AudioCodes (NASDAQ:AUDC) Q4 2020 Earnings Call

0:00 Greetings and welcome to Audio Code's fourth quarter and year-end 2020 earnings conference call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. It is now my pleasure to introduce Brett Moss from Hayden IR. Thank you, Brett. You may begin.

0:27 Thank you. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer, and Niran Baruch, Vice President and Finance and Chief Financial Officer. Before we begin, I'd like to remind you that information provided during this call may contain forward-looking statements related to AudioCodes business outlook, future economic performance, product introductions, plans, and objectives related thereto, any statements assuming, assumptions made, or expectations as to future events, conditions, performance, or other matters are forward-looking statements. As the term is defined under the U.S. federal securities laws. 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 audio codes industry and target markets, in particular, shifts in supply and demand, market acceptance of new products, and demand for existing products. The impact of competitive products and pricing on AudioCodes and its customers' products and markets, timing of products and technology developments, upgrades, and the ability to manage changes in market conditions as needed, possible need for additional financing, the ability to satisfy covenants in the company's loan agreements, possible disruptions from acquisitions, the ability of AudioCodes to successfully integrate the products and operations of acquired companies into AudioCodes business, possible adverse impact from COVID-19 pandemic on our business and the results of Operations, and other factors detailed in AudioCodes following the U.S.

1:55 Securities and Exchange Commission. AudioCodes assumes no obligation to update this information. In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share. AudioCodes has provided a 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 was posted on the website. Before I turn the call over to management, I'd like to remind everyone that this call is being recorded. and Archive Webcast will be made available on the Investor Relations section of the company's website at the conclusion of this call. With that said, I'd like to turn the call over to Shabtai. Shabtai, please go ahead.

2:30 Thank you, Brett. Good morning and good afternoon, everybody. I would like to welcome all to our first CORE 2020 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 summary for the quarter and then discuss trends and developments in our business and industry. We will then turn it into the Q&A session. Niran?

3:06 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 supplemental non-GAAP financial information that I will be discussing on this call. Revenues for the fourth quarter were $58.7 million, an increase of 11.1% over the $52.8 million reported in the fourth quarter of last year. Full-year 2020 revenues were 220.8 million, an increase of 10.2% over the 200.3 million reported in 2019.

3:55 Services revenues for the fourth quarter were 21 million, up 19.9% over the year-ago period. Services revenues in the fourth quarter accounted for 35.8% of total revenues. On an annual basis, Services revenues increased by 16.7% compared to the previous year. The amount of deferred revenues as of December 31, 2020 was $69.2 million, up from $62.2 million as of December 31, 2019. Revenues by geographical region for the quarter were split as follows. North America, 14%.

4:41 EMEA 35%, Asia Pacific 19%, and Central and Latin America 6%. Our top 15 customers represented an aggregate of 63% of our revenues in the fourth quarter, of which 49% was attributed to our 10 largest distributors. Gap results are as follows. Gross margin for the quarter was 71%. Operating income for the fourth quarter was $12.1 million compared to an operating loss of $26 million in Q4 2019. Full year 2020 operating income was $38.4 million compared to operating loss of $9.6 million in 2019. Net income for the quarter was $8.4 million or $0.24 per diluted share compared to a net loss of $8.2 million or $0.28 per diluted share for Q4 2019.

5:50 Full year 2020 net income was $27.2 million or $0.83 per diluted share compared to $4 million or $0.13 per diluted shares in 2019. I would like to remind you that gap results for the fourth quarter and full year of 2019 were impacted by the expense of $32.2 million we recognized in connection with the royalty buyout agreement with the IIA. Non-GAAP results are as follows. Non-GAAP gross margin for the quarter was 71.5% compared to 65.1% in Q4 2019. Non-GAAP quarterly operating income was 15.4 million or 26.2% of revenues compared to operating income of 8.3% An increase of 86.2%. Full year 2020 non-GAAP operating income was $47.5 million compared to operating income of $28.2 million in 2019. Non-GAAP quarterly net income was $15.2 million or $0.44 per diluted share.

7:14 compared to $8.1 million or $0.26 per diluted share in Q4 2019. Full year 2020 non-GAAP net income was $46.7 million or $1.41 per diluted share compared to $27.8 million or $0.80 per diluted share in 2019. At the end of December 2020, cash, cash equivalents, bank deposits and marketable securities totaled 186.3 million. Net cash provided by operating activities was 10.1 million for the fourth quarter of 2020 and 38.5 million for 2020.

8:03 Net cash provided by operating activities in both periods were impacted by the $11.6 million payment made in December 2020, which was the second installment pursuant to the royalty buyout agreement. Day sale outstanding as of December 31, 2020, were 54 days. On January 2021, we received court approval in Israel to purchase up to an aggregate amount of $30 million of additional ordinary shares. The court approval also permits us to declare a dividend of any part of this amount. The approval is valid through July 19, 2021.

