AudioCodes Ltd (AUDC) 2016 Q4 法說會逐字稿

Greetings and welcome to the AudioCodes fourth-quarter 2016 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, Ms. Elizabeth Barker, Director of Investor Relations at KCSA Strategic Communications.

Thank you.

You may begin.

Thank you, Melissa.

I would like to welcome everyone to the AudioCodes fourth-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 Financial Officer.

Before beginning, we would like to remind you that the information provided during this call may contain forward-looking statements relating to AudioCodes' business outlook, future economic performance, product introductions, and plans and objectives related thereto.

And statements concerning assumptions made or expectations of any future events, 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 in target markets, in particular shifts in supply and demand, market acceptance of new product 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; upgrades 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 our 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 this information.

In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share.

AudioCodes has provided a reconciliation of non-GAAP net income and net income per share to its net income and net income per share according to GAAP in its press release and on its websites.

Before I turn the call over to management, I would like to remind everybody 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 go ahead.

Thank you, operator.

Good morning, and good afternoon, everybody.

I would like to welcome all to our fourth-quarter and full-year 2016 conference call.

With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance for AudioCodes.

Niran will start off by presenting a financial overview of the quarter.

I will then review the business highlights and summary for the fourth-quarter and the full-year 2016, discuss trends and developments in our industry, and talk a bit about the outlook for 2017.

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 fourth quarter were $37.8 million, up 1.5% from the prior quarter.

Full-year 2016 revenues totaled $145.6 million compared to $139.8 million in 2015.

During the fourth quarter of 2016, we made sales to Avaya of $645,000 which remained unpaid.

On January 19, 2017, Avaya Inc.

announced that it had filed a voluntary petition under Chapter 11 of the US Bankruptcy Code.

As a result, the revenues related to these sales were not included in revenues reported for the fourth quarter.

Services revenues for the fourth quarter were $11.4 million, accounting for 30.2% of total revenues.

On an annual basis, services revenues increased by 14.7% from the previous year.

The sales revenues balance as of December 31, 2016, was $31.8 million compared to $26.3 million as of December 31, 2015.

Revenues by geographical region for the quarter was split as follows: North America, 43%; Central and Latin America, 9%; EMEA, 31%; and Asia-Pacific, 17%.

Our top 15 customers in aggregate represented 59% of revenues in the quarter, of which 49% are attributed to our 11 largest distributors.

Gross margin for the quarter was 60.9% compared to 61% in Q3 2016.

Non-GAAP gross margin for the quarter was 61.5% compared to 61.7% in Q3 2016.

Operating income for the quarter was $3.6 million compared to an operating income of $2 million in Q3 2016.

Full-year 2016 operating income was $7.8 million.

On a non-GAAP basis, quarterly operating income was $2.9 million or 7.7% of revenues compared to an operating income of $3.1 million in Q3 2016.

Full-year 2016 non-GAAP operating income was $10.4 million.

Net income for the quarter was $14.8 million or $0.44 per share.

Full-year 2016 net income was $16.2 million, or $0.45 per share.

On a non-GAAP basis, quarterly net income was $2.6 million, or $0.08 per share compared to net income of $2.9 million, or $0.08 per share in Q3 2016.

Full-year 2016 non-GAAP net income was $9.4 million or $0.26 per share.

During the fourth quarter of 2016, we recorded deferred tax asset in the amount of $11.6 million which represents the approximate amount of net operating losses and temporary tax differences that, based on our estimation, will be utilized over the next years.

GAAP net income for the fourth-quarter and full-year 2016 reflect the effect of the tax benefit associated with the creation of this deferred tax asset.

Non-GAAP net income excludes this non-cash deferred tax benefit.

Our balance sheet remains strong.

At the end of December 2016, cash, cash equivalents and marketable securities totaled $69.5 million.

Days sales outstanding, as of December 31, were 61 days compared to 63 days in the prior quarter.

