AudioCodes Ltd (AUDC) 2017 Q2 法說會逐字稿

Greetings, and welcome to AudioCodes' Second 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, Investor Relations for AudioCodes.

Thank you, Park.

I would like to welcome everyone to the AudioCodes Second Quarter 2017 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'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 events, conditions, performance or other matters are forward-looking statements as the term is defined under U.S. 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 products and technology developments, upgrade and the ability to manage changes in market conditions as needed, possible need for additional financing, the ability to satisfy covenants in the company's loan agreements, possible disruptions from acquisitions, the ability of AudioCodes to successfully integrate the products and operations from acquired companies into AudioCodes' business and other factors detailed in AudioCodes' filings with the SEC, the U.S. 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 second quarter 2017 conference call.

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

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

I will then review the business highlights and the summary for the second quarter.

I'll discuss trends and developments in our business and industry and outlook for the rest of the year.

We will then turn it into the Q&A session.

Niran, please go ahead.

Deferred revenues balance as of June 30, 2017, was $33.8 million.

Revenues by geographical region for the quarter were split as follows: North America, 45%; Central and Latin America, 7%; EMEA, 30%; and Asia Pacific, 18%.

Our top 15 customers in aggregate represented 55% of revenues in the quarter, of which 48% are attributed to our 11 largest distributors.

Gross margin for the quarter was 61.12% compared to 60.5% in Q2 2016.

Non-GAAP gross margin for the quarter was 61.9% compared to 61.4% in Q2 2016.

Operating income for the quarter was $1.9 million compared to an operating income of $1.3 million in Q2 2016.

On a non-GAAP basis, quarterly operating income was $2.7 million or 6.9% of revenues compared to an operating income of $2.5 million in Q2 2016.

Net income for the quarter was $1 million or $0.03 per share compared to a net income of $0.7 million or $0.02 per share in Q2 2016.

On a non-GAAP basis, quarterly net income was $2.5 million or $0.08 per share compared to net income of $2.4 million or $0.06 per share in Q2 2016.

Our balance sheet remained strong.

At the end of June 2017, cash, cash equivalents, bank deposits and marketable securities totaled $61.2 million.

Day sales outstanding as of June 30 were 60 days.

Operating cash flow generated during the quarter was $2.4 million.

During the quarter, we acquired 438,000 shares for a total consideration of $2.9 million.

As of June 30, 2017, and since we began to repurchase our shares in August 2014, we had acquired an aggregate of 13.6 million shares for an aggregate consideration of approximately $64.4 million.

In May 2017, we received court approval in Israel to purchase up to an aggregate of $15 million of additional ordinary shares pursuant to our share repurchase program.

The current court approval for share repurchases will expire on November 15, 2017.

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're very pleased to report solid financial results and continued momentum for the second quarter of 2017.

Second quarter results provides strong indication that our business momentum continues, and that we have laid out the ground for continued growth and solid execution of our business in coming years.

Similar to the first quarter trends, our 2 main businesses -- 2 main business lines, UC-SIP and gateways, which together comprise above 95% of our revenues continue to exhibit healthy business trends.

As such, it provides strong confidence levels in our investment in these areas.

In UC-SIP, we grew above 15% year-over-year, and we've continued to successfully execute on our enterprise voice strategy to help businesses migrate to a digital workplace in an all-IP world.

Investing and collaborating with Unified Communication contact center and SIP trunking market leaders should support extending this success over the next several years.

We have now become the partner of choice for CPE products in most of the leading Unified Communication and contact center application environments and building similar such positions with leading service providers worldwide.

The key product lines supporting continued growth in the UC-SIP are the Session Border Controller Line, the IP phone line and products starting Microsoft Skype for Business Solutions.

As for the gateways line, as mentioned in our press release this morning, we continue to see good demand, mainly as a result of the continued migration to an all-IP network, mainly in North America.

While we see initial similar such demand in Europe, the trend there is still in its initial phase.

We now see network transformation and migration to all-IP, it's an ongoing trend extending well to 2025 and beyond.

So this should create a very good support for the company revenues going forward.

The good news is that at this stage, we've created for ourselves a clear leading position with the most comprehensive portfolio in the industry for these projects, which lays out the ground for sustained growth and revenues in years to come.

