AudioCodes Ltd (AUDC) 2017 Q1 法說會逐字稿

Greetings and welcome to the AudioCodes first-quarter 2017 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, Elizabeth Barker with KCSA.

Thank you.

You may begin.

Thank you Melissa.

I would like to welcome everyone to the AudioCodes first-quarter 2017 earnings conference call.

Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer, and Niran Baruch, Vice President of Finance and Chief Financial Officer.

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

Statements concerning assumptions made or expectations as to any future events, conditions, performance, or other matters are forward-looking statements as the term is defined under the US federal securities law.

Forward-looking statements are subject to various risks, uncertainties, and other factors that could cause actual results to differ materially from those stated in such statements.

These risks, uncertainties, and factors include but are not limited to the effect of current global economic conditions and conditions in general and in AudioCodes' industry and target markets, in particular shifts in supply and demand, market acceptance of new products, and the demand for existing products, the impact 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 known 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 go ahead.

Thank you operator.

Good morning and good afternoon everybody.

I would like to welcome all to our first-quarter 2017 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 first quarter, discuss trends and developments in our business and industry, and the outlook for the rest of the year.

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 metric excludes recurring non-cash items.

Today, the earnings press release contains a reconciliation of supplemental non-GAAP financial information.

Revenues for the first quarter were $37.4 million, down 1% from the prior quarter and up 7.5% compared to the first quarter in 2016.

Services revenues for the first quarter were $11.4 million, accounting for 30.4% of total revenues.

Deferred revenues balance as of March 31, 2017 was $33.1 million, compared to $31.8 million as of December 31, 2016.

Revenues by geographical region for the quarter were split as follows: North America, 46%; Central and Latin America 8%; EMEA, 30%; and Asia-Pacific, 16%.

Our top 15 customers in aggregate represented 59% of revenues in the quarter, of which 54% are attributed to our 13 largest distributors.

Gross margin for the quarter was 62.4% compared to 60.3% in Q1 2016.

Non-GAAP gross margin for the quarter was 62.9% compared to 61.3% in Q1 2016.

Operating income for the quarter was $2 million compared to an operating income of $0.9 million in Q1 2016.

On a non-GAAP basis, quarterly operating income was $2.7 million, or 7.3% of revenues, compared to an operating income of $2 million in Q1 2016.

Net income for the quarter was $1.3 million, or $0.04 per share, compared to net loss of $0.2 million, or a loss of $0.01 per share, in Q1 2016.

On a non-GAAP basis, quarterly net income was $2.5 million, or $0.07 per share, compared to net income of $1.6 million, or $0.04 per share, in Q1 2016.

Our balance sheet remains strong.

At the end of March 2017, cash, cash equivalents and marketable securities totaled $62.8 million.

Days sales outstanding as of March 31 were 60 days compared to 51 days in the prior quarter.

Operating cash flow generated during the quarter was $0.9 million.

During the quarter, we acquired 1.1 million shares for a total consideration of $7.3 million.

One note about Avaya.

During the fourth quarter of 2016, we made sales to Avaya of $645,000 which were not recognized since Avaya announced that it had filed for Chapter 11.

Since the payment was received during the first quarter of 2017, these sales were included as revenues in the quarter.

During the quarter, we acquired 1.1 million shares for a total consideration of $7.3 million.

As of March 31, 2017 and since we began to repurchase our shares in August 2014, we have acquired an aggregate of 13.1 million shares for an aggregate consideration of approximately $61.5 million.

On March 20, 2017, the Board of Directors approved filing a new application with the court in Israel requesting approval for an additional repurchase program for $15 million of ordinary shares.

We filed the new application and we are expecting a decision in the coming weeks.

We reiterate our guidance for 2017 as follows.

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 solid financial results and continued business momentum for the first quarter of 2017.

As reported, first-quarter revenues came better than expected and earnings results were at the higher range of the guidance provided for the full year, which supports the confidence in our ability to meet the growth expectation in coming quarters.

As such, first-quarter results provide strong indication that our business momentum over the past two years remains intact and that we should expect solid execution and growth of our business in coming years.

Most important, the two key business lines in the Company, UC-SIP and gateways, which together comprise above 90% of our revenues, continue to exhibit very healthy business trends and thus provide us, management, with a strong confidence level that allows us to continue to make our investment going forward in these areas.