8:51 We continue to expect top-line revenue growth and operating margin expansion For the full 2021 year, we currently expect revenues in the range of $240 million to $250 million and non-GAAP diluted earnings per share of $1.45 to $1.65. I will now turn the call back over to Shabtai.

9:24 Thank you, Niran. We are very pleased to report record financial results for the fourth quarter and the full year 2020. Let me talk first about several major milestones achieved throughout the quarter and the full year. First and foremost is the strong financial performance which Niran just provided a detailed description of it. I'd like to stress some of the most important achievements which are strong expansion of Gross Margin, Operating Margin, and Jump in Net Income. Strong Cash Flow, Positive Cash Flow, all I'll discuss further on in the following. Then it's the evolution of our enterprise business.

10:10 Now close to 80% of our business, growing 17% year over year. Third is the resurgence of three new growth engines for 2021 and going forward, namely Microsoft Teams, Contact Center, and Conversational AI, all in the enterprise space heading into 2021. Then it's the rapid transition of our solution and services to real-time cloud communications. Much was achieved in 2020. We now invest full force and accelerate investment in this area, driving the momentum into more real-time cloud communication solutions. On top of this, we have substantially moved our focus in sales towards recurring revenue model as compared to the previous years where the majority of sales was done as capex transaction.

11:09 To highlight this last point, in March 2020, we have announced our Audiocodes Live initiative, which is a portfolio of professional and managed services designed to offer Audiocodes voice expertise, products, and solutions to enterprises via flexible subscription-based managed service model. We have already made nice progress in the second half of 2020 and now see the momentum building up into 2021. Now let me touch on the achievements made on the financial front. Overall company top line revenue grew 10%, about 10% year over year. However, once you break down the revenue into key segments, Enterprise and Service Providers. One can easily see that the progress made in 2020 in the enterprise space, about 78% of our business today was substantially higher and more impressive.

12:08 Enterprise business consisting mainly of unified communication, UCAS and contact center grew 17% in 2020 and now provides for about 78% of the overall company revenue. We expect this annual growth rate to continue well into 2021 and beyond for reasons I will dwell on shortly. Therefore, in our updated long-term financial model for next three years, we can clearly see that the company annual top line will step up to a range of 13% to 15% growth annually every year in two years from today. UCAS and contact center segments will drive this growth going forward.

12:53 UCAS is driven mainly by continued success in the Microsoft Teams space, where annual revenue grew by over 300% year-over-year, and more than 30% compared to the third quarter of 2020. Additionally, we experienced higher than originally planned revenue coming from the contact center business, which grew over 15% in 2020, with the world adopting substantially more Collaboration and Work from Home. In the coming years, the new normal, so to speak, we anticipate similar such growth in 2021 and beyond. Now let me touch on the achievements made on the financial front. To provide a more complete picture of the revenue in 2020, I'll just add that while we grew nicely on the enterprise, we didn't do so well on the service provider front and technology.

13:52 I'll say that we have experienced a decline in service providers' business, which is now about 18% of business, and which has declined for about 10% year-over-year, and also continuing small decline in the technology business, which now provides for about 4% of business. So 78% of business grew, 17%, about 22% declined, and that gives you The average of about 10% growth for the full year. Providing more color on growth in different business lines in 2020, UCSIP business line grew about 20% year-over-year. By the way, this would be the last time we will report numbers on UCSIP.

14:41 Very simply, as this indicator bundles growing software-based business lines such as the SBC management software and routing software, Together with devices and hardware appliances used in the service provider space and in on-prem deployments. As these two last months are bound to continue to suffer from the ongoing pandemic and not essential to our business, we will drop the UCC report. It's not going to be a good indicator to indicate our business health. We will obviously track our business through the development in our UCaaS and contact center and conversational AI business. Revenue related to UCaaS as a whole grew close to 20% as well.

15:29 All in all, we're talking about $140 million annually at the end of 2020. Revenue related to sales of session boards and controllers, SBC, have jumped in the full score. Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Managed Services, Professional Services. Those are growing very fast.

16:16 Actually, on an annual level, we're talking about 30% a year, which is nice growth. Now, let's talk about the growth engines, which is becoming a key factor for 2021 success and beyond. Entering 2020, Microsoft On-Prem Sky for Business was our main growing business. However, With the pandemic growing in impact throughout the first quarter, two new key major trends evolved for the year, collaboration and work from home. These two trends became essential to preserve business continuity and workplace productivity in the enterprise world. These trends drove, as a result, accelerated transition to real-time cloud communication and the introduction of a series of more new key technologies that we have developed such as WebRTC, Call Automation Processing, Intelligent Assistance, and Virtual Agents.

