Shirley Nakar - Director, Investor Relations Shabtai Adlersberg - President and CEO Guy Avidan - Vice President, Finance and CFO.

Dmitry Netis - William Blair Ittai Kidron - Oppenheimer Rich Valera - Needham & Company Les Sulewski - Sidoti Catharine Trebnick - Dougherty & Company.

Greetings. And welcome to the AudioCodes Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Shirley Nakar, Director of Investor Relations. Thank you, Ms. Nakarsir. You may begin..

Thank you, [Rob] (ph). I would like to welcome everyone to the AudioCodes second first quarter 2014 earnings conference call. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer; and Guy Avidan, Vice President, Finance and Chief Financial Officer.

Before beginning we would like to remind you that the information provided during this call may contain forward-looking statements relating to AudioCodes business outlook, future economic performance, product introductions and plans and objectives related thereto and statements concerning assumptions made or expectations 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 product and technology development, upgrades and the ability to manage changes in the 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’ businesses and other factors detailed in AudioCodes’ filings with the U.S.

Securities and Exchange Commission. AudioCodes assumes no obligation to update that 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 would like to remind everyone that this call is being recorded and an archive webcast will be made available on the Investor Relation section of the company’s website at the conclusion of this call. With that said, I would now like to turn the call over to Shabtai Adlersberg. Mr.

Adlersberg, please go ahead..

Thank you, Shirley. Good morning and good afternoon everybody. I would like to welcome all to our second quarter 2014 conference call. With me this morning is Guy Avidan, Chief Financial Officer and Vice President of Finance. Guy 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.

Guy?.

Thank you, Shabtai, and good morning, everyone. Before beginning the financial overview for the second quarter, I would like to remind you that the following discussion will include GAAP financial numbers, as well as non-GAAP pro-forma results.

Our second quarter non-GAAP pro-forma results reflect adjustment for the following three non-cash items, stock-based compensation expenses, which totaled $695,000, amortization expenses relating to the acquisitions of Nuera, Netrake, and Mailvision assets which totaled $339,000 and utilization of deferred tax assets in the amount of $581,000.

The full reconciliation of our results on non-GAAP -- GAAP and non-GAAP basis is available in the earnings press release issued earlier today and on our website. Revenues for the second quarter were $37.6 million, a year-over-year increase of 11.5%.

Sequentially, second quarter revenue increased 4.5% from the prior quarter as demand for core networking equipment continued to grow. Networking equipment revenue increased 15.3% compared to the same quarter last year and accelerated by 8.3% from the prior quarter which is in line with our annual forecast.

Increase in sales was driven by strong demand for new product lines, including Enterprise SBC, multiservice business router and IP phones. More specifically demand for Lync Unified Communications and SIP Trunk Services continues to be a significant growth driver for our business.

In terms of revenue by business group, in the second quarter, our networking business group accounted for 88% of revenue and our technology business group accounted for 12% of revenues, compared to 85% in our networking business group and 15% in our technology business group in the first quarter of 2014.

Revenues associated with our growing managed and technical service business line grew by 33.4% year-over-year and was 22% of total revenue or $8.2 million in the second quarter of 2014, up from $6.1 million in the second quarter of 2013 or 18.2% of total revenue.

Managed services and professional services helped further bind AudioCodes high-value relationship with its customers. Service revenues typically carry high gross margin and revenues are usually recurring in nature. Our service offering leverage AudioCodes extensive experience and technical know-how from 20 plus years in the industry.

In terms of geographical revenue breakdown, as a percentage of total revenues, sales in the Americas accounted for 52%, Europe, the Middle East and Africa 32% and Asia-Pacific 16%. Our top 15 customers accounted for 51% of total revenue, compared to 50% in the prior quarter.

In the second quarter, we had a single distributor in North America that accounted for 15% of sales, compared to 13% in the sequential quarter. GAAP net loss for the second quarter was $46,000 or breakeven on a per diluted share basis, compared with net income of $441,000 or $0.01 on a diluted EPS basis for the year ago quarter.