In UC-SIP, we grew about 18% year-over-year, and we continue to successfully execute on our strategy to grow the business in market segments related to unified communication, unified communication as a service, contact centers and SIP trunking, all of which keep expanding on a multiyear basis.

Supporting growth in UC-SIP, we saw nice growth of revenues in several of our business lines, including the session border controllers, the phone business, and products related to sales in the Microsoft Skype for Business market.

As for the gateways line, the consistent growing pace of migration to all IP networks in North America and Western Europe continues to drive success in sales of gateways and SBCs in TDM-to-IP and IP-to-IP connectivity applications.

As mentioned on our press release earlier this morning, we see a major change in the direction of sales of our gateway line.

While declining in revenues for six consecutive quarters, in 2015 and the first half of 2016, we now see, in the first quarter of 2017 and on the heels of the second half of 2016, sequential growth.

In fact, the strength of the migration to all-IP allows us now to be more cautiously optimistic about this trend of stabilizing or even growing gateways revenues that will continue to develop in coming years as more service providers start the journey and the process worldwide.

The growth in gateway sales is clearly evident in North America and leading Western European countries and should it continue in these countries for the next three to five or even seven years.

Obviously, we expect this trend to expand and unfold into more countries worldwide year by year.

All in all, as a global trend, we now expect increased demand for gateways to develop and remain strong for the next five to seven years.

We see similar such trends not only in the service provider space, and we expect similar such activity of moving the infrastructure from TDM to IP into large enterprise in these market segments, all backed with a lag of about a year or two.

At the end of the day, the anticipated shift from TDM to IP will become a must for each country with a limited window of about five to seven years for migration and implementation.

The potential, though, is huge as, up to now, only about 30% to 40% of businesses move to Voice-over-IP in North America, and, globally, we believe that there is substantially lower percentage that has shifted to IP.

As mentioned several times in the past, key to this success is the many, many years of huge investment in adapting our products and technologies to our partners' ecosystem specification and interoperability.

Another big advantage we have developed over competition is the complete solution approach which we took several years ago and which allows us to provide higher value to the end customer versus a single product.

So, summarizing the business trends for the first quarter of 2017 and talking about the implication going forward, UC-SIP is on track to grow to close to $70 million of sales in 2017 versus about $58 million in 2016, another year of about 20% growth.

We are confident in our ability to continue this business growth and reach close to a $100 million revenue level in 2019.

We remain focused on growing and positioning and are establishing early codes to become the leader in the enterprise and our business voice markets, and we have made important steps in the first quarter of 2017 towards achieving that goal.

In line with the global trend for digital transformation, the all-IP process drives transformation in the enterprise space too.

In the first quarter of 2017, we announced our EVM initiative.

EVM stands for enterprise voice modernization that is meant to help organizations modernize and upgrade their voice network for the new all IP era, supporting their new infrastructure for unified communication and contact center applications.

Obviously, supporting business services too.

We continued in the first quarter to grow our CPE business and are gradually becoming a more successful partner of choice for CPE gear worldwide for application partners and customers.

The fact that we are a global company and we have operations in many countries in the world allows some of our partners in North America to expand their services in other parts of the world using our infrastructure and services in these countries.

In the first quarter, we continued to evolve our business to the cloud era with growing deployments of cloud-related products and solutions such as virtualized SBC for enterprise and service provider operation and appliances for the Microsoft cloud PBX of Skype for Business online.

Finally, we continued to buyback our shares, as mentioned by Niran.

Now, that would be a longer-term plan for the company in coming years with the aim of increasing return value to shareholders.

Now, let me touch some of the financial highlights, non-GAAP of the first quarter.

Revenue came in at $37.4 million, which is 7.5% year-over-year, which is right on where we want to achieve with our annual goal.

We basically were about 1.1% lower than the fourth quarter.

This is better than what is usually expected.

Usually, in the first quarter, we used to decline about 2% or 3%.

I've mentioned UC-SIP revenue growing 18% year-over-year.

Service revenues, which are now 30% of the Company revenues, kept growing, increasing 11.6% over the year-ago quarter.

Gross margin was very high, record basically, 62.9% versus 61.3% in first quarter of 2016.

We are growing steadily on an annual basis.

I'll just mention that we were at 58% in 2013, 59.4% in 2014, 60% in 2015, 61.5% in 2016.

So, we are growing on a consistent basis.

Why?

Very simply, more services, migrating our solution and products to contain much more software components.

Operating margin improved to 7.3% versus the 5.7% a year ago.