17:16 As such, we emerge out of 2020 and add into 2021 with three new growth engines. The first and most visible one is the Microsoft Teams, which became in 2020 the fastest growing business for us. It has grown more than 300% year over year, and more than 30% in the last quarter over the previous quarter. Next to it, we saw accelerated growth of activity in the contact center where a series of disruptions in the space related to the transition to cloud supporting high quality communication for work from home agents over the open internet and the increased need for call automation and sales service drive growth in the space. Third engine is the conversational AI, which has become top priority for many contact centers.

18:07 You need to quickly and efficiently respond and handle customer calls coming in large masses, as people are locked at home, and providing a satisfactory customer experience. Now to our long-term financial model. As we've mentioned before, Gross margin and operating margin have demonstrated record levels in 2020. We ended the year with gross margin for the full score at 71.5% and 26.2% for the operating margin. By the way, talking about gross margin, we looked into our annual performance, and I'd like to draw your attention to the progress we made in the past five years, where gross margin stepped from About 60% back in 2015 to 68.1% in 2020.

19:02 This is a result of the shift of Mixofor revenues from hardware appliances more and more into software solution and services. So very decent growth. We believe we will continue to grow in coming years. Obviously, you know, the last quarter, as I've mentioned, we did Operating margin, this is the second quarter in a row where operating margin is well above the 20% level, which is kind of a mark for us. So let's talk a bit first on the longer-term financial model. We believe that as we will keep progressing with our enterprise business, growing above 16% a year, we believe that we will step up gradually In a matter of two or three years into annual revenue growth of about 13% to 15% overall for the company. Gross margin, we are at 68%.

20:06 We believe that the range we define, 67% to 70%, we should be able to grow beyond that at the end of this period. We would obviously... Work out of a strategy, and actually we are defining kind of a modified strategy for 2021. We see much more value in keeping operating above 20, but still allowing a big portion of it to be applied to growth and investment. So we will not try to achieve 24, 25% operating margin and above. We will instead opt for 20% plus and then invest the remaining into developing new areas for us, such as conversational AI and likes.

21:04 So let me go now into this specific business line or more interesting data points. First, let's talk obviously on Microsoft Business. In the first quarter, Overall revenues were close to $30 million. This represents a growth of 18% year-over-year and close to 15% sequentially. For the full year, we saw a nice increase of about 19% compared to 2019 combined. However, as we all know, there was a big, big We're coming out with Tim substantially on top. Tim has grown, just to give you an idea, as I've mentioned, 300% year-over-year.

22:24 Looking at $13 million in 2019, we should look now into, we've done about $55 million in 2020. So that's big growth. Also, I'll mention that in the full score, we kept growing sequentially, grew more than 30%. Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, You know, millions of dollars that will be less in 2021.

23:17 Now let's talk about new accounts. So we definitely grew with a large number of new Microsoft Teams accounts in 2020. On a overall annual level, I'll tell you that we have grown substantially. We've grown more than 200% from 2019 to 2020. We have seen the numbers. Roughly, if you look on the full score, I'll give you a data point here that about one-third of the accounts were accounts migrating from Sky for Business, and about two-thirds of the accounts were actually new accounts.

24:02 All in all, very nice growth on teams and new accounts. As to the future, as we kept saying, we have a very long runway ahead of us. Microsoft 365 is now at about $270 million. Teams was announced to have $115 million last October. I'm confident we'll hear new numbers as Microsoft releases their numbers today. So far, we believe it's only about 10% of the team's users have implemented voice. Very simply, we know for a fact that as Microsoft tried to become the dominant player in that market, the intention was put really more into collaboration, chats, and meetings, and voice was not a requirement. So many organizations could live up with their old PBX. It could be another company, PBX, one of the previous manufacturers named Avaya, named Cisco, named Mitel, any other.

25:17 So people could stay with their PBX but still get on board with Teams using the collaboration and meetings. We believe that as time goes by, the benefit of using an integrated solution all coming from Microsoft will basically drive The migration of those into Microsoft Telephony solution as well. So definitely a lot of potential going forward. We have heard that customers who have standardized on Microsoft Teams really not looking back. The product is working well and has become an important part of their daily work. And we've seen in surveys that these days in the enterprise, surveys show that More than 50% already selected Microsoft Teams over the other players and actually that number is expected to grow in about three years from today to about 60%.

26:21 More on the Microsoft business. We have launched SBC as a service on Azure a few months ago. It is available on Microsoft Marketplace in North America. will soon be available in other regions as well. Basically, very easy for customers to get on board Teams by clicking a few times on the keyboard and getting connected. Also, we enjoy strong activity in the field. In several cases, we also meet with the field The sales field staff from Microsoft helping winning accounts.

