AudioCodes Ltd (AUDC) 2022 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to AudioCodes First Quarter 2022 Earnings Conference Call. (Operator Instructions)

It is now my pleasure to turn the floor over to your host, Roger Chuchen. Sir, the floor is yours.

Thank you, operator. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer; and Niran Baruch, Vice President of Finance and Chief Financial Officer and Dmitry Netis, Chief Strategy Officer and Head of Corporate Development.

Before we begin, I'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, 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 and uncertainties and other factors that could cause actual results to differ materially from those stated in such statements. These risks, uncertainties and factors include, but are not limited to, the effect of global economic conditions in general and conditions 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 development, 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 acquisitions, the ability of AudioCodes to successfully integrate the products and operations of acquired companies into AudioCodes business, possible adverse impact of the COVID-19 pandemic on our business and results of operations, and other factors detailed in AudioCodes filings with the U.S. 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 an income per share. AudioCodes has provided a full reconciliation of the non-GAAP net income and net income per share to its net income and net income per share according to GAAP in the press release that is posted on its website.

Before I turn the call over to management, I would like to remind everyone that this call is being recorded. An archived webcast will be made available on the Investor Relations section of the company's website at the conclusion of the call.

With all that said, I would like to turn the call over to Shabtai. Shabtai, Please go ahead.

Thank you, Roger. Good morning, good afternoon, everybody. I would like to welcome all to our first quarter 2022 conference call.

With me this morning are Niran Baruch, Chief Financial Officer and Vice President of Finance and Dmitry Netis, Chief Strategy Officer and Head of Corporate Development.

Niran will start off by presenting a financial overview of the quarter. I will then review the business highlights together with Dmitry and provide a summary for the quarter and discuss trends and developments in our business and industry. We will then turn it into the Q&A session. Niran?

Thank you, Shabtai, and hello, everyone. As usual, on today's call, we will be referring to both GAAP and non-GAAP financial results. The earnings press release that we issued earlier this morning contains a reconciliation of the supplemental non-GAAP financial information that I will be discussing on this call.

Revenues for the first quarter were $66.4 million, an increase of 12.8% over the $58.8 million reported in the first quarter of last year. Services revenues for the first quarter were $27.5 million, up 26.2% over the year ago period. Services revenues in the first quarter accounted for 41.5% of total revenues. The amount of deferred revenues as of March 31, 2022, was $76.8 million, up from $71.6 million as of March 31, 2021.

Revenues by geographical region for the quarter were split as follows: North America, 48%; EMEA, 34%; Asia Pacific, 14%; and Central and Latin America, 4%. Our Top 15 customers represented an aggregate of 60% of our revenues in the first quarter, of which 48% was attributed to our 12 largest distributors.

GAAP results are as follows: gross margin for the quarter was 66.9% compared to 68.4% in Q1, 2021. Operating income for the first quarter was $8.1 million or 12.1% of revenues compared to $10.1 million or 17.2% of revenues in Q1, 2021. Net income for the quarter was $8.6 million or $0.26 per diluted share compared to $10 million or $0.29 per diluted share for Q1 2021.

Non-GAAP results are as follows: non-GAAP gross margin for the quarter was 67.2% compared to 68.7% in Q1 2021. Non-GAAP operating income for the first quarter was $11.9 million or 18% of revenues compared to $13.2 million or 22.4% of revenues in Q1 2021. Non-GAAP net income for the first quarter was $11.2 million or $0.33 per diluted share compared to $12.7 million or $0.37 per diluted share in Q1 2021.

At the end of March 2022, cash, cash equivalents, bank deposits, marketable securities and financial investments totaled $144.1 million. Net cash provided by operating activities was $0.9 million for the first quarter of 2022. Days sales outstanding as of March 31, 2022, were 69 days. During the quarter, we acquired 720,000 of our ordinary shares for a total consideration of approximately $20.9 million. We reiterate our guidance for 2022 as follows. We expect revenues in the range of $277 million to $285 million and non-GAAP diluted net income per share of $1.40 to $1.60.