Operating cash flow generated during the quarter was $6.7 million, and $18.3 million for the full-year 2016.

During the quarter we acquired 1.3 million shares for a total consideration of $7.7 million.

As of December 31, 2016, and since we began to repurchase our shares in August 2014, we had acquired an aggregate of 12 million shares, for an aggregate consideration of approximately $54.2 million.

We continue to expect top-line revenue growth and operating margin expansion in 2017.

We expect revenues in the range of $152 million to $157 million, and non-GAAP diluted earnings per share of $0.31 to $0.35.

I will now turn the call back over to Shabtai.

Thank you, Niran.

We are very pleased to report strong financial results and continued business momentum for the fourth-quarter and the full-year 2016.

As reported, fourth-quarter revenues and earnings came within the range of our guidance for growth over the previous and the year-ago quarter.

The reality, though, is that we had a better quarter to report until January 19.

We ended the fourth quarter with record results, with revenues above the $38 million target, and earnings that have beaten the Street consensus of $0.08.

As stated on our press release earlier today, on January 19, Avaya filed voluntary petition in their Chapter 11 of the US Bankruptcy Code.

And about $650,000 of revenues related to Avaya as a customer were moved to deferred revenues.

That belongs to the past.

Looking ahead, we have good reason to believe that business with Avaya will continue on the heels of the first nine months of 2016.

And we understand that their business is profitable; and, thus, we assume that business will continue going forward, except for maybe a slight decline in revenues.

So on a bigger-picture level, we continue the past two year's momentum of turning the boat and steering the Company into sustained annual revenue and earnings growth.

Now this is a direct result of successful execution of our strategic initiative for the past five years of growing the UC-SIP business in areas related to unified communication, contact centers, and SIP trunking, all of which keep expanding on a multiyear basis.

Growth in these areas has picked up recently as a result of the growing pace of transition to all-IP networks.

This acceleration is clearly evident in revenues related to the North American market where we experienced good growth in 2016 compared to previous years.

The US is leading the all-IP migration, and AT&T and Verizon are leading that front.

But we already see similar such strength in West Europe, and it is obvious that the rest of the world will follow this trend between now and 2025.

And so the grounds for continued growth in coming years are there.

Getting back to the fourth-quarter developments, we enjoyed growth across most business line, most notably in the UC-SIP area where revenues continued to grow more than 20% year-over-year.

Just to highlight that, the UC-SIP business -- which is relatively young business -- that business delivered about $9 million of revenue in 2012; grew to about $47 million in 2015; $58 million in 2016.

And now we believe that we will get to the $100 million mark in 2019, growing at a rate of around 20% a year, give or take.

In many ways, this evolution should be perceived as reinventing the Company since 2009 when our previous business that was centered on technology and gateways started to decline.

Key to this success is a solution approach we took several years ago which allows us to provide higher value to the end customers when compared to competition which provide solution and products on a best-of-breed product approach.

Another pleasant surprise in the fourth quarter was the strength of the gateway business, which grew 7% above the previous quarter.

In fact, the gateway revenues increased in second-half 2016 about 10% above the first half of 2016.

Entering into the first quarter of 2017, we see preliminary similar such strength.

As mentioned on our previous call, these better results should be mainly attributed to the increasing trend of migration to all-IP.

This trend is evident in the US and West Europe; and owning the right portfolio of product and services will benefit us in the next 5 to 10 years.

We also saw increased pace of RFPs and proof-of-concept trials by service providers in North America and Europe to start migrating their voice services to UC-SIP trunking, a trend that will further facilitate growth in coming years.

In the fourth quarter of 2016, UC-SIP and gateways combined revenues comprised above 90% of the business.

And, thus, decline of the legacy technology business is now fairly contained and cannot impact severely our quarterly revenues going forward.

All this leads us to believe that we have a strong foundation for growth and confidence in strong and healthy business in the coming years.

Now to some of the business highlights of 2016.