This quarter we recognized a non-cash utilization of our deferred tax assets of $581,000, compared to $380,000 utilization in our deferred assets in the previous quarter based on statutory tax rate.

Non-GAAP net income for the second quarter was $1.6 million or $0.04 per diluted share, an increase of $537,000 versus the year ago quarter and an increase of $507,000 sequentially. In the second quarter of 2014 on a GAAP basis gross margin was 59.2%, non-GAAP gross margin was 60%.

GAAP operating expenses were $21.9 million in the second quarter, compared to $21 million in the first quarter of 2014. Our total non-GAAP pro-forma operating expenses were $21.1 million, compared to $20.3 million in the first quarter of 2014.

The increase in GAAP and non-GAAP pro-forma operating expenses was predominantly attributed to the growing in our workforce and the strengthening of the Israeli shekel versus the U.S. dollar. Partially offset that by an increase in grant from the Israeli office of the chief scientist.

We added 22 employees during the second quarter and our total headcount as of June 30th was 651 employees. We continue to invest in sales and services personnel to take advantage of the growth opportunity in our new product business line and service business, and our focus on gaining market share.

In addition, we will continue to add new engineers that will further develop the AudioCodes cloud delivery network and strengthen our new product business.

Net cash used in operating activities were $386,000 this quarter, compared to $1.9 million cash provided in the sequential quarter and net cash provided by operating activities of $4.1 million in the year ago quarter. Short-term and long-term cash balances at quarter end were $91.8 million, compared to $94 million as of March 31, 2014.

The decrease in cash balances in the second quarter was primarily attributed to an increase in freight receivable this quarter due to backend loaded quarter. We have so came in at 75 days compared to 69 days last quarter.

While we expect demand for our new product and solution to continue growing at a double-digit compound annual growth rate over the next three to five years within this large growth trend for our new product and solution.

We do anticipate some of this growth will be offset by a decline in our technology and legacy product, which accounted for 12% of our revenue in the second quarter of 2014. We are reaffirming our guidance for 2014 as follows. On an annual basis, we forecast revenue to be in the range of $147 million to $152 million.

Non-GAAP earning per diluted share are expected to be in the range of $0.18 to $0.22. I will now transfer the call to Shabtai..

Thank you, Guy. We are very pleased to report continued momentum in our business and strong revenue growth for the second quarter of 2014, our eighth consecutive quarter of growing revenue.

The products in higher sales were across almost all of our business lines, starting with session border controllers, the multiservice routers, the IP phones, growth in our services and professional services, in the market for unified communications, business services and contact center and finally, in the Microsoft and BroadSoft ecosystems.

And so the second quarter of 2014 is contributed much to our long-term business growth and prosperity.

And in view of the product achieved this quarter, I’m confident in stating that AudioCodes is emerging a much stronger company, a better position to become an industry leader in the voice networking market in the years, unified communication, real-time communications and business services.

While our networking business line now 88% of our business keeps growing. This is the third consecutive quarter in a row. This we are growing on an annual rate of 15%.

As noted in our press release earlier today, we achieved new record sales for our session border controllers, a new product category, but which provides further evidence and support to the success for our strategy in the market. We continue to rump-up sales in the Microsoft Lync market and continued to introduce new products and solutions.

As mentioned, the launch of AudioCodes One Box 365, a new One Voice for Lync solution that provides our partners an intuitive and quick way to bring enterprise voice alongside Office 365 in both pure cloud and hybrid on-premise solutions, expands our market opportunity in the Microsoft Lync ecosystem We’ve also launched the Cloud Delivery Network Architecture Program and opened the new R&D center with an approved budget and support from the Chief Scientist of Israel for about $29 million over the next three years.

We’ve already 20 new engineers on Board and planned to add more IT positions in order to advance our developments in the emerging cloud and the SDN and NFV industry trends. We expect to start see -- we expect to start to see return on investment as earliest 2015. Now, let me touch on some of the more significant data points.