I will now turn the call back over to Shabtai.

Thank you, Niran. Before we dive into the first quarter results, I'd like to inform you that we have prepared and on placed a brief presentation the quarter update to aiding our discussion today. Please refer to the Investor Relations section on our website.

We're pleased to report solid top line results for the quarter, growing 12.8% year-over-year. Revenue acceleration this quarter was mainly driven by ongoing strength in our enterprise business, which grew over 15% year-over-year and accounted for roughly 85% of our revenues. Service revenues grew above 25% year-over-year and accounted for an all-time record of 41.5% of the total company revenue. This is a proof of executing on our strategic priority by successfully transforming to cloud services and recurring revenue model with AudioCodes Live managed services.

At the core of this success was our Unified Communication and Collaboration business, which grew over 20% year-over-year. Unified Communication and Collaboration makes up roughly 85% of enterprise business. Making up the majority of UCC, our Microsoft business grew above 25% year-over-year, representing an acceleration in growth from approximately 20% in '21. Within that mix, Microsoft Teams grew over 50% year-over-year.

As projected by several sources, including an industry research firm, Wainhouse Research and an analyst note from Piper Sandler. Microsoft Teams voice seats are anticipated to grow at roughly 35% to 40% compound annual growth rate. throughout 2025, which supports our confidence in multiyear runway for our TMS Teams business. Wrapping up discussion of UCC business, our Zoom Phone business also had an exceptional quarter, reaching all-time record and up 50% year-over-year.

Shifting gears to the customer experience segment, which accounts for the remaining 15% of the enterprise business, customer experience declined 8.5% on a year-over-year basis, owing to a tough comparison from Russia business generated in the first quarter '21, ex-Russian business, our CX segment would have been up roughly 10%.

We continue to see great progress with our conversational AI business, where total contract value signed during the quarter grew around 40% year-over-year. We are well positioned to grow [15%] in our conversational AI portfolio in 2022 compared to the previous year.

We're glad to report that the acquisition of Callverso at the end of 2021 started to bear fruit with substantially increasing new opportunities for intelligent virtual agent solution for the Contact Center application.

Importantly, AudioCodes Live, our Managed Services offering for UCC, CX and conversational AI segments continue to see strong momentum. We exited the month of March a $20 million ARR run rate, and we expect our AudioCodes Live managed services to double again in 2022 to over $30 million from over $15 million in 2021.

Our pipeline continues to expand across core areas of business, supported by long-term secular trends of migration of voice infrastructure to the cloud, hybrid work and enhanced customer engagement and experience solution powered by [AI].

Shifting to margins, our non-GAAP gross margin came at 67.2% versus 68.7% in the year ago quarter, owing to the 1.4 million higher costs associated in the quarter with the procurement of components in the open market. Excluding these costs, our non-GAAP gross margin would have been at 69.3%.

Non-GAAP OpEx increased 20% year-over-year, mainly due to 3 factors: one, the increase in head count of 132 positions were up 17% and related budget and salaries on a year-over-year basis, all that done in order to support a growing business needs and expansion.

Rising salaries in the R&D space in Israel is the second driver for higher costs and salaries. So higher and rising salaries in the R&D space, where the boom in local high-tech industry drives shortage in skilled manpower and therefore, drives higher salaries.

And lastly, the impact of much lower NIS/U.S. dollars exchange rate as compared to the first quarter '21 rate, which was favorably hedged. Non-GAAP operating margin was 18% versus 22.4% in the year ago quarter, which was impacted by higher component costs, increased hiring activity and less favorable hedged new Israeli shekel U.S. dollar rate. Excluding the higher component costs, non-GAAP operating margin would have been at 20.1% in the quarter. On the heels of this development, our non-GAAP earnings per share came in at $0.33, in line with our internal budget. This compares to $0.37 in the first quarter of 2021.