As such, while we assumed initially that when we entered 2017 that we would see another year of declining gateway revenues compared to 2016, the reality is that gateway sales are advancing and actually growing.

In fact, gateway sales in first half '17 increased above 10% compared to sales of gateways in first half 2016.

To summarize -- summarizing the business highlights for the quarter.

UC-SIP is on track to grow to close to 20% on a yearly basis.

This will bring revenues in this area to close to $70 million this year versus about $58 million in 2016.

So we continue our growth in that business line.

UC-SIP business now becomes the equivalent size of gateways business and should outgrow it in coming years.

The main product lines, as I mentioned before, supporting that trend are the SBC, the phones and Skype for Business market.

As such, we are confident in our ability to continuing to grow UC-SIP business with close to $100 million revenue in 2019.

We remain focused on growing and positioning AudioCodes to become the leader in enterprise voice connectivity markets, and we have made the important step towards that in the second quarter.

Our efforts around Skype for Business in the UC market collaboration with Genesys in contact center market and the efforts on the enterprise voice modernization front in enterprise voice, all position us as a key vendor to partner with when migrating enterprises in large organizations to a digital workplace.

We continued in the second quarter to grow our CPE business or gradually becoming a more successful owner of choice for CPE gear and deployments by the most leading service providers and enterprises.

In the second quarter '17, we continue to evolve our business to the cloud era with growing deployments of cloud-related products and solutions such as virtualized Session Border Controllers and appliances for the markets of Cloud PBX, Skype for Business online.

I will not go over all of the financial highlights for the quarter, I'll just talk about 2 of them.

As provided earlier, financial performance was as expected and planned.

Touching on the OpEx front -- on the OpEx area, we grew 2.4% compared to previous quarters.

This is mainly a result of headcount added in late 2016.

Based on changes made in our headcount and budget plan for the second half 2017 and elimination of about 15 positions in the later part of the second quarter, we now estimate OpEx for the third quarter and fourth quarter of 2017 to be lower by about 2% or 3% compared to the second quarter, so we will see a decline in OpEx in coming quarters.

This estimate takes already into account the less favorable U.S. dollar -- Israeli shekel conversion rates.

As to the deferred revenues, as mentioned by Niran, they continued to grow in the second quarter.

Level of deferred revenues grew to 2.3% to a level of $33.83 million.

Now touching on our sales worldwide.

All in all, sales performed to the plan and to the target.

North America exhibited good buying patterns, same with West Europe except for 1 region, which suffered from slight weakness.

And then, Asia Pacific performed well.

Actually in 1 part of Asia Pacific, we grew better and we have good indication that in some of the larger countries in this region we'll enjoy increased sales in coming years.

So all in all, a very good quarter on the sales front.

Touching on some of the more notable deals.

In the contact center market, we enjoyed a very large deal, close to $1 million with a leading contact center player.

We then add a series of enterprise opportunities with leading enterprise vendors of around $100,000, $200,000 each.

Touching on the Skype for Business segment, we enjoy more sales in the on-prem environment.

We're still waiting for the cloud product to take off.

On the business services market, we had some very important deals, some in Asia Pacific, some in Latin America.

All in all, we are seeing good demand and more reception to our products in the service provider space.

So all that points to our ability to continue to grow going forward.

We also enjoyed initial growing sales with a first partner, a new partner, that we have not sold to before, but now becomes on board.

Touching more in details on the market space.

Revenue grew only 8% year-over-year.

The declining growth rate from the traditional 20% and 30% in 2016 and in the past is attributed mainly to slow adoption of Microsoft Cloud PBX solution, which we hope to see improve in the second half '17.

Also, sales of on-prem Skype for Business did not progress much as enterprises have delayed their deployments.

In view of this, we see more signs that Microsoft continues to balance the message of on-prem solution versus the Cloud PBX with more focus on the hybrid approach for years to come, which we believe will benefit us substantially.

For operating Cloud PBX with a similar feature level compared with other UC solutions, we saw good progress in the cloud connect edition product for Microsoft in the second quarter, and we await a more advanced release planned for the second half of this year.

I should note though, that we see a very high level of interest with our customers and several leading service providers in exploring market opportunities with regard to the use of Cloud PBX in the mid-markets.

We are thus optimistic that we will see a resumption of growing sales in the Skype for Business market in the fourth quarter of this year.