27:09 Also, we had a rather big investment in 2020 into expanding our meeting room offering for teams. So we're just getting to market with some of our new products in that space. We're getting to market with our meeting inside shortly two, three weeks from today. So all in all, definitely an activity. To name a few New wins in the quarter. So, you know, we want a leader, a teams project, actually migration project from Sky for Business, from one of the leaders in the financial services world. Basically, we have provided there our session board control technology and our management technology and all in all, some professional services So a nice mix, about half a million projects.

28:05 We won a large project with a very large world-leading Asia-Pacific service provider where we have expanded into several of their subsidiaries. We have provided their SBC as a service. It's running on Azure, and we plan to expand into a few more subsidiaries. We won a world leader in chemical products for the car industry. We're working through a very large service provider who provides a fully managed service as part of their team's rollout. A lot of success. So all in all, a lot of activity in Microsoft. Assuming that, well, knowing that Microsoft is now 45% of business, right?

28:53 About 100 million out of the 220 in 2020. Tim Snow becomes the most important business for us. Traditionally, we've been selling to the enterprises, companies that have 5,000, 10,000 and more employees. We're now starting to target the mid-market with our Other Codes Live offering. As I mentioned before, Other Codes Live offering is a managed services offering providing many solutions. We offer it in like a three-tier program and we enjoy Quite a success in second half of 2020. How do we grow from here on Microsoft Teams? So first is obviously we intend to grow on the number of AdiCodes Live users.

29:40 That's one dimension. The second dimension is trying to scale up in revenue from the essential program to the pro and premium services where we can charge for more on a per user per month basis. We do intend to introduce new business application services this year. We will shortly announce our recording services. We have several times been selling contact center solutions from partners we work with. We will be providing analytics, voice analytics, and meeting analytics shortly, conversational AI services, and more. So all in all, this is the main focus of the company going forward.

30:26 Now to take you to the second priority in the company, which is the contact center market. This is a fast-growing market. No question that COVID-19 pandemic further accelerated growth in this space. Right now, about 15% of our business basically are in the contact center market, grew 15% last year. All in all, This market is a great market for us. Very simply, a lot of disruption, a lot of room to apply technology advancement. I've mentioned transition to cloud. I've mentioned work from home and WebRTC to maintain quality of service. I've mentioned the trend to intelligent contact center that's emerging that's basically providing a much greater role to conversational AI to deal with customers' inputs and requests.

31:24 Basically, we are expanding. While in the past our play was majority around Genesys business, we now see more entry into other names in the industry and basically quite expand the reach of our solution to other contact center vendors. Also, we have changed a bit our strategy that instead of trying to focus on the vendors themselves, such as Genesys, and we've mentioned throughout the years names like Five9 and Nice in Contact, we now intend to go more towards end users. Some of them prefer to stay on-prem and not transition to cloud, and then they find our solution fairly helpful in allowing them to maintain this on-prem operation.

32:15 On top of that, conversational AI gets a big boost for automatic handling of self-service customer engagement. So we're providing in that market, you know, connectivity solution, voice quality monitoring solution. We're about to see virtual agent solution and agent assist solution. All in all, fairly active space. In terms of revenues, we didn't grow much between 19 to 18. We stayed at about 30 million level. In 2020, revenue grew to close to 35 million. 15%. Throughout the year, we didn't broke down yet revenues from different quarters, but we can easily see that we have been stepping up in revenues throughout the year. So ending the year on a strong note on the contact center.

33:12 Obviously, conversational AI that's built to improve customer experience and reduce cost is growing in use. It is estimated that already 30-40% of customers prefer to use self-service speech interfaces, not involving a human agent. It is predicted that towards 2023, that percentage will grow to 70%, so a lot of room to grow there. Let me touch on our SBC operation, because this is turning to be a stellar performance in our company. with record revenue growing, as I've mentioned, above 40% in the core. All in all, as I've mentioned, we will grow to close to 100 million from just 60 million plus last year. The share of sales of SBC into the Microsoft space grew substantially in the fourth quarter.

34:12 Now it's more than 50%. We have a rather nice geo-split. About 38% of revenues in North America, about 34% in Western Europe, and about 10% to 11% in Asia Pacific and then Cala. We've seen strong booking growth going forward, so we feel very confident in our ability to perform here. If I'll do the breakdown between product and services, I'll tell you that product grew More than 50% this year, and we also grew very nicely on the services. One very important note to make here is that, as I told you in the beginning, we put a lot of emphasis on managed services. Just to tell you that in the SBC business line, those services really jumped and almost tripled in the year.

35:10 So we started from a low number of millions in the SBC managed service, and now we have to close to three times in that. Also very important being questioned many times about what's the portion of software versus hardware. I'll tell you that while we saw huge increase in SBC in 2020, the hardware portion of it almost did not grow. It did grow, but very mild, between five to 10. Majority of the growth really came from the software. And now, you know, virtual SBC, you know, and it's being used in data centers and in the cloud.