Getting back to the guidance provided earlier this year, we are [reiterating] our 2022 revenue guidance of $277 million to $285 million and non-GAAP EPS of $1.40 to $1.60 million based on strong business fundamentals and our ability to navigate the supply chain issues. That said, there's no change to our long-term financial targets, which remain in the range of 13% to 15% long-term goal on the revenue growth, about 67% to 70% on a non-GAAP gross margin, OpEx percentage of revenues within the range of $47 million to $50 million and then non-GAAP operating margin between 20% to 23%.

I would like now to hand over the call to Dmitry Netis our Chief Strategy Officer, to give a brief overview of our strategic focus areas, after which I will provide more disclosure of different business lines. Dmitry?

Thank you, Shabtai, and hello, everyone. Since I joined the team in January, we have undertaken a deep dive into fine-tuning our strategy to ensure that we have optimal plan in place to capitalize on the strong multiyear secular growth opportunities in our core market, which is mainly an enterprise market and accounts for roughly 85% of our total revenue. The remainder 15% is the service provider CPE segment, comprising our hardware platforms.

In terms of the enterprise business, AudioCodes is the leading provider of voice services, serving customers in 2 primary markets, Unified Communications and Collaboration Service, UCC and customer experience contact centers, which we refer to as CX. Voice remains a top interaction channel in digital transformation and will remain as such for a very long time. Voice is a high-impact, high-value channel mission-critical to companies serving their customers and their employees.

We're seeing the next stage of evolution of voice, not just in the traditional sense of telephony, but also in the non-telephony world, such as meeting assistance, IVAs, conversational AI, call recording and even Metaverse in the future. It is increasingly hosted in the cloud and consumed as a service as in the case, for instance, with Microsoft Teams.

The addressable market for voice services is expected to reach 72 billion TAM by 2025, comprised of UCC and CX, both of which are undergoing the shift to the cloud. Our approach here is simple, be the most interoperable communications platform as a service when it comes to voice services. We focused strictly on the enterprise segment where 65 of Fortune 100 multinational companies of customers of AudioCodes, and we believe this segment will ultimately drive the long tail of our CPaaS.

Our voice CPaaS platform incorporates a cloud-native architecture of our Session Border Controller or SBC, WebRTC gateways and our Voice.ai Connect platform, powered by our [call] flow APIs and enhanced by a voice quality monitoring, analytics and orchestration tools. On top of this voice platform, we offer meeting room solutions and user devices in our AudioCodes Live subscription services that enable a one-stop shop marketplace for our enterprise customers. This is what Microsoft Team increasingly zoom customers value most. This voice platform makes up the best majority of our total enterprise revenues today split between the UCC and CX.

Additionally, we offer a portfolio of productivity-enhancing software and conversational AI applications, which include our intelligent virtual agents called VICA from our Callverso acquisition. This is an exciting market that recently, Gartner in its piece called Contact Center Conversational AI and virtual assistant estimates to grow from $332 million to $13.9 billion by 2026. That's a 72% CAGR.

Conversationally our market has a future -- is a future growth engine of AudioCodes, and we're developing a number of new applications here, including conversational IVR for customer service called Voca and our [meeting] Intelligent Solutions, SmartTap and Meeting Insights. AudioCodes is a unique asset built on product-led engineering organization with a strong technology superiority in voice-related services, keep strategic partnerships and a one-stop shop approach.

With that, let me now update you on the key pillars of our strategy. Our mission here is threefold. First, we expand our voice platform and upsell conversational AI apps into the UCC vertical by partnering with Microsoft Teams and Zoom Phone. Second, we expand our voice platform and upsell conversational AI apps into customer experience vertical in partnership with Microsoft, Genesys and other contact center and CRM platforms. And third, we accelerate our transition to subscription services via AudioCodes Live for our customers, this move to managed services shifts the burden of managing complex voice infrastructure to us, freeing up resources of IT departments to focus on more value enhancing initiatives of our customers.