As a result of enhancing our One Voice with Skype for Business solution, this new product and solution, we anticipate that now our solution will become very attractive, actually the more attractive solution to enterprises and mid-market companies, and we believe a good prospect in that market in years to come.

Another important achievement in the second quarter is our success in growing our alignment and strengthening our working relationship with global system integrators, both in North America and in Europe and Asia Pacific.

And we believe that should help us grow to become much more dominant in larger deals in the Skype for Business market.

And thus, we're seeing an increased pipeline developing for us with these partners.

Touching just on 2 other lines, Session Border Controller, our stated plan for the year was to grow above 20%, which indeed we achieved that in the second quarter, so that was a very successful quarter for SBC.

We saw increasing sales of software and the virtualized version of the product.

And we had a record revenue for the virtualized SBC in the quarter.

And also, we enjoyed a very large deal, larger than $1 million in Asia Pacific with a leading service provider, and we believe that that will open for us more channels to the market with that partner also in the service provider space and enterprise space.

On the phone business line, our stated goal is to grow 40% to 50% this year.

Actually this line is growing very nicely.

We did about $10 million last year, so we plan to grow to close to $15 million.

We introduced new products.

We're being accepted more and more by enterprises as a valid product supplier in the environment.

We have grown our shipment of products.

We -- this year, we will probably double the amount of product -- quantity of products shipped compared to 2016.

And we intend to introduce early 2019 two more new products.

We announced earlier in the year a solution for small room conferencing in partnership with another industry leader, Jabra, so we have seen high demand for that new product.

All in all, we feel very confident that that line will help us drive more revenues and more wins in a comprehensive full Skype for Business solution in the market.

Finally coming to our guidance and outlook.

Reference our 2017 overall plan, we reaffirm our original guidance provided in January this year.

We are on track to execute on our target to grow revenues by about 7% over 2016 revenues, and meeting our guidance to grow earnings by 25% compared to the previous year.

First half '17 performance and business momentum provide good support for our 3-year plan to grow revenues to $180 million in 2019.

On buyback, as reported, we have purchased 438,000 shares in the second quarter '17, since we received the court approval in mid-May.

We have continued with the buyback program in July and plan to continue with it until the end of the approval, which will expire in mid-November.

And with that, I've completed my initial presentation.

Back to you, operator, for the Q&A session.

(Operator Instructions) Our first question today comes from Rich Valera of Needham & Company.

So Shabtai, it looks like you're keeping your overall guidance unchanged, but it looks like gateways are performing better than you expected coming into the year and you've kind of upped your target for gateways, but it looks like the UC-SIP side is performing under where you thought it -- it sounds like you're at around 15% versus the 20% target.

So one, just wanted to gauge what you think the right target is for this year for the UC-SIP business?

Is that now more like 15% for the year?

And then if you could dig into why you think the Skype for Business piece of that is slower than you expected?

I know coming into the year, you talked about a pretty robust pipeline of Cloud PBX trials.

It just -- I guess, it sounds like those aren't converting into implementations.

But if you can give more color on that, I'd appreciate it.

Right.

Thanks, Rich.

So first on the UC-SIP, actually, it's not that it's trending to the lower part of the 15% to 20% range.

Actually, I said, over 15%, it was closer to 18%.

So we're not predicting diversion from our goal.

I think we will finally end up in the -- around you can take, 17%, 18%, could be 19%.

It really should grow with coming quarters really because some of our business lines, among them mainly the SBC and the phone line, both actually sell better than expected.

So we are optimistic on the UC-SIP.

We see -- well, while gateway increased, the overall was just in line simply because we have a very small part of our business related to both technology and application.

And that part was a bit weaker in the quarter.

But that's really a very small part and not significant.

So this is where you may have seen some lower performance.

Regarding Skype for Business, we actually, as I've indicated, on the one end, we have seen a very high interest in the market for our appliances, which embed Microsoft Cloud Connect solution.

The thing is that at this stage, the market is still kind of waiting for Cloud PBX to become more complete and more mature.

And that process, we knew it will -- it was due to be -- to occur somewhere near midyear.

We've seen press release.

We do expect another release in the -- towards the end of the third quarter.

But all in all, except for a slight delay, I think we definitely see good, good prospects in the market.

But all in all, customers who are waiting for Cloud PBX to become more feature rich and enterprises, which targets more on-prem, both delayed their decision.