I've mentioned UC-SIP growing to about $55 million, 20% over the previous year.

We mentioned that we are confident in the ability to grow that business to $100 million in three years.

Gateway business of recovery; we've discussed that.

2016 annual decline really moderated to less than 10%.

We now believe that that performance should be sustained in the coming years due to all-IP migration.

We remain focused on growing and positioning AudioCodes to become the leader in enterprise voice market.

In that market, there are three key pillars.

And we are talking about unified communications; we are talking about advanced IP-based contact centers; and we are talking about the voice infrastructure that now is moving towards an all-IP.

AudioCodes is building itself to become the leader in that market.

And we believe that we are in a very unique position and see competition fully -- we can help them with what we have developed so far.

We continue to invest in collaborating with our key partners, namely Microsoft, Genesys, and BroadSoft, and saw a meaningful return on these investments.

We emerged a very successful vendor of CPE gear to our partners and customers.

We believe that currently we are one of the leaders, if not the leader, in that category.

We have substantially increased our penetration into the service provider market in 2016.

We had a lot of success in the EMEA market in that area.

We are, at the same time, going cloud.

Transition to the cloud era, we made important steps in evolving our business to the cloud era with growing capabilities in years of virtualized SBC and Skype for Business online.

Finally, we continued to buy back our shares in the fourth quarter.

We continued to buy shares in the fourth quarter of 2016 with the aim of increasing return to our shareholders.

Just to make a note that buyback in the fourth quarter was done in a much higher price level, about $6.00 versus the previous range of 4.3.

That tells you our confidence in our operations and the sense of making that buyback.

Now touching on some other significant data points relating to the full-year 2016, all of which are non-GAAP numbers.

So I'll go over the short list.

Services revenue grew 14.6% over previous year to $43.3 million.

That comprises now 30% of the Company revenue.

That is growing for us above 10%, 10% to 15%, on a multiyear basis for five, six years already.

Gross margin improved to 61.5% from 60% in 2015.

We are growing steadily here on an annual basis from 58% in 2015.

Why?

Simply because we deliver more services; we are migrating our solution to be more software-based.

That will result in growing gross margins.

Operating income grew nicely in 2016 to 7.2% from 4.5% in 2015.

Our stated goal is to achieve 10% in 2017 for the last quarter of that year.

Net income increased to $9.4 million in 2016, about 60% increase compared to 2015.

Operating cash flow was strong for the second year in a row.

We generated $6.7 million in the fourth quarter.

We generated $18.3 million in 2016, back on the years of 2015 when we generated $17.6 million.

Headcount grew to 700 employees from 640 employees a year ago.

The increase was slowly built off about 50% in R&D personnel; 50% in customer-facing activities, marketing sales, customer care.

The good news is that we believe that the R&D budget for coming years is pretty much contained, and we do not see major increase in R&D and product expenses in coming years.

Most of the increase in budget will be done in sales and marketing.

That should increase modestly in 2017.

We believe that we will tie up those expenses to growing sales, so we believe that our ability to control the P&L is getting better.

Now I'll touch two new areas that we have not reported so far, but we intend to start reporting steadily on an annual basis.

First is deferred revenues.

Deferred revenues at the end of 2016 rose to $31.8 million.

That is 12.9% growth over $26.3 million at the end of 2015.

In fact, growing deferred revenues tells you that, side-by-side with reported revenues, we have -- we are building for ourself a strong and very helpful cushion for revenues in coming years.

The second area that I'd like to touch for the first time is our activity in the applications area.

In the applications area, we do have internal activity.

You may call that internal startups.

Those are located in three key areas.

One is compliance recording for Skype for Business; we call that activity SmartTAP.

The second one is our mobility solutions called MobilityPLUS.

And the third is our voice recognition, voice dialing and routing, which we codenamed VocaNOM.

In 2016, revenues in these application areas and others were above $3 million.

We intend to grow them above 30% in 2017 and get close to the $4.5 million or $5 million range.