As for AudioCodes, the economics here are quite equally compelling. Over the life of a typical 36-month managed services contract we derive over 2x the economic value on the recurring services versus a historical CapEx model.

Wrapping up this discussion, we're looking to execute on the aforementioned land-and-expand strategy by leveraging our strong voice CPaaS powered by our market-leading cloud native session border controllers, call flow APIs and management and orchestration tools.

Our past stellar performance has been recognized by Omdia, which ranked AudioCodes just this quarter as the #1 enterprise SBC in the whole entire year of 2021 with 18.18% market share, bypassing for the first time on the annual basis, competitors such as Oracle, Cisco and Ribbon. We are proud of this achievement going from roughly 10% market share to nearly 20% in just 3 years. Our excellent execution track record, technology superiority and innovation engine give us confidence as we write the next chapter of our growth.

Lastly, consistent with the strategy we just outlined, we will also look to accelerate our organic growth via potential M&A opportunities.

I will now hand the call back to Shabtai to discuss details of individual business lines. Shabtai?

Thank you, Dmitry. As discussed previously, Microsoft business grew above 25% year-over-year, representing an acceleration in growth from approximately 20% in 2021. We are pleased to see that the pickup in growth of Microsoft credit opportunity discussed on the last quarter translated into higher business growth this quarter. Specifically, Microsoft Teams business grew above 50% year-over-year in the first quarter. Teams accounts additions in the quarter were 260 versus 206 in the year ago quarter, the highest on record, which speaks to the accelerating adoption of Teams as a UCC platform and our market leadership in this segment.

Importantly, Microsoft credit opportunity continued to grow at a healthy rate. In the first quarter of '22, new opportunities -- new Teams opportunities credit grew 51% year-over-year compared to 2021.

Now let's talk through a couple of Microsoft important wins in the quarter. The first one, we're working with a Tier 1 service provider. We have signed a 78-month contract with a global freight transport company, selling AudioCodes Live services for $5 million total contract value. The deal calls for migration of 30,000 users to Microsoft Teams Voice. We won the engagement on the simplicity and broad capabilities of our solution versus those of our competitors, underscoring the strong competitive position we enjoy in our market.

Second win, we are working with the large system integrator and signed a contract with a multinational health care medical device company, enabling migration to Microsoft Teams from Cisco and Avaya by providing AudioCodes Live managed services to 3,000 seats in the U.S. plus IP phone sales in the first phase of the deployment. Discussion are ongoing that could take total deployment to over 50,000 seats globally were several millions in total contract value.

Now after reviewing these 2 deals, let's dive into the AudioCodes Live or as we call it, Teams Voice as a Service. Just to remind everybody, since inception in mid-2019, Live Teams ended 2020 at about $7 million ARR has more than doubled in 2021 to reach above $15 million ARR, and in 2022, as discussed earlier, we plan to double it again to above $30 million. The background for this growth is obvious based on growth demonstrated in the U.K. market in the past 12 months, it is obvious that Microsoft Teams is the leading solution for large enterprises in North America and worldwide.

According to a recent Piper Sandler analyst report from October 2021, introducing a U.K. market model for the next 5 years. Teams seats compound aggregate growth rate in coming years is about 34%, quite steep growth that should support continued growth for our Teams Live services. This reports estimates about 4.2 million Teams Seats for 2021, 8.1 million seats for '22 and 31.5 million for 2026.

AudioCodes Live success stems from the fact that it removes complexity from the process of integration with legacy enterprise telephony and provide a seamless, rapid and cost-effective migration to Teams communication and collaboration for our enterprises. AudioCodes Live provides, among other things, a solution for Direct Route SBC devices, network and user management products and a complete set of automations of which are delivered on a recurring per user per month model.

Now referring to some of the live product announcement made in the first quarter. Since the launch of our flagship AudioCodes Live team, Direct Route managed service nearly 3 years ago. Direct Route is Microsoft terminology for bring your own carrier service. Our strategic priority is to provide partners and end customers with flexibility in choosing the Teams voice deployment options, the bets with their needs.