35:55 Basically, SBC software solution grew more than 150% as compared to 2019. So give or take, you know, all of the SBC use the same software load, the same technology. It's a great success. And the gross margin is really high there. I'll just mention also on the SBC side that we've seen nice growth on WebRTC as a result of the move to work from home, and we've grown more than 50%, so definitely interesting. The last area I'll touch is conversational AI, which really seems to be our next-gen growth engine. It's a very fast-growing market with COVID-19 pandemic definitely driving that with the lockdown.

36:47 Booking and revenues grew more than 50%. Still, we are talking about small numbers, less than 4 million, but we do have a target of targeting above 10 million in two years, by the end of 2022. Conversational AI business grows fast. It does include three different business lines. One is recording services. It's the smart app, which is a compliance recording. We just got certified about a month ago for Teams. We are the second company certified for Teams. So that starts to sell nicely. We also, as I mentioned before, are going to introduce Meeting Insight in a major way in Teams shortly.

37:35 Second line is the Voice AI Connect. Voice AI Connect basically allows chatbots and textbots to be serviced and approach enabled by voice. So you have today hundreds and thousands of different chatbots used daily. Some could be used as millions. Take a service provider allowing customers to reach out through messaging and WhatsApp and like and Messenger. So if you want to allow all the public to access those same services by voice, that's definitely where Voice AI Connect comes in, and we enjoy quite a success.

38:21 Third is our VOCA operation, which was very successful this year, growing more than 150%. All in all, the technology used in all those three business plans has been homegrown. It's a combination of some homegrown Cognitive Services Technologies. We use in conjunction with Microsoft and Google and AWS cloud cognitive services. And above all, our huge experience in networking, telephony, and SBC really gives us an advantage as compared to other players in the market. So all in all, very exciting business. I'll just say that we definitely intend to grow in 2021 substantially about 50% in this line.

39:15 So do expect to see it popping to the range of 5 to 10 million at the end of this year. One more very important note to make is that we are expanding our solution for Voice AI Connect. While in the past we just Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg Finally, to complete my presentation, I'll just repeat what Niran mentioned in terms of guidance. In terms of revenue, we now guide based on results in the FOSS score and plans for the year. We're guiding for a range of between $240 to $250 million. As to the earnings, as Niran guided, we have announced a range that The business outlook is good and tracking along the same lines of success in 2020, so we see no difference in that. There are going to be two new changes in 2021.

40:41 One is a big change in the U.S. dollar New Israeli Shackle Conversion Rate, which we assume that this will impact the bottom line of our earnings by about 10%. So unfortunately, with the US dollar's weakening in Israel, we're going to lose like 7% or 8% in terms of applying it to salaries, and that will result in about 10 cents.

41:26 Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Band of 145 to 165. And with that, I've ended my presentation. We'll move it now to the Q&A session. Operator? Thank you. We will now be conducting a question and answer session.

42:11 If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Rich Valera with Needham & Company. Please proceed with your questions.

42:46 Thank you. Good morning. Shabtai, first question around your long-term top-line growth target of 13% to 15%. Just wanted to clarify, are you thinking about that as kind of a 2023 target, or just what timeframe that is? And then what specifically do you expect to drive the acceleration of the top-line growth over that timeframe? Thank you.

43:11 Okay, yeah, the answer to the first question, yes. We view that range as applying to 2023. Where does the confidence come from?

43:23 So last year, we grew 10%. What drove it was 18% in enterprise and decline of about 10% in service provider. We believe that service provider decline will basically flatten out. So in our plans and assumptions, We do not see the service provider business declining substantially from where it is today. Once we keep growing 17% on the enterprise, you will see gradually every year growth in the top line. Our guidance, if you take the mid-range of it, 245, that represents roughly 11% growth. We believe we will step up into any Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg,

44:40 Yes, so indeed the gross margin of the product was very high relatively to previous quarter. What drove that is the product mix. As Shabtai mentioned, SBT grew very nicely and this is a very high gross margin and most of it is actually software and services. With regards to 2021, As Shabtai mentioned on our long three years model, we believe 67% to 70% gross margin is achievable.

45:22 Okay, that's overall gross margin.

45:25 Yeah.

45:26 Got it. And then just a final one for me on clarification on the SBC business. You said I think it grew to close to $100 million. If you could just say sort of what that was on a percentage basis for the entire year. And then could you clarify what percent of SBC was in fact software this year? It sounds like that percent must have gone up based on what you said, but just wondering if you could provide the actual percentage of SBC revenue that was software-based in 2020. Right.