We have much believing in growth in these areas.

Those are software products.

They will tie into our solution story.

So we believe that we have a great customer base who turn to -- we have this new application in order to grow revenues.

Looking on the sales side, most regions performed very well.

We saw nice growth in North America, both the enterprise, which was very strong in the fourth quarter, actually growing about 10%; and service provider segment.

We attribute that, again as I've mentioned before, to Skype for Business and the all-IP activity.

We saw similar better trends in EMEA, where activity has picked up substantially more in the Western regions.

APAC kept performing -- APAC is the region that has accrued the margin 2016, all in all, about 13%.

Now touching on two key business lines and providing some color in it, I'll talk about the markets of Skype for Business activity.

In 2016 we grew above 20% compared to the previous year.

All in all, we got to a level of about $45 million.

That's almost 1/3 of the Company revenues.

Microsoft continued to push for cloud PBX in 2016, with Cloud Connector Edition for hybrid voice.

And we have been glad to know that we have been the first partner to sign a license distribution with Microsoft on the CC.

2016 was also the strongest year for us in terms of selling IP phones for Skype for Business.

I'll talk about phones in a minute, but I'll tell you that IP phones grew dramatically.

We have had more certifications.

We now consider ourselves to be a very fast-growing vendor in the Skype for Business IP phone area.

All in all, we are very pleased with the activity.

We are being perceived as a market leader.

We've been approached by enterprise customers, by service provider customers.

And we do anticipate a continued growth of at least 20%.

From some signs that we've seen at the end of 2016, I'll know that we have seen increased activity around the Cloud Connect Edition that is meant to help cloud PBX grow.

I'll tell that simply because I think that we went through a long 12, 18 months of inability to grow in that market.

We do believe and we see a lot of push in the market that by mid-2017 or end of 2017, at the latest, cloud PBX will become very strong in the markets.

We intend to become a very strong player in that market.

So we believe that, at the end of the day, starting from the beginning of 2018 and on, we will see very strong activity and revenues coming from that market.

On session border controllers, we've seen the best quarter ever in the first quarter; revenues went up about 30% compared to the year ago.

All in all, we are growing in software solutions, in service solutions, in large enterprises, in managed enterprise SBC [and active in] core.

We are going to launch, based on a few design wins that we had with large enterprises, we're going to launch towards Enterprise Connect a very ambitious firm on modernization of the voice network and enterprises.

We believe we've got good portfolio and services that will support good market share in that market.

We have been very successful at deploying global SIP trunking with several world-leading service providers.

So, all in all, we're very encouraged about the session border controller activity.

I mentioned last -- on the business line, the IP phone area; it grew very nice, about 50% in 2016 to about [$10 million].

We have seen very strong growth in the Skype for Business segment, and we already crossed hundreds of thousands of units in 2016.

We expect similar such growth in 2017, growing about 50% going forward.

Finally, I'll get to our guidance and outlook for 2017 in the next three years.

Regarding revenues, we now guide for the range of $152 million to $157 million, a 6% to 7% growth.

That takes into account growth of 20% on UC-SIP and a decline of 8% to 10% on the gateways.

We've been conservative here; we may see lower decline on gateways.

But at this stage, this is the guidance we will be giving.

We expect that over the next three years, we will grow around 25% to reach a level of $180 million in 2019 based on organic growth.

Regarding earnings, we expect better performance.

We expect to grow earnings per share about 25% in 2017; and believe we can more than double earnings per share compared to 2016 in the course of the next three years.

The better expected performance on earnings realized on leverage we have in our financial model; this is related to the fact the majority of the increase in investments required in R&D and in the product front have been made.

So additional OpEx in coming years will be made in proportion to growth in sales.

Lastly, on the buyback, as reported we purchased 1.26 million shares in the fourth quarter, spending $7.7 million and continuing the buyback in the first quarter of 2017; as we intend, as we complete the current program, to evaluate and further assess such plans.