To that end, we recently announced AudioCodes Live Express, which is a self-service SaaS offering, asset on AudioCodes Azure Cloud for reserves, VARs and managed service providers looking to seamlessly and efficiently provision Microsoft Teams [1] services. The beauty of this service is quick onboarding and provisioning, which can occur in minutes and is handled entirely in AudioCodes Cloud.

We also recently extended capabilities of Live Cloud managed service, which simplify onboarding of Teams business customers of service providers offset in the service provider cloud. This service is also known as Microsoft Operator Connect. Microsoft Operator Connect provides end users an alternative to procure Teams voice from select care partners directly through the Teams admin portal. Colt is the first publicly disclosed carrier using AudioCodes to offer this service on Microsoft Operator Connect. To date, there are roughly 25 carrier partners on Microsoft Operator Connect and AudioCodes is working with many of them.

Just last week, we announced that AudioCodes has been named by Microsoft, an Operator Connect Accelerator Partner. This is a new direction for Microsoft to enable tens of additional care or managed service providers to expeditionally offer voice service or Operator Connect with no infrastructure investments required and without the need to maintain ongoing API integration directly with Microsoft.

So with the vast area of different live services offering, let me distill the primary differences between the different offerings. So our flagship is Live Teams, which targets enterprises and which enables Teams via Direct Route. This solution is sold to reserve and system integrators. The target of our historical medium to large customer. Usually, we're talking about seat count of between 3,000 and 30,000 that often have a very complex telephony system environment and require customization.

Second offering is Live Cloud, which is a white label SaaS platform. It is sold to service providers to enable them to provide small to medium-sized customers. And then lastly, Live Express, which again is a AudioCodes branded SaaS platform that enables [resource] with no telephony experience to quickly onboard customers.

As discussed so far, Live basically targets the enterprise, this is where we derive all 4 managed services today. Live Cloud and Live Express represents new Greenfield opportunities for us targeting small to medium customers with likely [fear] office location and less central complexity.

Now let me shifting gears to Zoom Phone. I would like to discuss an emerging fast-growing operational momentum at Zoom Phone, while still a small percentage of overall business. Zoom Phone activity in the quarter sets another record and was growing more than 50% year-over-year. Zoom has publicly discussed the strategic importance of up-selling its core meeting customers with Zoom Phone. In the January 2022 quarter, Zoom added around 550,000 Zoom Phone seats up from 0 to 3.5 years ago. Zoom Phone launching U.S. Canada in January 2019.

As the formers voice expert was the most comprehensive voice solution in the market, AudioCodes is uniquely positioned to benefit from these long-term upsell tailwinds. We are stepping up our investment in marketing activities around the Zoom platform and look forward to announcing new product launches on Zoom ecosystem in the coming months.

Following the revenue growth in the first quarter '22, we also know that we have seen a record in new opportunities created. So in the first quarter 2022, Zoom Phone new opportunities grew more than 50% year-over-year.

Now let me wrap up my discussion with conversation AI segment, which grew 40% year-over-year and is expected to grow 50% -- above 50% in 2022. This segment consists of 5 applications: Smart App or compliance recording solution, meeting insights or meeting productivity service, Voca or conversational IVR solution, Voice.ai Connect platform that transforms chat bots into voice bots and VICA, our intelligent virtual agent solution.

Let me highlight our intelligent virtual agent solution, the one we acquired from Callverso, which has been a driver of strong momentum in the first quarter. As proof of strength and scalability for IV solution, I would like to discuss a large customer in the medical space, Clalit, which is Israel largest medical services provider serving over 4.7 million people with our IVA deployed at the company's contact center and 600 -- 1,600 of its clinics.

Let me provide some data points that indicate our strong and successful the IVA service at Clalit. We're talking here about the following metrics: VICA, the IVA announced daily more than 80,000 calls a day and up to 120,000 calls a day on peak call volume. That has resulted in roughly replacing 200 fewer human agents. And then all that saving was translated into a cost saving of about 100 million new Israeli shekel or about U.S. $30 million.