Headcount decreased five employees to 695 from the 700 employees we had in the fourth quarter of 2016.

In first quarter 2017, we added though sales and marketing position as we plan to expand globally this year and next two years to support growing sales.

Net income increased to 2.5% (sic -- "$2.5 million") versus $1.6 million a year ago.

Cash flow from operation was $0.9 million versus the $2.7 million we did in the first quarter of 2016.

Deferred revenues continued to grow in the quarter.

We reported $31.8 million in the first quarter of 2016.

We ended up with $33.1 million at the end of the first quarter.

Now, to sales.

Generally, sales performed to the target.

Results came right on where we planned them to be.

We also see some strong start for the second quarter of 2017.

In the Americas, I'd like to note that North American enterprise sales were very strong.

Also, we see some good initial signs for increased level of activity in the service provider space.

In Central America and Latin America, we performed better than expected.

We believe that the economic recovery showed in some major countries such as Brazil, Mexico, and others will help our revenue grow in coming quarters.

EMEA was relatively okay.

We felt some weakness in one or two countries, but we don't believe that signals any change for the business.

We believe that that will improve in coming quarter.

All other regions performed fairly well.

Now, let me give you some highlights of some of the notable deals we had in the quarter.

First, in the Skype for Business market, we had a very large project, on-premises project, for a retail network in North America.

That project alone provided close to $1 million of revenues in the first quarter.

We had, obviously, a few more deals.

We won a major deal with a very large and advanced technology company in the US, again, selling our phones and SBCs.

Touching the contact center market, we had real success in that market.

We have gained probably a new, good partner in that space which we never sold to before 2017.

We have also supplied a lot of products to another player in that market.

In both cases, I'm not referring to Genesys.

We enjoyed good sales in other two accounts, one of which was in Russia.

Again, we see some recovery also in Russia, and that is a contact center market.

Touching a third market, business services, we continue to enjoy increased success in the over-the-top and service providers market.

And also, we have seen some good activity with one large tier 1 service provider in EMEA using our enterprise as we see (inaudible) SBC.

A quick recap of Microsoft operations in the first quarter.

That was a very successful quarter for us.

Actually, it went up 45%, up from the first quarter of 2016.

That represents somewhat a recovery in that market from the fact that Microsoft is now balancing its message between cloud deployments and hybrid deployments.

So, we saw recovery in the on-premises market versus a year ago.

Cloud PBX adoption for use remains low for production now, although we saw a very substantial increase in Cloud Connector Edition appliances, which were bought by many parties over the world to support testing and initial proof of concept.

Our appliances for the Cloud Connector were selected by several major service providers.

So, we have much belief that when more advanced releases of cloud PBX will be delivered to the markets mid of this year, we will see impact on growing sales of Cloud Connector Edition and Cloud PBX solution in the market the second half of 2017 and in 2018 for sure.

We have seen big growth in selling our phones into the Skype for Business market.

Actually, we went up more than 50% from the year-ago quarter and we believe that, on an annual basis, we will grow in a similar way, between 50% and 60%.

All in all, we enjoyed good sales into the Skype for Business server edition, which goes into large enterprises.

I've mentioned already the one deal with a retailer that basically drove much of our sales in that space.

In the SBC area, we also have been successful.

Revenue grew 18.2% over the year-ago quarter.

All in all, we target, for this year, to grow another 20% on the SBC side.

That has been also a record quarter for the virtual SBC, which went up above 20% over the prior quarter, which signifies much higher growth.

So, all in all, we move very nicely from other base product into software-based product, virtualized SBC, which will, as I've mentioned before, continue to improve our gross margins.

Most of sales went into mainly North America and then into Western Europe.

So, all in all, two very strong regions for us in terms of our SBC sales.

In terms of sales, we won a big tier 1 service provider account in Europe.

We sold SBCs to a very large US-based large enterprise, and we won a few more deals in the international markets, in EMEA, in Latin America, and a few more areas.

Most important, in the first quarter of 2017, we launched the enterprise voice modernization program, which is based on a new universal communication architecture.

That is promising to be a very advanced competitive solution for the enterprise space which will have to move to all-IP.

The EVM, the voice modernization program, aims to basically provide large enterprises that are built of multivendor PBX environments with a solution that will unify the overall global infrastructure.

And that program basically talks about an overlay network of session border controls with the centralized routing and management server that provides a very advanced and unique solution to enterprises.