As Guy mentioned before, quarterly revenues grew 11.5% year-over-year and 4.5% quarter-over-quarter. More significant and relevant is our ability to grow the networking business by 15.3% year-over-year and 8.1% over the previous quarter to a level of $33.2 million.

Again, this is the third quarter in a row where our quarterly networking revenues increased about 15% year-over-year. Another record -- new record at the level of gross margin, which for the first time reach level of 60%.

As stated previously, we believe this is a sustainable gross margin range, given our transition to better mix of software solution and services.

Let me touch headcount and OpEx, in order to support for the growth in our business and part of the plan to add new position in line with cloud computing R&D program, headcount grew in the quarter to 651 employees, an increase of 22 employees from the previous quarter and 40 employees since the year ago quarter.

Operating expenses grew $860,000 from the previous quarter and $2.8 million from the year ago quarter. When compared to 2013, the increase in OpEx is attribute mainly to the growth in headcount to support growth and to the strength of the Israeli shekel against the U.S dollars.

To provide more insight to the impact of the FX rate issue, I will simply indicate that while we enjoyed a very favorable new Israeli shekel versus U.S. dollar converge rate in 2013.

Now we witness much lower converge rate about 12% to 13 % lower, applying this 12% to 13% lower convergent rate increase to our annual expense of about 40 million new Israeli shekels. This represents an average increase of about $1.5 million in each for our quarters on the quarterly OpEx in 2014.

As such, the increase in real OpEx since a year ago is about $1.3 million out of $1.8 million. That’s represent a real increase of 7% as compared to our revenue gross of $11.5. So that should give some light as to why OpEx is being growing fast. We are investing in our business.

We see growth all across the lines and this is a good reason to keep investing. Now let me go to sale side generally exceeded the original plan for the quarter, which was $37 million. All in all, we saw nice contribution for most regions, with Asia-Pacific and Latin America over performing.

The one region that stands out weakness a second quarter in a row is Russian. Now let me mention some notable deals. In the Lync -- Microsoft Lync segment, we add few notable deals.

We add two large projects, one in Western Europe for Hosted Lync with two Tier 1 service providers, then we can mentioned, a large deal in North America for SBC for Lync connectivity on a Verizon SIP-Trunk and third, is a new project for us in India which again, this is the first time we see Lync deployed in India.

Second segment, second market is managed services, here we saw two large deal, one in Asia-Pacific comprising of a combination of session border controllers and gateways, and then in South Europe a very large multiservice router deal with Tier 1 service provider. We see lot of growth in that area.

The third space, the contact center, both notable deals were in Latin America in Brazil, where we enjoyed large projects, one through the wide channel and in both cases we sold media gateways and session border controllers. Now let me touch some of our notable products trends.

First of all, new products represent a proxy for the growth and prosperity of the company. I’ll mention to you all that new products category includes now session border controllers, multiservice routers and IP phones. To touch upon annual growth, in 2012, the total revenues from these three product lines totaled $10.3 million.

In 2013, we grew 80% to about $18.6 million. This year we have a target of reaching above $30 million, which will represent about 60% growth in 2014. I’m glad to say that already in the first two quarters of 2014 we have reached that plan and might even achieve better.

Growth has been all across the line session border controller, multiservices routers and IP phones. We grew in that category new products, more than 30% quarter-over-quarter, more than 80% year-over-year.

We feel very good and definitely now see new products becoming a real growth engine in the company next to some very stable and very strong lines such as the services and media gateways. Going into our session border controller sales and talking about our success patterns, first, we grew 30% quarter-over-quarter and 100% year-over-year.

We now have a substantially much more complete broader portfolio. In the past two years, we’ve been able to close gaps against competition in terms of capacity at the session border controllers, software solutions and much richer portfolio that explains much of the very fast ramp-up in that product line.

We are embedded in some of the leading ecosystem application vendor in the world. We are embedded into the Lync solution. We are certified there. We are embedded into a BroadSoft Solution for enterprise and premises. We are embedded into the Genesis Solution. We are working to enlarging that list.

So as long as we are embedded in those ecosystems and application and those application grow in sales, we will grow. We simply are embedded there. In Q2, we saw the first signs of penetrating some tier 1 service provider portfolios.