46:00 So yeah, first, we have approached the 100 million level in SBC. That's a number. I don't have here with me the right split between software and hardware, but again, I want to urge you to change a bit the way it's being perceived. Guys, listen, all of our hardware was developed 7, 10 years ago, okay? It's a median 4,000, median 800, a long list of hardware products. But that is something that was developed, and we do not engage in it. Just to give you an idea that out of 350 employees in R&D, there are about 15 guys in hardware, all doing fixes, end-of-life issues, etc.

46:53 And the load, the load is one load. We do release a new workload every seven to nine months, and that's basically a load that's going to be sitting on everything, both in the virtual machines that's running on public clouds, on data centers, and then running on top of hardware, on hardware servers that were designed several years ago. But still, the customer pays for the intellectual property, the SBC, not really for the hardware. All in all, I think, as time goes by, and one more, by the way, very important point to make. When you're talking about data centers at premises and or in the cloud, you're talking about software, and this is what we sell.

47:41 We sell virtual software. However, when you go to offices, when you go to branch offices, which every large company has, there's no way, if you want to optimize cost and efficiency for those branch offices, You need to use a hardware device. That hardware device is going to include a firewall, a router, an SBC, switch, and a few more. So calling this an SBC hardware really doesn't make sense. It's all about software. So that's the way you should look upon it. And I'm not mentioning the gross margin, but you can bet that the gross margin on the hardware and software combined It's very, very high. North of, just draw a number, north of 80-85%.

48:30 Right. Okay. Thanks for that clarification and I'll pass it along. Thanks. Okay. Thanks. Thank you. Our next question comes from the line of Ramo Lensha with Barclays. Please proceed with your questions.

48:45 Thanks. Congrats on a strong finish to the year. Shabtai, can you go a little bit deeper? When you say on the CC side, you want to go closer to the end user and talk more on the little bit with the on-premise focus clients as well. That sounds to me more like Avira-type customers. Do I read that correctly? How do I have to think about that strategy? And then I had one follow-up.

49:14 Okay. We've not mentioned names, and this is not really limited to one pair or more. I think when you're going to large end users, you find probably some resistance in moving the solution to cloud simply because in terms of cost, it's going to be substantially more expensive for them. So large companies do not necessarily rush to move to cloud. Still, you know, the more advanced solutions are going to be applied into the cloud. So some of these end users find themselves with a need, let's say, for WebRTC just to provide high quality of service to their own based agents. And or they need to use conversational AI just to be able to, you know, automation of customer calls and service.

50:08 So we find a need in the market, and not only with the name you have mentioned, to really be able to upgrade the capabilities of on-prem solutions. And we have seen a large number, I think more than 10 just in the second half of 2020. So we believe this could be a trend that we can work. And by the way, it happened also with Genesys accounts or other accounts. That's the trend.

50:44 On the team side, how do you think this will play out? Where are we in terms of your penetration on new teams deployments and where do you see that overall teams trend going? Thank you.

51:01 So all in all, as I've mentioned, we've been growing nicely in terms of quarterly, sequentially, in new accounts on Microsoft Teams. And actually, looking into the chart in front of me, relatively the pace of Skype for Business customers moving into Teams is kind of flat. So we're talking about more than 100 accounts a quarter moving. But then on new accounts on Teams, we see like about 20% growth in terms of number of new accounts. So it's going forward. And again, I want to stress the point I was making that while Microsoft was very explicit in convincing customers to use Teams for collaboration and meetings, there was no much pressure on them to move to Teams voice and the customer could have Keep using his old PBX.

52:04 As conversational AI, you know, capabilities grow, meeting capabilities grow, there will be, you know, anybody that's stuck with an old PBX will just add a few more dollars for his license and will move into a more, you know, comprehensive, advanced voice solution. So we believe that we should see, you know, I don't think we'll have a problem keeping up with the 20% Gross a year in Microsoft Teams.

52:34 Yeah. Okay. Perfect. Thank you. Congrats. Sure. Thank you. Thank you. Our next question has come from the line of Ramzi El-Assal of Jefferies. Please proceed with your questions.

52:48 Yeah. Sorry. This is Samad Samana. I'm not quite sure where Ramzi's name came from, but thanks for taking my questions nonetheless. Congrats again on a strong finish to the year. Maybe just the first, Shabtai, on the Skype for Business install base, how much of that do you believe is left to convert over to Teams for Voice and what percentage do you think realistically you could convert over to Teams for Voice?

53:22 Tough for me to answer that question, simply because one needs to assume that there will be a certain portion of the end users who would rather stick to on-prem installation and not move to the cloud, for many reasons. It could be security and others. And quite frankly, I don't have a very... Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, Shabtai Adlersberg, But really have no idea on how it's going to keep.

54:20 We'll keep reporting. That's the only thing I can do.