We increased our activity regarding the deployment of our SBCs in the cloud.

We also are deployed in various clouds, including Amazon, and we believe that we will see more increased sales in that environment.

I'd like also to mention that we won a very, very big win in the service provider space in the region of Asia.

Now, coming finally to our guidance for 2017 and outlook, regarding revenue, we now have better confidence in reaching the higher range of the $152 million to $157 million range we announced earlier in the year, basically talking about, all in all, 7% growth in 2017.

We remain conservative.

We may be surprised by the growth of the gateway business that can push that number higher.

First-quarter 2017 performance and business momentum provides good support also to our plan to reach a revenue level of $180 million in 2019.

Regarding earnings, we expect to grow above the 25% increase over 2016 which we announced earlier in the year.

We'll know better by mid-2017.

I should add, though, that we may face some FX headwinds in the second half of the year because of the lower US dollar versus the Israeli shekel conversion rate.

On buyback, as reported, we purchased about 1.1 million shares.

We do plan to continue our program in 2017 and already submitted an application for approval by the Israeli court.

In fact, assuming business trends continue in 2018 and 2019 as previously in 2016 and 2017, we see this program continuing on an ongoing basis for the next two years.

And with that, I'll conclude my presentation, and I'd like to turn the session back to Q&A.

Operator?

(Operator Instructions).

Dmitry Netis, William Blair.

A couple of questions.

I just want to revisit each of the segments and just make sure I understand kind of the guidance as far as the growth rates are concerned.

Your gateway business you mentioned grew sequentially for three consecutive quarters.

You had guided previously for 8% to 10% decline.

It looks like you may be guiding for a flat to maybe up some growth this year in gateways.

So I just want to confirm that is the case.

In UC-SIP, I think the guidance previously was 20%, so is it -- I think in the press release, I've seen something to the order of 15% to 20%.

So I just want to make sure you are still guiding to 20% for UC-SIP.

And also if you could recap the Microsoft Skype for Business segment and whether you are on track there to complete the year at 25% growth.

I think that's the number I had here, and that is relative to, I think, what you said was 45% growth in Q1.

So, if all my numbers are correct or incorrect, I would love you to rehash all of those three segments.

Thank you.

Sure, Dmitry.

So, let's touch them one by one.

UC-SIP, we guided for 20%.

We still guide for that.

In the first quarter, we grew 18%, but we believe we are on track to do the 20%, so nothing has changed here.

On the gateway side, as I have mentioned before, we witnessed some very nice growth over the last three quarters.

As a matter of fact, already in the beginning of this quarter, we see further growth.

So, on a long-term basis, in the past, we guided for an average decline of 7% for the gateway business in 2017, 2018, and 2019.

We could be surprised.

My feeling is that this year, 2017, we will not see that decline.

And as a matter of fact, I do believe that we have a good chance of reversing that.

Would we just stabilize or go down 1% or 2%, or grow 1% to 5%?

That is still up for grabs.

We just did one quarter; we still have three left.

But all in all, a substantially better environment supported by the transition to all-IP.

Finally, to Microsoft, indeed the first quarter did provide a huge increase over the first quarter.

In our plans for the year, we have about 20% growth in Microsoft, but, based on the first quarter, we may anticipate further growth.

That is supported mainly by better premises sales, the fact that cloud PBX will allow, by midyear, coexistence of the cloud with the on-prem solution, and the growth of our phone business.

So all in all, we maintain our guidance for Microsoft.

And again, it will be unfold second quarter and going forward.

Okay, great.

So just to follow-up again on Microsoft side of things, so you said 20% with potential upside to do better than that as you go through the year.

Right.

What has changed, or what is changing?

It looks like maybe Microsoft isn't as religious about their cloud PBX as they were in the past and are now enabling, you know, the customer (multiple speakers)

That is correct.

That is correct.

We see signs (multiple speakers)

(multiple speakers) go ahead (multiple speakers)

That is correct.

I mean, two years ago, it looked more like black and white.

I think, in the past 12 months, more realization is that large enterprises would like to stick -- well, certain a part definitely, if not the majority of them, would like to stick with an on-prem implementation.

They definitely started trial with cloud PBX and I'm confident that, three or five years into the process, the mix between premises and cloud will move more to cloud.

But in 2017, 2018, and as far as I can see now, the on-premise -- I think this realization that the on-premise service solution is going to be supported, driven forward, and it's going to be a hybrid mode that will prevail in the market.