I’m glad to say that we have now already three large tier 1 service provider in EMEA selecting our session border controller. Going to the multi-service routers. We have introduced a new very effective, cost-effective product line the Median 500 line. We are on track to more than double our revenues over 2013.

We have new design wins, a notable Q1 win in EMEA. We have good entry already in to third quarter of 2014. We see strong demand for the product. And we our engaged deeply in transitioning into new era of NSV and SDN and planned to announce more development in the second half of 2014.

As for our services, global services, second quarter 2014 has been very, very successful. Target has been achievable also has been plan including support and maintenance, professional services and training. In the second quarter, services sales did 15% better than the original plan.

All in all when compared to the first half of 2013, we saw 18% growth over the year ago. Professional services grow faster, grow above 50% year-over-year. We have new services launched in the past 12 to 18 months and those are just starting to ramp up. And most of the momentum right now is in the U.S. and EMEA.

Microsoft Lync ecosystem revenue grew above 5%. All in all 48% over second quarter of 2013. And if I compare the first half of 2014 to the first half of 2013, we saw 44% growth. As before, North America is the largest region. We are selling there more than $2 million a quarter for the fourth consecutive quarter.

We've been improving our operations selling into the Lync environment in West Europe. We now are in a better position versus competition in the past -- when compared to past 12 and 18 months. We have successfully launched the One Box 365. This will enable enterprise voice alongside Office 365 in both pure cloud and hybrid on-premises solutions.

We have received much interest from that announcement. We've been -- we've seen very impressive website page hit in the first week of announcement. This initiative is 100% aligned with Microsoft cloud initiative for triple-digit growth adding 1 million users to the quarter to the Microsoft.

The initiative supports Microsoft field team’s effort to achieve their target which is selling 365 online licenses and further assess our ability to offer services into that environment.

We are announcing two new product for that environment and extended element management system for our IP phones within the solution framework of One Voice for Lync and we’re also announcing a very efficient, very strong solution for voice and session monitoring quality for Lync.

With that, I have completed my review for the quarter and I will now end the session to Q&A.

Operator?.

Thank you. (Operator Instructions) Our first question is from the line of Dmitry Netis of William Blair. Please proceed with your question..

Yeah. Thank you, gentlemen. Question on OpEx, want to go right through it. I think you spent $21 million. I understand forex issue. But if look at the guidance you provided $0.18 to $0.22. And I continue with that some run rate of roughly $21 million, basically wind up at low end of that, Guy.

So can you give us some idea where you think the OpEx will be for September-December quarters and how you plan to achieve maybe the midpoint of that guide or maybe the high end of that guide.

I mean, give us some kind of color around that OpEx as we go through the year?.

Thanks Dmitry. So as you remember the -- our plan for the year was to continue grow in terms of personnel in the second half and to add more than 10 reps predominantly in R&D. So number one, we cannot really control the FX. We will recruit based on the FX issue. You look at your model.

We were actually in terms of revenue and gross margin, really ahead of plan and this is why we felt very confident to recruit personnel ahead of time. But for the second half, we believe that we will continue to grow revenue and gross margin. So we will -- we definitely meet the guidance..

Got it. So it’s the gross margin impact. I guess, I might be just shaking out a little bit lower than what you came out with this quarter which…..

Right..

Okay..

And as Shabtai mentioned before we were talking, I mean the beginning of the year, I mean, your model you added something like 85 -- 58.1% in terms of gross margin obviously due to favorable product mix more revenue from support. We were 60% level today and we believe it’s going to be even better in the future..

Okay. Very good. That’s helpful. And then on the (indiscernible) headcount additions, I think you said 20 new engineers and then you transferred some over.

So how many engineers do you have in the facility today and is the plan failed to kind of windup at 50 by the end of the year?.

Yeah. Right now, we have about 25, which is comprised of about 20 new people on board and few people from our headquarter R&D center. As Guy mentioned we have a plan to grow to close to 50 personnel towards the end of the year.