54:23 Great. And this one may be for Niran or for you, whoever wants to take it. But we appreciate all the disclosures that you give around kind of full year numbers and growth rates. But Is there any philosophical thought around reporting the dollars around how big your Microsoft business is, kind of more precisely on a quarterly basis, just given that that's, as you noted, that that's the most important part of the business on a go-forward basis? We're just seeing if we'll maybe get more color on that on a consistent basis in dollar terms going forward.

55:04 Yeah, so Samad, hi. We are not providing it on a quarterly basis. The numbers we provide are not audited by our auditors. They are based on internal reports that we have. So we can't provide it historically on a quarterly basis.

55:25 Gotcha. And then maybe just a last question. You know, we saw the news around the buyback extension. Just curious, maybe more broadly speaking, what the philosophical approach to that will be and how we should think about the execution of that or just maybe the logic behind asking for an increased buyback.

55:52 Right. So the idea is that sometimes the market gets irrational, right? I mean, we all know those times. We have our view on the fair value of what we do compared to the value of other assets in the market. When we find it beneficial for us, we will engage on the buyback. It's not that we intend to go for the same strategy when we add. We're going to look on the multiples, etc. All in all, I'll tell you that we are I'm glad to say that we are big producers of cash flow. Before paying the $10 million or $11 million to the Israel Innovation Authority, we have produced about $50 million.

56:44 One of our board members told me it's half of an offering. So we're producing a lot of cash. In terms of cash allocation, I've been answering that question a few times. Priority goes into M&A, then to dividend payments, and then to buyback. And again, we will weigh the situation over time and decide accordingly.

57:11 Great. Congrats again on the quarter. Nice to see the stock having a strong move this morning. Take care.

57:17 Thank you so much. Thank you. Thank you. Our next question comes from the line of Walter Pritchard with Citi. Please proceed with your questions.

57:27 Hi, thanks. I'm wondering if you could just talk to, you mentioned some pullback from the selling into the UCATS providers and instead focused on end users. If you could talk a little bit about that decision and how you're seeing as the team's adoption goes forward, how you're seeing customers choose connectivity options there and if there's been any change relative to what you've seen more recently.

57:52 Yeah, I think there's some confusion. I've not mentioned that in conjunction with UCAS. In UCAS, well, A, in UCAS we do it for a long time, right? I mean, we are selling sometimes indirect or indirect to the end users. It's really what I've mentioned on the call related more to the contact center market, where our go-to market up to last year was substantially on working with the vendors themselves to reach to the end users. We found that with the move to cloud, which really moves the world from being an on-prem market to being a two-fold on-prem and cloud market, we found that in order to service better the on-prem portion of it, we better develop a Direct go-to-market for those. Obviously, you can imagine that we will use the same Salesforce. At this stage, we have more than 200 people, both in terms of salespeople and pre-sales, and any sales manager getting into the account would be able to sell not only a UK solution, but also a contact center solution.

59:18 One big, big, big clarification, we're not selling contact center, guys. Let's be are very clear about it. We do sell complementary technology and solutions that help to improve. So we're selling WebRTC, we're selling SBC for access, we're selling a technology called click-to-call that allows calling over the Internet. We will be selling conversational AI. So those will be the type of solutions that we will be selling.

59:53 Got it. And then just, I guess, relative to Microsoft and Metaswitch, in terms of their own offerings on that end, you talked about your, you know, your SPC as a service that rolled out in the quarter. What are you seeing in terms of the market with the, you know, customers looking at those different offerings, understanding it's quite early?

1:00:14 We haven't seen any of that. Quite frankly, not seen. We may. But right now, we are developing our own offering. As you have heard, we developed, you know, a SBC as a service approach. We have developed a managed services approach. You know, we believe that we will be competitive even if ever, you know, that happens.

1:00:40 Great. Thanks for taking the questions.

1:00:42 Sure. Thank you.

1:00:46 Thank you. Our next question has come from the line of Tal Liani of Bank of America. Please proceed with your questions.

1:00:53 Hi, guys. Good morning. Good afternoon. A few questions. First, can you give us an update on Zoom? You had an announcement before. I just want to know what's the experience so far. Second, I want to understand how it works with Microsoft Teams and sorry for the very basic question, but how does the sell cycle happen? Meaning, do you sell to them or do you sell to the enterprise? Who's selecting the technology behind it? I'm trying to understand the drivers. Maybe we'll take one by one. We'll do these two and then I'll ask my other questions.

1:01:40 Okay. As related to Zoom, we have seen a little of Zoom phone activity earlier in 2020, but towards the fourth quarter, we've seen some uptake. You know, I'm also being reported that we see more opportunities coming up in 2021. You know, Zoom announced about a few weeks ago that they've reached a level of 1 million, you know, Zoom phone users. So we do expect that going to 2021, We will win more Zoom phone accounts. I think the only thing that's left is really to wait for the next six, nine months and then provide more information. But we definitely see a change from 2020.

