing. It's a long discussion. And usually -- I'm managing the business. I'm not an investor here. So, I've tried to give you some reasoning to what's going on.

  • Jay Berningo

  • Okay. I appreciate that. I think the reason why the stock isn't going up is because we can't get any consistency in earnings growth. That's my opinion. But, I do appreciate your explanation of the reasons for the share purchase. Thank you.

  • Shabtai Adlersberg - President, CEO

  • Sure.

  • Operator

  • Vijay Davar, Northland Capital.

  • Vijay Davar - Analyst

  • Yes, hi. This is actually for Mike Latimore. Thanks for taking my question. Could you tell me what -- how much was the mix between enterprise versus service providers?

  • Shabtai Adlersberg - President, CEO

  • We don't have that number right here with us. We'll get back to you after the call. We can give it to you.

  • Vijay Davar - Analyst

  • Okay. Sure. And what was the contribution from your recent acquisition, Active Communications?

  • Shabtai Adlersberg - President, CEO

  • The contribution from the recent acquisition is not meaningful and was not a key reason for the acquisition. The acquisition was really much more technological in nature. So -- .

  • Vijay Davar - Analyst

  • -- Okay. And the win from Deutsche Telekom, is that factored into the guidance for the full year?

  • Shabtai Adlersberg - President, CEO

  • No, we will see Deutsche Telekom as a customer this year. But, it will not step up in 2016 to be too meaningful to change the guidance or affect it.

  • Vijay Davar - Analyst

  • Okay. I think one of the previous questions was on the gross margin. I was just curious to know, how much further can the gross margin go, given the transition towards UC-SIP and also services, which is kind of more higher-margin business? Is there any target for the year end or maybe something for the next year?

  • Shabtai Adlersberg - President, CEO

  • Well, we have one key unknown element that's a question. And that is the other side of the business, which is a combination of the gateway technology and some other legacy line.

  • We have good control, good planning, and very good chance of performing on our UC-SIP business on the growth, which we target 15% a year. We have less control on the gateway business revenues simply because that is tied up more to the market behavior, which is at this stage a bit too difficult to forecast. So, it's tough to say more on the gross margin in that respect.

  • Vijay Davar - Analyst

  • And on the OpEx side, is it still manageable at the sub-$20 million levels, or given the acquisition or any other expenses, can there be a possibility of OpEx going up sometime during this year?

  • Shabtai Adlersberg - President, CEO

  • I think we'll -- on the OpEx side, we are where we want to be. I think we have roughly planned for $19.5 million give or take level for the year. And I think we [dare] to do it.

  • There's one more element though that I should mention that is the exchange rate. We've seen earlier this year the exchange in the currency rate between the new Israeli shekel and the US dollar. And that may affect more in the second half. But, at this stage, it's pretty hard to say what's going to happen. Beyond that, I think OpEx will stay around where we planned.

  • Vijay Davar - Analyst

  • Okay. And maybe one final question on Skype for Business. Given the increasing interest towards the Cloud version, do you see any delays in the Skype on-premise deployments?

  • Shabtai Adlersberg - President, CEO

  • We've seen those. We have proposed those. We've seen that in the North American market last year. We also saw some of that in our European business this year. But, we believe that -- given time and effort, we believe that, now that Cloud PBX and on-prem solution being better understood by customers and partners active in deploying it, think that will move on all this delay. And I think we'll get back to a good market.

  • Vijay Davar - Analyst

  • Thank you.

  • Shabtai Adlersberg - President, CEO

  • Sure.

  • Operator

  • Rich Valera, Needham & Co.

  • Rich Valera - Analyst

  • Thank you. Wanted to revisit the grant from the Chief Scientist's Office. So, if you get $2 million -- $1.8 million this year, the balance of the grant it sounds like is $26 million, which let's just say roughly is split over two years. So, it would be a step up from $2 million to $13 million. And you're going to get kicked out I think two-thirds of that.

  • So, it's an enormous number relative to your R&D expense. So, just wanted to understand what needs to happen for you to get the balance of that grant. Do you need to go through an approval process every year? And could that size be reduced as you apply for that approval process, say, next year in advance of getting what would be something like a $13 million grant potentially?