But again we will weight out gross and FX and write-off for us in firms and according to that we will maneuver with recruiting the R&D..

Okay, great. And then one other question and I'll jump back in the queue. If I did the math, your new products grew about to $6.6 million or thereabouts. So can you confirm that and if you are saying that you expect to achieve I'm just trying to clarify I heard you right. You’re trying to achieve about $30 million out of that product line this year.

Is that correct? That wouldn’t fail our pretty big ramp in the second half.

So is that correct? Is that your expectations?.

Actually for the second quarter, the number for new product is substantially higher than what you mentioned. So it’s above -- much above 6.x. Second, yes, indeed, we do plan to -- assuming growth continue toward the second half, we do plan to end of the year above $30 million for new products..

Okay.

Is your NSBR and IP phone products are kind of over $1 million run rate for quarter right now or are they still below that number?.

All lines are above the $1 million quarter rate..

Okay. Excellent and then maybe just kind of zero-in on the Israeli conflict. Did you guys see any impact on the business spend in Israel or Europe, I think -- if I look back, I think you did about $8 million in revenue in Israel.

Have you seen any impact of that? What’s your kind of take on the run rate of that business, given what’s going on in your country right now?.

Actually, there is a very little impact to our business. Basically business is almost as usual apart from the fact that we’ve got about 10 employees which will call on the front command, I think, unusual -- business as usual in Israel in any war place..

Okay. Thank you gentlemen. Stay safe..

Sure. Thank you..

Thank you. The next question is from the line of Ittai Kidron of Oppenheimer. Please go ahead with your question..

Thanks. Shabtai, can you talk about the new products specifically on the SBC side. What is the -- how do you look at the pipeline over there.

Is there any regional color you can add around that or type of deployments you're seeing more traction for the -- with that product?.

All in all, we’re very successful, mainly in the ecosystem of our partners and service provider. So, again, since we are living with sales in the Microsoft Lync environment as we see sales in that segment grow, same goes for the BroadSoft ecosystem, same goes for Genesis, same goes for few more names, which we will not mention this time.

Also I have mentioned the fact that we’ve been very successful, mainly in Europe with three large Tier-1 service providers. So yes, we feel that EMEA could be strong place for us given that most of our competition, three big companies are America companies. Therefore, we believe position in EMEA could be stronger.

But all-in-all, I think the fact that we have invested heavily in enlarging the portfolio in basically closing the gaps on almost most of the issues, such as capacity and features and others. We see the momentum very strong. This is the first quarter in a row where we grow very fast on the efforts we see..

Okay. Very good.

Now regarding the gross margin, can you tell us and give us a little bit more color, what was it that really go with the 60? How much of it was competition being less pushy or product mix or regional mix? What ever color you can give us on the gross margin?.

Hi, Ittai. The gross margin wise and we discussed that before we mentioned that we are seeing much more revenue from services and we actually gave the information regarding services as a segment and we’re reporting around 75% gross margin on services.

So it is always for us, it is always beneficial to sell more services and out of that, 60 basis point growth in gross margin, services was number one..

Okay.

And, Guy, regarding your annual guidance, you haven’t changed it, you’ve talked -- clearly you sounds like your products are gaining well [Technical Difficulty]?.

Yeah, we can hear you good..

You haven’t changed your annual guidance, but it sounds like new products are running ahead of what your plan was. So can I have those filling the gap? Would it be fair to say that the technology is dropping faster than you expected or the media gateway business is decelerating faster than you expected? I am just kind of trying to put in the puzzle..

Okay. Let me try indeed give -- let me try indeed give you an overall breakdown of the company. Target this year is to reach level of 147 to 152, let’s stuck 150. The most -- the largest and the most stable business in the company is gateways. We’ve been running on a level that’s above 80 to 90, I would say mainly in the year on that business.

Actually we expect this year to be a little up by 3% or 4%. So that’s one area. The other area is technology. Technology is declining on an annual basis. Last year it went down from about 25 to 21. This year we expect it to go down from 21 to 18. Then services, services is growing nicely.