With that, I have completed my initial presentation, and I'll turn the session to Q&A.

Thank you.

(Operator Instructions).

Rich Valera, Needham & Company.

Just wanted to talk about Avaya.

It sounds like you're pretty optimistic about business with them picking up as you move into 2017 here.

Can you say what you've actually heard from them?

And do you -- have they actually started paying their vendors at this point, or do you believe that's going to happen shortly?

Just wanted to get any more color there.

Thank you.

Sure.

You know, we cannot talk; but I can tell you that we have been talking to them.

We received funds from them.

And I think you've seen them mostly in the press.

So a letter that was presented in the press that Avaya is really -- if you go to their website and look upon their financial results for the end of September 2016, you will see that they are in good shape; selling and profitable.

I think they are, at least from what we heard, they intend to continue on with the business.

And I think they would probably look to further their relationship with their vendors.

So except for changes in the market, I think we will see a continued relationship, and that is based on communications that took place already.

Got it.

And then just want to get a little more color on Microsoft's cloud PBX.

You sounded pretty optimistic that that business -- their business would accelerate in that area; sounds like mid- this year, maybe into 2018.

Just wanted to -- remind us what you sell into Microsoft's cloud PBX.

And then if you can just provide a little color on what makes you think that's going to kind of accelerate as we move into the second half of this year.

Thanks.

Right.

So currently we have two key products sold into that market.

We have the CloudBond 365 which has started selling almost 2 years ago; that has grown.

But this isn't the stage when Microsoft announced the CCE, the Cloud Connect Edition; I think that was February 2016.

We've seen Microsoft putting more emphasis going forward on that.

And we have reacted accordingly.

We have completely [fully fast] to invest it, and completed all developments necessary to come up with a Cloud Connect Edition appliance.

I can tell you that we started to sell that to clients in the third quarter.

Revenues and sales in the fourth quarter substantially increased.

We see increased pace already in the first month.

I know for a fact that there are certain meaningful incentives that are being put to the market to help push cloud PBX.

And we've seen demand and some leads tell us that there's very strong interest in the market in cloud PBX.

And how soon -- and we have saw this, I told you, in quite a large number of appliances that will have helped connect initial adopters to the cloud PBX service.

And we know that Microsoft plans by mid-2017 to try and fill in all of the gaps that they have currently between the server edition and the online edition.

So, all in all, this increases activity from customers.

We see increased sales of appliances on our side.

And we see a lot of demand and push for Microsoft.

So that gives us -- that tells us that the environment is improving, and it is growing, going forward.

Got it.

And you expect your primary -- to primarily benefit from the sales of your cloud connect appliance into that market.

Is that correct, moving forward?

Well, Microsoft has key interest in pushing Cloud Connect Edition, and we follow their plans.

So, yes, we are working closely trying to help them and us get fast to markets.

Great.

And one more from me.

With the EPS guidance you've given, can you say if there's any more stock buyback embedded in that guidance?

Or does that assume a flat share count?

No.

Actually, current projection assumes completing the current plan by the end of the first quarter of 2017, and assumes no other buyback.

That is not to say that once we complete it, we will look into the situation and we will make an assessment.

It doesn't say that we do not plan; but we simply will make a decision only once we complete it, and we have better understanding of what needs to be done going forward.

Got it.

And do you have convenient how much is left on that plan?

Yes.

So we announced that we purchased about $1.2 million, $1.25 million in first quarter.

We continued the same pace in the first quarter.

So, in January, I think we purchased between $550,000 to $600,000.

And I believe that similar amount is left for the end of the quarter.

But we all need to assume that there are certain price thresholds there.

So about -- out of about $2.5 million that could be purchased up to now, we have purchased $1.9 million.

So we are very close to completing the program.

Very good.

Thanks very much, Shabtai.

Dmitry Netis, William Blair.

Shabtai, I want to follow up to Rich's question on Avaya.