  • Shabtai Adlersberg - President, CEO

  • Okay. Thanks, Rich. No, actually, I think, let me put things in perspective and clarify. We have already one [firm] that was approved in 2013 and basically provided funds to cover R&D expenses between 2014 and 2016. That has already been built in our plans for 2016.

  • What was approved was a new plan that is partially basically in -- covers the same 2016, but adds 2017 and 2018, meaning that, compared to what we have in plan, we will see a slight increase this year of that two-thirds of $1.8 million. And that will make next year, 2017 and 2018, fairly similar to the overall 2016 budget that we have this year.

  • So, the $13 million, A, obviously is to be only two-thirds of that. And then this is maybe a slight increase over what we will have generally in 2016. So, you should not expect a big change going forward. But, at the end of the day, it's a budget that's approved and funded for another 2.5 years.

  • Beyond that, there are no specific terms and conditions for us to meet other than to form what we have committed to develop and to aggregate upon. And as long as we do that, as we did in the past two years, we see no big impedance reaching in accepting that budget.

  • Rich Valera - Analyst

  • Okay. Maybe we'll have to take that offline. I'm still confused about the magnitude of the grant and $1.8 million a year. I'll move on.

  • So, with the UC-SIP products, you mentioned they grew 20% in the quarter, which I think was in line with the prior commentary you'd given on the 4Q call. But, you mentioned them being a 15% long-term growth business.

  • Last quarter, I think you talked about that being a 20% growth business for this year. I'm not sure if that has changed. But, just wondering, has anything changed in your view on the growth prospects for UC-SIP, or is that just the longer-term view where you're being a little more conservative than the 2016 view?

  • Shabtai Adlersberg - President, CEO

  • Right. Nothing has changed. Actually, this quarter was -- we had a very nice surprise because we've seen two -- first, let me tell you that UC-SIP is a combination of five different business -- smaller business lines. It's the SBC. It's the phones. It's the routers. It's the management software, the One Voice Operations Center. And it's the CloudBond 365.

  • Now, you can understand that it may happen that, in a given quarter, you'll see fluctuations. So, we enjoyed in the first quarter great performance on the phones. We have enjoyed great performance on CloudBond, on the One Voice Operations Center. SBC was great. The routers were less. But, that is within our plan because we understand that routers will pick up more as the all-IP projects start to ramp up.

  • We -- I'm just trying to be conservative. Going forward, we will see growth. But, I think it will be more reasonable for us to plan and manage our business according to a plan that calls for 15% growth rather than 20% because I'm talking about the multiyear trend, talking about three years down the road. I think it would be presumptuous for me to target 20% for the next three years.

  • Rich Valera - Analyst

  • Okay. That's helpful color. Thank you. And then in your prepared remarks, think you mentioned that gateways were down 18% in the quarter. And last quarter, you distinguished between trunking gateways and I guess your enterprise gateways. Can you give any color on how those two segments of the gateway business performed this quarter?

  • Shabtai Adlersberg - President, CEO

  • Yes, I'm glad you mentioned it because, indeed, as I've mentioned on my answer previously, basically, gateway business is a bit out of control in meaning that we may see one quarter where we see 50 gateways selling better. And in the first quarter of 2016, we've seen them perform less than planned, but we saw nice increase on the trunking.

  • So, I think for better planning purposes, we will focus on, from now on, on gateways as a whole. And this is why we've mentioned that 18% decline for the overall. We will see fluctuations on a quarterly basis between one type of gateways going up. The other one may decline further.

  • So, all in all, I think it's fair to assume that, on an annual basis, we'll see between 5% and 10% overall on the gateway business decline. Other than that, it's pretty hard to predict with more finer details.

  • Rich Valera - Analyst

  • Okay. So, the -- obviously, you were sort of ahead of that pace as far as decline in the first quarter. So, presumably, you expect that rate of decline to lessen as we move through the year. Is that fair?