I don’t have the exact number, but somewhere between -- it was about, I am not sure, it was $28 million last year. By the way, it does include Media Gateway Session so it’s kind of overlapping, but services should grow 10% to 15% this year.

New products which is indeed a proxy for build it grow the company and products indeed provide 15% annual growth we always talk about. New products will grow above 60% this year. So I mentioned the numbers we did 10.3 million in ’12, 18.6 million in ’13, and this year we plan to do more than 30.

So that drives some of our assumption as to how we would end up this year in terms of our guidance of revenues and profit..

Very good. And Shabtai to follow up on that. When you talk about new products doing more than 30 this year, just trying to take a little bit forward into ’15, I would assume the number over there is going to be above 40 somewhere.

But when you think about driving it to that number further, even further into ’15, what is it probably a partnership or a cost structure you need to have in place in order to drive that growth? What are sort of like the obstacles you see here in getting there?.

Okay. So actually I would tell you that I do not see at that point in time any new addition -- any new driver that would help do that. Session border controller is being maturing for two, three years now. We will end up this year essentially between I would say -- I would guess between 25 million and 30 million.

Multi-service router growing substantially, more than doubling this year and this is -- we are just starting out, this is the second year of operation or that segment itself if look on market, so this is about 1.4 billion globally. So there is a lot of room to grow here by simply winning more accounts with the service provider.

And then IP phones, we’re just starting out. We have been investing three years in developing the phones. We have been investing another year in certifying the phones into various environments, Microsoft, BroadSoft, Genesys, Interactive Intelligence and others. I would say that here I do expect even faster ramp up than in other area.

So all-in-all, there is no need for anything special to happen, all we need is to execute and that is where all of the focus of the company is..

Very good. Good luck guys..

Thank you, Ittai..

Our next question is from the line of Rich Valera with Needham & Company. Please proceed with your question..

Thank you. Good morning. One of the follow-up on your SBC service provider wins, you mentioned something you got your first wins there, congratulations on that.

Can you give us some color on what enabled you to win in the service provider segment? How did you stack up against the competition? And how do you see y our prospects in the service provider space for SBC going forward? Thanks..

Right. I think one needs to go to understand how session border controller market is segmented. In the past, it was more about service provider and pairing application where we didn’t play at all and we do not plan to play at all. We are focusing more into other segments, the enterprise segment and the access.

As I mentioned in the past 12 months we have completed a lot of the capacity issues and features that prevented us from participating in the access SBC market. And also we believe that in the enterprise market with the variety of capacities in combination and integration with media gateway technology, I think in that space we shined.

So the fact that we are selected by large service provider as part of their portfolio is the de facto. SBC is something that comes out of that combination. Also I think it’s not the secret that is a leader in this space, ACME Packet was acquired by Oracle. We have seen according to Market Research, their market share declining down.

And I think both ourselves and competition are capturing space -- capturing steam in that space. So all-in-all, I think this would be the general background behind our success..

Great. And then you mentioned that the virtualized version of your SBC in your comments.

Can you talk about how that’s going, how you see the split of this business maybe this year and as you move out between the virtualized version and the hardware -- proprietary hardware base versions of your SBC?.

Right. So yeah, actually we do see increase in our sales. We started to sell that product nine months ago. Already in the first two quarters of 2014, we have seen growth and indeed the ability to integrate the SBC as seamlessly because as the software solution makes it a very likable product. So we started to sell it nicely in 2014 already..

Correct.

Presumably you see that growing as a percentage of SBC revenue as you move through this year and into next year?.

It’s growing. It’s still a very small part, I mean definitely below 10%, but again in terms of future potential for that product, we believe it will grow more. It’s simply a process. And as you can imagine you know when service provider move more to NFC and other trends in the industry, software solution will become much more attractive..

Great. And then just wanted to revisit the OpEx. So it sounds like from your comments on and answer to previous questions that you do expect your quarterly OpEx levels to increase as we move into the back half, as you continue to hire. Just wondering if there is any color at all you could give us on next year’s OpEx.