Following our success in the Israeli market with VICA virtual agent, we have plans to start addressing the global market in the second half of 2022. Another area of strength within the conversation AI portfolio is the Voice.ai Connect product, which powers voice interactions for the growing market of chat bots. We continue to win more chatbot applications with leading worldwide partners. We believe we are on track to more than triple ARR in 2022 compared to '21. As such, we strongly believe that conversation on AI can develop into a new meaningful growth engine to fuel our growth going forward.

This pretty much concludes my prepared remarks. I'd like to point out that in view of the strong growth anticipated for the UCC markets we serve, our top leading position as leading voice partner to the leading vendors. And the investments done and continue to be done to keep our momentum in this space. We are confident and optimistic as ever about strategic vision, our strategic vision and strong competitive foundation that we have built to capitalize on the multiyear secular growth opportunities in our core enterprise market and subscription services.

I'll stop here, and now we will turn the floor back to the operator for the Q&A session. Operator?

(Operator Instructions) Your first question for today is coming from Greg Burns.

It's Greg Burns from Sidoti & Company. First, you had mentioned some impact from Russia. I didn't catch if you put an exact number behind it, but what was the exact impact from Russia on the business in the quarter?

Yes. We refer to existing business, mainly in the CX market where a large deal was diluted. So revenues compared to the first quarter of '21 were roughly very low. We do not anticipate any new opportunities to develop in the Russian market in the coming future.

And Dmitry was talking about cross-selling opportunities, can you just talk about what the attach rates currently are, maybe with some of your applications into the Microsoft ecosystem and how you see that developing over time.

Yes. I'll tell -- well, Dmitry defined our strategy land and expand. So as we see [iCrat] is the most needed solution in the Microsoft Teams, if you want to connect and use voice with the outside world. Now we do have today probably the leading -- the best solution in the enterprise space. Once we are able to penetrate an account with that service we are offering within our managed services, more services attached to it. Those could be [cell] phones, meeting room services, core recording services, solutions and others. So all in all, we take advantage of the fact that we have grown access to the team's customer base that allows us to win with one area application in our service and then add on top of it more services.

But maybe just to understand where you're currently at versus what the goal is here. What is the typical like attach rate for applications on top of the core Microsoft Direct Route offering?

Right. So right now, we have -- I have no statistics here with me to answer that. I'll mention just that there's definitely an interest, give you one or actually 2 areas, okay? I think we need to realize Teams is the new PBX to win the world, right? We're coming from a world where there's been a lot of other PBX manufacturers such as Cisco, Avaya, Nortel, Lucent and others. And all that gear is going to migrate now and in the future to Teams. Now every PBX has got auxiliary services, right? Take IVR services, take recording compliance recording services. So if you add a PBX, let's say, an Avaya PBX and you needed to provide IVR solutions to your customers. Once you move to Teams, you need to establish a new IVR solution or a new compliance recording solution. So that's exactly what we do. We have developed a very advanced IVR conversational, IVR solution. We have a very advanced compliance recording solution called SmartTAP, and in the past 6, 9 months, we have seen a rising number of Teams users who're now on top of the deck, now want to use the IVR and/or the compliance recording. Hopefully, that answer your question.

Your next question is coming from Ryan MacWilliams.

It's Jack McGuire on for Ryan with Barclays. So on the 2 large live deals in the quarter, any color around how AudioCodes has brought into these deals? And is there any specifics around the pipeline for these kinds of deals just going forward?

Sure. So usually, with our live services, we usually work directly in the mid-market through usually a set of local partners, Microsoft partners. When you go to large deals, such as those that I've mentioned here, the one that has to do with the health care or the one with the freight transport services. Those are huge companies. The go-to-market is usually true global system integrators. So in both cases, we have worked our way into the accounts to those partners.