And we are definitely built for that.

We introduced CloudBond 365 for combined premises and cloud operation, you know, more than 15 months ago.

We also came with Cloud Connector Edition appliance.

And we follow much of the direction that Microsoft is charting.

And we believe that, all in all, our ability to provide a comprehensive solution that helps both premises, cloud, and mixed environments to enjoy Skype for Business, that will come into play.

Got it, got it.

So they are pushing hard on-premise and maybe hybrid while they are trying to figure out their cloud PBX strategy.

Right.

-- which will come in at a later time.

Understood.

Real quick on the Avaya impact, it sounds like you've been able to recognize the $645,000 worth of business that you booked or were about to book in Q4 that came in in Q1.

So some of the upside you may have seen was due to that Avaya PL that you received previously in Q4.

Correct?

Did I get that correctly?

Yes, that is correct.

Yes.

I think the fact that we got paid in the first quarter basically signals that AudioCodes is considered to be an important supplier to the Avaya operation going forward, even under the Chapter 11 framework.

We believe that we may now have more opportunities simply because we may find more cooperation with Avaya, as much as we can find with other parties in the market trying to replace Avaya.

So, all in all, being the most advanced comprehensive supplier of CPE gear to the overall industry and that includes all of the names you can think of, put aside Cisco.

We will continue to enjoy sales in that environment.

Avaya, as everybody recalls, was a top-tier telephony vendor with a huge installed base.

And I think that being able to provide solution to that environment and upgrade it to a more advanced environment is a big advantage for AudioCodes.

Do you have a number, Shabtai, for Avaya for the year that's included in the guidance?

I think it was (multiple speakers)

We do have a number.

Obviously, I cannot talk about it.

But all I can say is that --

Do you feel comfortable (multiple speakers)

-- Avaya started out the year, became minor few millions in 2016.

Still, it's too early to talk about the impact on 2017, but give or take a positive and/or a negative impact, it cannot be substantial in 2017.

I think that, going forward, in two or three quarters, we'll know better the impact.

Okay.

Last, very quickly, a last question on the contact center side.

Do you have an opportunity to deploy into this new deployment that Amazon had introduced or Amazon Connect?

Is there an opportunity to play there?

Or maybe I'm just trying to connect the dots as far as the "good partner" that you mentioned on the call.

Would that be Amazon, by any chance?

Right, no, I -- obviously, when Amazon entry into the UC space was announced a few months ago when they have announced their partnership with Vonage and then later on when they announced the contact center market, usually, as far as I understand, and I may be wrong, but we target substantially the larger operations in our organizations.

Okay?

So, we usually target with our solution either the enterprise market, which is 10,000 employees and upward, and/or the midmarket, which is a few hundreds of employees and a few thousands.

I'm not sure that the Amazon offering relates to such big companies.

And I would tend to think -- I may prove wrong -- that the solution presented would be satisfactory and good for the micro business and/or the SMB.

I know that, currently, it lacks more advanced or sophisticated features.

So, this is the way we will see it.

We are not embedded in that, but, all in all, we do not think, at this stage, that that will have an impact on our contact center operation.

Got it.

Thank you Shabtai.

I appreciate these comments, and I apologize to my colleagues on the line that I've taken maybe a little bit more time than usual.

Thank you very much.

I'll take the rest off-line.

Rich Valera, Needham & Company.

I wanted to follow-up with a couple of questions on the gateway business.

First, can you say what was the year-over-year performance of that business in the first quarter of this year?

And then can you give us the base revenue number for 2016 for the gateway business so we can get a sense of what a difference between being down 8% to 10% versus being flat might mean for your revenue for this year?

Thank you.

Okay, the first question, you know, I don't have the exact number here, but I believe that we were up more than 10% on the gateway side comparing first quarter 2017 to first quarter 2016.

I'm sorry, I missed the second part of the question.

What the total gateway revenue number was for 2016.

Oh, okay.

I believe the number was between $60 million and $70 million.

$60 million to $70 million?

Okay.

Yes.

Got it.

And then I think you kind of covered this, but Skype for Business was a very strong, I guess 45% up year-over-year, and it sounds like the bulk of that growth was from the on-prem part of your Skype for Business.

Is that correct?

Yes.

Okay.

So, it's kind of Microsoft somewhat changing strategy it sounds like where they are more willing to entertain on-prem or hybrid deployments than maybe they were a year ago.