1:02:27 As to Microsoft Teams, always the discussion is at the end of the day with the CIO and the IT manager of the end users.

1:02:38 and basically he is the one that's making the decision.

1:02:42 How we fulfill that? Usually it's being fulfilled by partners. So we have partners in the field which based on the final solution proposed to the end users, that end user is buying the equipment in our solution from the partner and the partner in return buys it from us.

1:03:05 And in your view, what's the... What's the win rate or can you tell us about the competitive landscape in these kind of accounts?

1:03:14 We believe that due to the fact that we have kept throughout the years to develop a very comprehensive portfolio of not only product but really solutions where we combine several products and add on top of them a management solution, a recording solution, an analytic solution, and a few more. Lately also conversational AI, a VOCA type. Our offering is substantially more comprehensive than competition. The only competition we had in the past now seems to be focusing much more on service provider business. So quite frankly, I think we're doing fairly well in this Teams environment. No tough competition. Always competition, but not too strong.

1:04:05 Great. Shabtai, two more quick ones. One is, can you discuss the environment in 2020 and the sustainability, meaning in 2020, you know, employees started working from home. We had to invest in collaboration tools, Teams, one of them. Do you have concerns that you have tougher comps for 2021 and that Corporates bought what they needed and now they can slow down. Any concern about sustainability of what we've seen in 2020?

1:04:41 You know, I'm an optimistic guy, so it's tough for me to be pessimistic on this one. I'll tell you the following, okay? In context scenario, it's pretty obvious that we just started a completely new cycle, right? Work from home, you know, we've seen WebRTC growing substantially faster. Conversational AI is growing fast. Same for SBC solutions that need to support cloud migration. So in contact center, we really are in the first inning of the thing. As we go for Microsoft Teams, again, you know, I have no reason to believe that we will quote-unquote see customers already got to their needs back in 2020 and there's no more accounts. Quite frankly, you know, as I mentioned, you know, only about 10% of businesses Microsoft Teams users have applied Teams Voice, and we believe there's a huge, huge growth area for us.

1:05:43 So I do not share, but again, we will go through the year, but in every single quarter since the beginning of the year, we've seen growth. I've mentioned we grew in fourth quarter 30% over the third quarter. So Right now, I have no evidence that it's slowing or changing.

1:06:04 Got it. My last question is the stupid question. Not that my other questions were very smart, but in your press release, you mentioned that you went through, that's what happens when you get a COVID vaccine. My last question is, you mentioned in a press release that you got court approval for buyback. Stupid question, just to understand the law, to understand the kind of the procedure. Why is there court approval? Why can't just the board decide? I don't know how it works with Israeli companies.

1:06:39 Hi Tal, this is Niran. In Israel, whenever you would like to distribute a dividend or to do buyback, you need to file an application to get the court permission for that unless you have a Thank you. Congrats on a great quarter. Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question has come from the line of Robin Gass of Opus Capital.

1:07:31 Please proceed with your questions.

1:07:34 Thank you for taking my question. A follow-up question regarding the teams moving into PBX and voice and competition there. Just to first verify that I understand correctly, your solution would be needed and you have opportunities there if this PBX to the cloud Teams voice would be based on the Microsoft Teams solution. My understanding is that there is a competition there with the existing UCAS leading companies like 8x8 and Incentral also jumping on the Teams voice opportunity offering their PBX in the cloud. So this is my question.

1:08:34 Competitive dynamics there and is it correct that your solution would not be needed if they go with this UCAS alternatives? Thank you.

1:08:45 Right. You're definitely right. Definitely this competition arising from the middle of 2020 by other UCAS players such as RingCentral and 8x8 telling customers, okay, you have settled on Microsoft Teams, but for telephony, either you're already using mine or you want to use mine instead of using Microsoft telephony and I'll offer you a solution. I'll tell you that that is a fair competition, but I'll tell you that I believe that long-term, the capabilities and the services that we are offering for Microsoft Teams voice and telephony will super see those offered by other companies.

1:09:34 Business is voice. This is the only thing we do. and, you know, just to see a judge coming out with meeting insight, I don't think you'll see any comparable capability in other companies. So, yeah, it's a competition we know to fare. Thank you. Sure. There are no further questions at this time. I would like to turn the call back over to management for any closing remarks.

1:10:05 Okay. Well, thank you, operator. I would like to thank everyone for attending our conference call today. With continued good business momentum and execution towards the end of 2020, we believe we are on track to achieve another strong year of growth and expansion in 2021. We look forward to your participation in our next quarterly conference call. Thank you very much. Have a nice day. Bye bye. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day or a great evening.