And then one more quick one. Any more specifics around how [Cloud Bots] has been performing? And any key plans for the acquisition as you take it global in the second half?

So again, we have -- I haven’t mentioned the number, but we have seen a huge growth in the number of new opportunities for virtual agent solutions. We're working right now in the Israeli market, very strong on the medical vertical on the financial one, large utilities. We are working in 2022 to port that technology into a multi-tenant cloud-based solution that we can deploy on a global basis. So it's a work in progress. I assume, we'll probably launch it within the next 6 to 9 months.

Your next question for today is coming from Ryan Koontz.

Sure. It's Ryan Koontz with Needham. Congrats on nice Microsoft numbers. It's great to hear that. I wonder if you could expand a little bit on the decline in contact center, customer experience was that primarily attributable to Russia? Or was something else going on there with your different partners you work with in the contact center.

Okay. Yes. So actually, the decline is tied up to few figures. I'll name a few of them. One is, as I've mentioned before, the Russian market. The second one has to do with the delayed big above $1 million opportunity delay in the finance sector. Then we do see some of the players in the CX market. I think their names, some of them are losing market share. So we had some decline. And lastly, obviously, we had some business with some large contact center player who is moving its business to the cloud, that has caused also some loss. But all in all, the space is fairly vivid and we do expect to recover from that decline in the first quarter.

And on the gross margin headwind, is that primarily on IP phones there or your cloud appliances?

No, not really. IP phone is fairly okay. Actually, it's other components, which are hard to outsource in the open market. Therefore, we're trying to get them through other [returns]. And -- but that's not the fuse. It's more the [CP gear], the service provider is CP.

Your next question is coming from [Jeremy Soller].

This is [Jeremy Soller]. I work with Samad Samana. Another quick one on margins, actually. How should we think about the shape of margins throughout the rest of the year? Do you have any visibility into how these costs are looking into Q2?

Yes. With regard to the gross margin, procurement cost of components in the open markets continued to accelerate in the first quarter. The component purchases in the open market at higher-than-expected cost in the first quarter of 2022 is expected to have residual impact on the second quarter as well, though a magnitude that's less than first quarter, while we expect supply chain cost to remain temporarily elevated for the rest of 2022 relative to 2021, we believe the supply chain situation should stabilize by the end of the year.

And one more from me. How should we -- do you have any color on kind of teams across geos and how it's performing? Is it still primarily driven by the Americas? Or if you could provide any color there?

All in all, we definitely see teams continue to grow. Actually, it's a long-term basis of the numbers quarter were like $4 million last year, $8 million this year. So yes, it's not going to stop. We do see more continence created, and I think we have a winning position in the market.

Your next question for today is coming from Tal Liani.

It is [Lauren Dixon] for Tal Liani at Bank of America. I just wanted to dive a little bit more into the supply chain issues around the components. Last quarter, I know this has been a concern as well although appears to be overemphasized this quarter, especially when I look at the supplementary slides. I'm just wondering if this quarter with the magnitude of the components shortage greater than expected.

Yes. Actually, we see the trend continue also in the second quarter. So we believe it should be stabilized by the end of the year.

Okay. Sorry, this is Tal. I'm going to jump in. When you say stabilize, does it -- is it going to worsen in the second half? Or is it -- I'm just asking about the impact on gross margins and margins in general.

Yes. We believe that the second half will be better in terms of gross margin if we compare it to the first quarter of 2022, which was the low side of our range.

And is the improvement because of supply chain or the improvement is because of other things like currency or anything else?

We are 1 month ahead in the quarter, and we see better both in supply chain and also in prices. So we need to buy less in the open market, less components.

There are no further questions in queue. I would like to turn the floor back over to Shabtai for any closing comments.

Okay. Thank you, operator. I would like to thank everyone who attended our conference call today. We've continued good business momentum in 2022 and strong underlying market trends in our industry. We believe we are on track to another year of growth in 2022. We look forward to your participation in our next quarterly conference call. Thank you very much. Have a nice day.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.