I know there may not be a lot you can talk about.

But if I do the math, this quarter represented -- Avaya represented roughly -- actually less than 2% of your revenue.

I wonder if that is the going rate, or if that's what you'd seen in the past in terms of Avaya revenue.

Or is this abnormality?

If you can comment on that; and how much potentially Avaya would be baked in, into the 2017 guidance.

Or have you not baked that into the 2017 guidance?

So I was just wondering if you could comment on that.

As you have mentioned, at this stage, fourth quarter was around $650,000.

That was the normal quarter.

So you can build from that some assumption as to the level of sales in 2016.

We have no reason to believe that that will be declining in a brute way in 2017 so it will be a business that continues.

We do know that Avaya -- and that is what they have stated -- will try to continue growth under the Chapter 11, and turning the company to be much more software and services based.

We have a good track record with other companies who have got a software and services business.

So I do not preclude that assuming Avaya continues to function as a company, that we will either continue in or even gain more business there.

So all is open.

I don't think fourth quarter is, quote-unquote, bad news.

But I think that is a one-time thing, and we have no reason to see brute changes going forward.

The thing is, they may continue to operate in the normal environment they think they are in.

The problem is that their destiny is in the hands of the courts.

And nobody knows what really will happen, whether the company gets split or sold, or continues as a going concern.

In that vein, do you assume revenue for 2017 from Avaya?

Or did you really take a hard look and said, hey, maybe we shouldn't be putting that revenue guidance on.

I'm just trying to ascertain how conservative you are with Avaya's revenues in that 2017 guide.

So (multiple speakers) again, the tolerance on our change potentially in the business in 2017, given the numbers we discussed, could be about $1 million or $1.5 million, give or take.

That is the level when we are talking about 150-somewhat -- that is the level that we should be able to either compensate for from other customers and activities.

So we have not paid any attention to that.

We don't think that is that material in terms of planning.

Okay.

All right.

That's helpful.

And then if I look at the guide for Q1, are we expecting services revenue to continue to grow on a kind of seasonal basis?

I think you've shown growth in services for -- I can see seven consecutive quarters now.

So should that trend continue, or should we bake in some seasonality there in Q1?

And should product be kind of in that seasonal trend in Q1, as well, as we've seen in the last few years?

Right.

So usually we do not -- in terms of planning or guidance, we have never made a split differentiated between product and services.

As a whole, we normally have -- we have guided usually for relative weakness in the first quarter of the year compared to the fourth quarter in the range of 2% to 3%.

That might be the case, or it may not.

But I think we should plan for around the same level of Q4, and give or take 1% or 2%.

But roughly it should be kind of flat or a little down quarter, that's all.

Great, that's helpful.

Very helpful.

And then I guess my last question would be just looking at your business, you've done a good job on gross margin side of the business, of things that's -- 61.5 exiting the year, so pretty good expansion there.

Your session border controllers, I presume it's a higher-margin product.

It is growing; your services are growing.

I guess I just supposedly wanted to touch on the competitive environment as a result of your margin improvement.

Is it something you are seeing that's easing out there in terms of competition?

Are they getting less aggressive from kind of the key members of the SBC pack or gateway's pack, the Oracle, Sonus jammed into the world?

If you could discuss that competitive -- enterprise business, again you noted North America was also pretty decent growth there, over 10%.

So just in broad strokes, if you could discuss the competitive environment, that would be great.

Thanks.

I'll try to touch briefly on -- I'll divide that based on business areas.

Session border controls, we feel we are becoming more competitive, relatively, on session border controls mainly in the enterprise space.

The solution approach or ability to provide a solution that comprises a combination of session border controls and session routing engines and a few more elements allows us to be much more effective on the enterprise.

We also -- I should say that we've been able to hire some strong people in the sales area that once worked with other companies, so we feel we are growing.

Key activities these days is in the US and Germany, but we do see more Western Europe countries and other places.

So we believe that on what we call international markets, we will try to become the best player on -- as this is.