Well, I think it's a bit difficult to read into it simply because let's not forget there is one basic, you know, phenomenon that I think many people do tend to ignore.

When people talk about Skype for Business, usually they talk about the licenses, and the most used functionalities when activating those licenses would usually be presence, instant messaging, and collaboration over PC clients.

In many ways, if you'll ask, and we know about the majority of the large enterprises we work with, deployment of voice in Skype for Business has never reached a level that's higher than 10% to 20% in those large enterprises.

Simply, it means that any large enterprise that has got tens or even hundreds of locations, the deployment is gradual and it means that it spans over several years.

So, what we have seen in the Skype for Business market in the first quarter was really a combination of two elements -- two components, one which was expanding of the old design wins we had in prior years, could be in 2016, 2015, 2014 and 2013, and then I believe a smaller percentage of new wins in the enterprise market.

So, all in all, we are enjoying the fact so lately in informatics research chart that puts Microsoft with 57% market share.

So, Microsoft is a large power in that market, commanding about 50% market share.

We are the most advanced successful voice vendor there.

So, as the market keeps expanding, we will expand, and that was what happened in the first quarter.

And when cloud PBX will kick in, I believe that we will again expand our solution into that too.

But we are glad to say, as I said in the presentation, that we've seen -- the enterprise market seems to be making a comeback after there was some false assumption that it will move quicker to cloud operation.

Got it.

That's helpful clarification.

Then I just wanted to kind of revisit your longer-term thoughts on the gateway business.

I guess going back maybe a year or year and a half, this business declined pretty sharply and you kind of looked at it as a long-term, as you said, declining business of maybe 8% to 10% per year.

And now we've had a few good quarters and we are talking about it being a long -- potentially being a long-term flat or maybe even growth business.

And I'm wondering what kind of gives you the confidence to make that projection.

Longer-term, it seems like potentially what we are seeing here is a lot of volatility and, you know, tough to perhaps draw longer-term trends off of this volatility.

But I just want to get your thoughts on that, and I guess particularly maybe the distinction between service provider gateways and enterprise because, looking at some of your competitors, it doesn't look like there's been any change in the long-term decline of the service provider gateway market, but maybe enterprise has different characteristics.

So, a lot there but I just wanted to get your thoughts on the longer-term view of the gateway market.

Thanks.

Sure.

So yes, Rich, actually you are right on the pony with the latter part of your question.

Indeed, one needs to make a big distinction between service providers and enterprises.

Let's touch enterprise.

The market for enterprise gateways is solid, which I saw again in another report a few days ago again from Infonetics which puts the enterprise gateway market fairly solid although declining a bit, a few percent a year; I would tend to think about maybe 2% or 3%.

But all in all, it's very solid.

On the service provider market, you need to differentiate between applications.

So, what's going down really is more the pairing of the international connection, those type of installation.

Those are -- have basically grown to maturity and now decline.

But when you talk about the move to all-IP and you talked mainly about the small businesses, the micro-businesses, that are all penetration of voice-over-IP into those small businesses has never occurred.

And the over-the-top guys, by the way, do represent that.

And as you can see them going very fast tells you that there is much need for gateways in that market.

Actually, you can think about growth of gateways connected or related somewhat to the over-the-top growth.

And you know, we just talked about the small business, but when you talk about the midmarket, this is a thing where AudioCodes will shine simply because the deployment gets to be much more complex.

You are talking about companies with hundreds of employees, with location and facilities all over the nation or global.

And this is where our very comprehensive arsenal of gateways and SBC will come into play.

So I think the all-IP process in the SMB, in the midmarket, and let's not forget it's only North America at this stage and maybe Germany, and you have still more than 120, 150 countries.

So, the solid basis to believe that demand will keep -- will be good, and when we are looking to charts from our internal database, we see, for the past so many quarters, an increase in North America, more than three quarters actually in North America.

And it's good.

So, this allows us to believe that we will enjoy growth in several years going forward.

That is the change from what used to be until a year ago.

Okay, that's helpful color.

Thank you, Shabtai.

Thank you.

Mr. Adlersberg, there are no further questions.

I'd like to turn the floor back to you for any final comments.

Thank you operator.

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

Relying on good business momentum and execution of our plans in the first quarter of 2017, we believe we are on track to achieve another year of growth and continue to build a growing, profitable business for coming years.

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

Thank you very much.

Have a nice day.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.