  • Shabtai Adlersberg - President, CEO

  • Yes, I believe also -- I've mentioned the all-IP projects. Each of them carries huge amount of gateways in it. And when they will start kicking in, in big numbers, it's pretty difficult to say at this stage. So, we'll have to go quarter by quarter. But, all in all, I think we will see the gateway business declining, but the UC-SIP business, which is the main business, growing substantially faster.

  • Rich Valera - Analyst

  • Got it. And then I'm sure you're aware Polycom is looking to potentially get together with Mitel. Polycom's historically been very strong in IP phones. But, they could be viewed as more of a competitor to some of the deployers of phones if they get together with Mitel. How do you see that as a potential opportunity for AudioCodes and the IP phone market?

  • Shabtai Adlersberg - President, CEO

  • Hard for me to relate to it. But, really, we're coming from a completely different angle. We bring a more complete solution for the Skype for Business market. We believe that our ability to provide such complete solutions versus a solution that comprises of various vendors is much better.

  • And also, since we entered that market fairly late compared to Polycom and other companies, it took us some time to reach a level of maturity and feature richness before we could compete well.

  • We believe that we are in this year really changing the scene. And we are far better equipped to compete. And with our solution approach and more mature business line, and I don't know what the Mitel-Polycom acquisition will close here. But, we believe that, irrelevant of that, we will keep growing nicely in that market.

  • Rich Valera - Analyst

  • Fair enough. And you may have addressed this in some of your previous comments. But, just I wanted to see if you could give any color on the significance of your support for the Microsoft Cloud Connector Edition and the Skype for Business Cloud Connector Edition, which you highlighted in your release. Is there a specific product opportunity associated with your support of that?

  • Shabtai Adlersberg - President, CEO

  • Oh, yes, absolutely. We try as a company to bring the fullest solution to the Skype for Business market. Right now, there are three different approaches, a pure on-prem solution, a pure Cloud solution, and then hybrid solution.

  • With our CloudBond 365, we target the hybrid implementation. With Microsoft Cloud Connect Edition, we target the pure Cloud. We already have a platform that is very well suited. We're going to announce very shortly a solution that will use our SBC in more products in conjunction with it. So, we intend to play on all fronts in all different implementation of Skype for Business. And we believe we will be among the frontrunners in that.

  • Rich Valera - Analyst

  • So, just to be clear, the Cloud Connector Edition is for the pure Cloud implementation of Skype for Business?

  • Shabtai Adlersberg - President, CEO

  • Yes, it's meant basically to provide PSTN calling for enterprises who are already tied up with dial plans with existing service providers. So, pure -- no, Cloud PBX originally targets to have Cloud PSTN calling. But, with the CCE, basically, it allows enterprises to stay connected with their service providers but still use the Cloud PBX solution.

  • Rich Valera - Analyst

  • Got. Okay. Thank you.

  • Shabtai Adlersberg - President, CEO

  • Sure.

  • Operator

  • Greg Mesniaeff, Drexel Hamilton.

  • Greg Mesniaeff - Analyst

  • Yes, thank you. I just have one question. Any changes to your pricing model for the SIP -- UC-SIP products in the quarter? And just if you can give us any color on the overall pricing environment. Thanks.

  • Shabtai Adlersberg - President, CEO

  • I think pricing environment is pretty reasonable. We do not see -- since we compete on several subbusiness lines, and in each, we do not have serious competition, all in all, we have no price pressure in many of these lines. So, all in all, we don't see much changes to our pricing in UC-SIP.

  • Greg Mesniaeff - Analyst

  • And the way you charge for the software, nothing has changed in that regard.

  • Shabtai Adlersberg - President, CEO

  • No.

  • Greg Mesniaeff - Analyst

  • Okay. Okay. Thank you.

  • Operator

  • Ladies and gentlemen, are there any further questions? Okay. Mr. Dennis, there are no further questions at this time. Would you like to make any closing remarks?

  • Collin Dennis - IR

  • Yes. Thank you, operator. I would like to thank everyone who attended our conference call today. Based on the good business momentum and execution of our plans in recent quarters, we believe we are on track to achieve another year of growth and progress in 2016 and continue to build a very strong, sustainable, profitable business in coming years. We look forward to have you on our next quarterly conference call. Thank you very much.

  • Operator

  • Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may disconnect your lines.