So that's the source of what we see, but we do believe that that will probably come back, I would point more to the fourth quarter of this year and beyond.

Got it.

And just to clarify, Shabtai, the closer to 18% number you referenced, was that for the first half for UC-SIP or for the second quarter?

That was for the second quarter.

I simply don't recall the first quarter numbers, so.

Got it.

Definitely second quarter, yes.

Just wanted to clarify.

So I mean to maybe summarize your comments on the Skype for Business.

It sounds like it's just perhaps taking them a little longer to get a more mature version of that Cloud PBX out there that the kind of market's looking for and you think you might get that towards the end.

Right, right.

And but still -- yes, that's correct.

But I'll again mention that, we see tremendous interest by very strong players in the market, who await the newer versions and are really -- because there is a segment of the market, mainly the mid-market, which is -- will probably be best-served by that product.

And I think those players do anticipate much demand in that area.

So yes, we are optimistic on that.

Got it.

And then, if you could just maybe break down the gateway performance a little bit.

You've historically broken that down into kind of the enterprise and the service provider piece.

Can you give us any incremental color on how those 2 pieces are performing relatively?

So actually, I don't have the breakdown here with me, but I -- since I know some of the main accounts, we have some large accounts, something to build up in the service provider space that is occurring for more than a year now, both in North America in -- with other service provider, leading Tier 1 service provider worldwide.

On the other end, when -- think about the over-the-top companies, when they expand from the market business to the SMB and the mid-market, there always comes a stage where in order to provide a complete solution, they need to use those gateways in projects.

So we see demand in both.

Think about the world using today, I would say, hundreds of millions of wired phones on the desk and think about all that now has to be replaced by IP phones somewhere, let's say, 20 years from today.

The expense that's related to changing all those phones is tremendous.

An IP phone, an average phone, will sell today for between $40 and $100 and some depending on quality and on features.

We all understand that while it's relatively easy to replace the core of the network from a plus 5 switch into a soft switch.

Replacing all that -- those phones by businesses, by the end user is very costly.

So a gateway that sells for, let's say, $10 a port is substantially more cheap than a IP phone that would sell for that purpose.

So this is why you would see in -- and I don't think it will go down anywhere in the next 5, 7 years.

There will always be high demand for those gateways to help connect current phones into the new evolving IP network simply because the budget that's needed to replace all those phones is not there.

And nobody will make that spending these days.

So that's why gateways are being required both on enterprises and service providers.

The next question is from Dmitry Netis of William Blair.

Good quarter, guys.

Little bit of a follow-up on the guidance and Rich's question there as far as the top line guidance.

I think at 7%, as you're guiding, you would be kind of towards the upper end of that range, $152 million, $157 million.

So I think what I'm -- I guess, if you could -- if you can help us understand September, December quarter of how you're thinking about the ramp being more back half loaded or fourth quarter loaded and September may be more flattish to the June quarter results.

Can you kind of explain what the pipeline looks like?

And how the revenue may end up?

And whether there's -- you're foreseeing maybe much of an upside to that 7% guidance, any opportunities where you feel you may potentially exceed that number?

Thank you, Dmitry.

Yes, we -- usually, our fourth quarter is the strongest one.

So you can assume that we will see growth in the third quarter, but rather small compared to what we expect in the fourth quarter.

Usually, it's largely associated with more significant service opportunities.

So all in all, we will see fourth quarter larger than first quarter growth.

Okay.

And as far as some potential opportunities, are you guys thinking like as far as big deals that are landing at the end of the year, fourth quarter, what are some of those deals?

Are they maybe the areas of Skype for Business?

Is there a gateway service provider?

Any of the verticals gives you confidence that you can end up at the high end of that guidance range?

If you could help us understand where that strength is coming from.

Yes, we largely plan on increased effort in the enterprise space.

The North American business is very strong for us, growing very well.

We're adding more positions there.

We expect larger deals in the Skype for Business market.

The fact that we own close to a complete solution, there's no such other solution in the market that is anywhere close to what we offer.

We also have some capabilities that do not have a match.

So we believe it's our position with large enterprises getting stronger and stronger, we may add more direct touch to some of that effort.

So all in all, we believe in a very strong enterprise business going forward.

Okay.

Great.