Same for phones: we believe -- we have invested a lot in 2016 in adding resources, in coming up with development and certification that will allow us to sell better in the phone area.

I'll just mention that -- I haven't touched that.

You all know that Genesys that now became probably one of the largest, if not the largest, contact center players has initiated a commercialization program in 2016 whereby they OEM all of our products, all of our gateways, as this is IP phones and others are sold by Genesys.

So we have -- you may, quote-unquote, call it exclusivity for Genesys environment.

So we are picking up on phones.

We definitely see Polycom as the strongest player, but we feel that we can continue to climb up the hill.

We relatively feel for the good in the Skype for Business.

I think we are competing mainly with Sonus, and we feel we are in good shape there.

So all in all, I think competitive-wise, we are in good shape.

I guess a quick follow-up about this core Microsoft type of business.

That grew 20% year-over-year to $45 million.

I think in the past you said the business will grow 25%-ish.

Would you expect it to continue to grow at that rate in 2017?

My expectation is that we will not see huge difference in 2017.

But I believe that as cloud PBX gets in a full way to market, that from beginning of 2018 we will definitely see higher growth.

I think that the cloud PBX has got great potential of substantially improving our growth rates from 2018 and going forward.

Great.

Thank you very much.

(Operator Instructions).

Mike Latimore, Northland Capital Markets.

Just on the Skype for Business topic one more time, I guess when you talk about your CCE appliance, I believe that's a hybrid deployment implied there.

I guess is your view that the growth that you'll see will be from sort of the hybrid deployments over time?

Not really; CC, Cloud Connect Edition, is meant for fewer cloud deployment.

It simply allows the business on one end to connect to cloud, PBX in the cloud; and then do his PSTN [illumination] using the service providers he is used to work with.

But that has got nothing to do with hybrid.

The hybrid implementation we have today is CloudBond 365.

And I know that there are plans of Microsoft to offer similar such capability in less than a year from today.

Got it.

So I think you just said that you think the paper business will be kind of flat in 2017, but pick up back to normal growth rates in 2018, something like that?

Is that the way to think about it?

For us, yes.

Got it.

And so most of the growth in Skype over time will be coming from the pure cloud deployments, or from hybrid -- I guess for AudioCodes.

I think while initially the thought was that businesses will adopt pure cloud operation faster, I think now realization is that a lot of the businesses will probably choose a hybrid approach.

So CCE will probably evolve to support not only pure cloud environments, but also hybrid ones.

So that's going to happen.

So the thought is the majority of your revenue would be tied to hybrid over time.

Yes; because that would be probably the mostly used configuration, I would assume.

Okay.

And then just on the tax rate, what should we think about in terms of cash tax rate or cash tax payments in fiscal 2017, and even in fiscal 2018 -- if you kind of have a general idea for that year?

This is Niran.

With regards to the tax expenses in 2017, you can assume the same level as you've seen 2016 -- at the non-GAAP P&L, I mean.

Any reason that that would go up materially in 2018, or not, at this point?

Also at 2018, you can assume the same level.

I remind you that we have NOLs, net operating losses, both in Israel and in the US, which we have the major operation there.

And that will allow us to remain at the same level of 2016 and 2017.

And last on foreign exchange rate changes, any notable impact on the fourth-quarter revenue or earnings?

Year-over-year?

With regard to the foreign exchange, we actually already hedged a major part of 2017 exposures.

So we already took it into account in our guidance.

Great, thanks a lot.

Thank you.

Ladies and gentlemen, we have come to the end of our time allowed for questions.

I'll now turn the floor back to Mr. Adlersberg for any final remarks.

Thank you, operator.

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

Relying on good business momentum and execution on our plans in 2016, we believe we are on track to achieving in 2017 another year of growth and progress; and continue to build a growing, profitable business for coming years.

We look forward to your participation in our next quarterly conference call.

Thank you very much, and have a good day.