And then you said, Skype for Business may be coming back at the end of the year.

I was just curious, obviously, you're on the ground, you're seeing what's happening today.

Microsoft had their Inspire conference, partner conference a couple of weeks ago.

Was there any change in strategy, change in direction that could affect their business coming into the 2018 timeframe?

Any anecdotes you potentially could share with us if there was any change or any strategic direction being set at that conference?

Right.

So much of the change anticipated relates to Microsoft's action.

And they have just started the New Year on July 1. We anticipate a big conference -- end user conference is planned for September, Ignite.

And we hope that, we will see towards that event changes that Microsoft is applying in that market that will allow both increased progress on both Cloud PBX and on the on-prem.

So we're optimistic that we will see that coming.

So give or take a quarter from today, I think, we will see some change in the markets.

Okay.

And then just kind of going through some changes in the industry.

Obviously, some of your competitors are emerging and maybe that's more of a service provider side of the equation.

Do you foresee any potential impact to your business either on the enterprise side or the service provider side?

How do you view this transaction, positive, neutral?

I suppose it's not negative, but given potential disruptions, but anything you can talk to as far as the impact and help that consolidation.

Could it be better actually, because of the pricing environment, has opportunity to kind of get better given the consolidation in the industry.

Any of those factors affecting business, I'd love to hear from you, your thoughts there.

Right.

So both companies, both GENBAND and Sonus has a focus substantially more on the service provider market.

So with the combined company, I would assume that that focus will remain.

We put more effort into the enterprise space.

So in fact, anyone may have his own opinion, but I think we're seeing a good environment for us in the enterprise space.

So we -- for us, that combination does not signal anything that's negative.

Beyond that, obviously in the past, we almost never crossed way with GENBAND.

We definitely were competing with Sonus if there was an opportunity.

So I assume we will see that continuing, but maybe to a lesser extent.

Okay.

And then maybe, one last question on the financial side of the equation.

I look at the gross margin this quarter, it came in about 100 basis points under last quarter's result.

Just if you could provide what drove that?

I know you mentioned an Asia deal.

Was there a (inaudible) Asia deal or is there something else going on?

And how do you foresee that margin occurring through the end of the year?

Is there going to be upward pressure, kind of neutral steady flow where we exited Q2?

Any sort of direction of the gross margin would be helpful here.

Right.

(inaudible)

Yes.

Okay.

So just touching on the gross margin.

I think that previous quarter where we reached 62.9% (sic) [61.9%] was a one-off quarter, where there was a certain mix of product constellation which allowed us to deliver a higher gross margin.

We seem to be coming back to where we were planning all along for the full year of around 61.5% to 62% gross margin.

So it's -- merely, it's not representing any pressure on prices.

It's simply an issue of mix of products, mix of hardware versus software.

As I've mentioned before, there were some application areas which were weaker, that which is software based, so that affected the margin.

So that's the source for that.

Okay.

So less software revenue is what sort of drove -- you had higher software content in the March quarter.

So less software in June is what (inaudible).

It's an application.

It's the application, one application area, which was higher in the first quarter and lower in the second quarter.

Okay.

Now that you -- geographies potentially had an impact here.

You mentioned an Asia deal being one of the bigger contributors this quarter, that was not a contributor here to downward pressure on the margin from Q1 to Q2 time?

Yes.

Actually that deal, we won it.

It's still not recognized.

So we will see the benefit of it in the second half.

Okay.

Very good.

And then...

We just mentioned that Q1, it did.

I'm sorry?

I mentioned that we won it, but it will not -- it's not recognized in terms of the financials.

Okay.

And I apologize to my peers on the call.

I just want to throw in one last question on the OpEx.

You mentioned it's going to be lower in the second half.

So you are putting up some leverage there on EPS and it sounds like margins are stable, gross margins rather stable and revenue obviously stepping up here.

So if you do the math, it -- the EPS actually steps above the range that you reiterated, coming in kind of the upper 30s, (inaudible) lower depending on how much lower obviously the OpEx goes.

But if it's lower than Q1, Q2, which is what you said, by 2% to 3%, you should be well above that guidance range on EPS, which you gave.

So just trying to understand the conservatism of maintaining that EPS guide.

Okay.

So 2 key points.

One is the FX issue.

We had a very favorable U.S. dollar versus a new Israeli shekel rate in the first half.

We will not have that in the second quarter.

We hope that the shekel will not get stronger again, but we have a new budget that's based on the current level.

So we expect hopefully not negative surprises here, maybe positive surprises.

We also did some, as I've mentioned, elimination of 15 positions in view of the worsening of the conversion rate.

Also, it's really the second quarter that was substantially higher than the first quarter.

If you look into the numbers, second quarter OpEx was $0.5 million higher.

With the changes that we have made and the new plans, we now expect third quarter and fourth quarter to be lower than the second one, but a bit above the first one.

So that's the picture on the OpEx front.

Well, that's right.

But even with that type of guidance, I understand you're going to come out better on OpEx.

I guess, there is going to be -- and I assume you're buying back the shares.

So there is positive pressure from lower share count and lower OpEx on the EPS.

So you will end up essentially, just looking at the model and looking at top line gross margin, that's higher than the upper end of that range of -- you gave 31% to 35%, you will be above that for the year?

Well -- okay, I'll -- again, I'll mention 2 things.

Again, we've tried to be conservative due to the fact that we have the FX currency issue.

And second, we simply try -- we need to control those fluctuations in the gross margin.

On the buyback, I'll just mention that, although we continue to do the buyback basically every single day, due to volume limitation, we're not buying at a rate that we bought in the past.

So that affects our ability to gain more on that front.

But all in all, I think -- we took all those factors together, we came up with a budget plan, that budget plan we felt we could not -- we had no reason to change the guidance.

That's the bottom thing, so...

Our next question comes from Mike Latimore of Northland Capital Markets.

Shabtai, you mentioned there may be some large state for business deals that are in the pipeline for the fourth quarter.

I assume those are on-premise deals correct?

Yes.

Right now, you should assume that any large deal is taking place with the on-prem release.

And you also said that obviously there'll be another release of Cloud PBX later this year.

Will that shift, do you think, their focus to pure cloud?

Or will they continue to emphasize a hybrid approach, do you think?

So I think there is realization.

And I think it has to do not only with Skype for Business but for the overall market approach, where there was some very simplistic thought in the past that when cloud comes, everybody moves to the cloud.

I believe that we've seen that not only in the Skype for Business but in other areas too that large enterprises really prefer to have much better control or more full control over the operation of their communication infrastructure.

And for that reason, many of them choose -- we know for a fact -- in Europe, for example, take Germany.

We know that the majority of enterprises do prefer to keep on-prem solution.

They'll definitely use a cloud solution where it helps in the branch offices in smaller locations.

But I think, all in all, while everybody initially thought that there would be a swift move to the cloud by everyone fairly fast, I think right now, the hybrid approach becoming substantially more.

And this is being -- we see messages coming from our partners, including Microsoft, where combining on-prem for the larger facilities for headquarters and using cloud for smaller facilities, that will be probably the solution of choice for the next several years going forward.

So that will -- basically when you have a better cloud solution, and you have a commitment to advance the on-prem solution, that would be the best combination for the end user.

And I think that is the new scenario that's being created in the market.

And I think you said in the mid-market, the Cloud PBX, interest levels are high there.

I guess, is that kind of globally or is that more centered in Europe or the U.S.?

That's globally.

Actually, we're working with several service providers, and we see demand coming from companies the size of a few hundreds to a small number of thousands, which are looking for a Cloud PBX to provide a solution.

And then with regard to Avaya, are you seeing kind of orders from Avaya also?

Yes.

We keep working with Avaya.

And although the business is smaller than it used to be compared to 2, 3 years ago, we definitely work with Avaya.

Okay.

One of your competitors is partnering with firewall companies to address the security market.

Is that something that you see opportunities around?

Again, I'm sorry, I missed that.

Yes.

One of your competitors is partnering with firewall companies to address the security services.

Okay.

Is that an opportunity for you as well?

Yes, I think we definitely agree that security is a very important capability.

We have our own solution, we have our own alliances, and we definitely work to increase that.

So yes, we see that as an opportunity for us too.

There are no further questions at this time.

I'd like to turn the call back over to Shabtai Adlersberg for closing remarks.

Okay.

Thank you.

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

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

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

Thank you very much.

Have a good day.

Bye-bye.

This concludes today's conference.

You may now disconnect your lines.

Thank you for your participation.