I know you are going to have a significant increase in your grant, OCS grants and presumably some hiring perhaps around that. But is there any color you can give us on how OpEx might grow next year? I know you don’t want to give full guidance, but any color on OpEx for next year will be helpful? Thanks..

Yeah. At this stage it would be pretty mature. There is a very big uncertainty with the forex depending on who you talk to. I think we’ve seen -- at least my personal view we’ve seen much of the bottom in that trend, might be the downside is very limited in my mind. And I would expect that we may see better FX.

So just trying to combine FX with the grant, it’s still not done, that work has not been done. And I think probably we will be in better position, plus debt at the end of the year..

Fair enough. Thanks gentlemen..

Sure..

Our next question is from the line of Les Sulewski with Sidoti. Please proceed with your question..

Good morning, gentlemen. Thank you for taking my questions. Just to revisit the gross margin side and then on the each business segment. So I understand your service side is about 75% gross margin.

And then, what is it on gateways, is it above 50%, then the legacy product business declining? Is that in the 40 range or so? And then, what is it on the new products, if you kind of give a little more color on that?.

Right. So again, services are around 75%, gateways and technology obviously above 60%, and the new product is, what I can say is SBC’s gross margin is higher than the MSBR and the IP phone gross margin. The blended gross margin is getting close to the average..

Okay. That’s helpful. Thank you.

And then just one more, what are you seeing as far as the cloud delivery program, any feedback there and then also if you can touch up on mobility?.

Yeah. We do have an initiative here. We are the deploying an initial application. We usually do those pilots in Israel. We have a voice dialing application. We have more services plan. We have a remote monitoring. Actually we do have a remote monitoring service already ran from the cloud. We do intend to introduce few more.

So we started to deploy over the existing application and we’ll work to add more, but this is really in the beginning of the process..

Yeah. Thank you..

Sure..

Our next question is from the line of Catharine Trebnick with Dougherty & Company. Please go ahead with your question..

Thanks for taking my question.

Can we go back to this SBC just to I haven’t clear my -- that the attraction really in Europe is more through the enterprise and that would be through your resale channels or is that through the carrier channel into the enterprise? And then the follow-on question is, it doesn’t look like you have products or going to develop products pairing or more the core of the network.

So basically my understanding is really targeted at SIP trunking in the enterprise with the SBC products?.

Yes. So I’m sorry, the latter part of your question. Yes, we are focusing on the enterprise and the access application. We’re not focusing on the paring application, that’s first. Second, most of our sales of session border controllers go to our distribution and those are usually enterprise distribution channels, not service provider channels.

But our wins as of late of service providers in EMEA may open a new channel for us through those service providers too..

And then where would you say the penetration for IP trunking in Europe versus North America because ever since I have covered ACME in 2009, that’s always been almost there.

And I am pretty curious to see now with them out of the picture through Oracle where you're seeing IP penetration in Europe?.

Actually, we do see nice a pickup. As I’ve mentioned, we've been selected this second quarter into three large Tier-1 service provider in Europe, which tells you that SIP trunking services are selling to ramp up there. Yes, there is much activity, I think this year more than we have seen last year..

Is that like 10%, 20% up would you say?.

I don’t have the numbers with me, but EMEA is very strong for us, yes..

And then how about your resell partner with BroadSoft, is that pacing pretty well in North America and Europe?.

Yeah. It’s not really a resale, it’s really meeting the market, that of arrangement but yes, I can definitely say that in the second quarter, sales into the BroadSoft ecosystem grew substantially over previous quarters..

All right..

Definitely correct..

Good quarter. Thanks for taking my questions..

Thank you..

Our next question is coming from the line of [Jessie Katz] (ph) with (Indiscernible). Please go ahead with your question..

Hi, guys. Thank you for taking my question. I wanted to ask you about ball out there, conservative landscape, especially in SBC.

How do you see Sonus operating into the market, maybe if you give us some color about that?.

Sure. We actually think we are focusing on enterprise. We see competition substantially in the Microsoft Lync environment. We see less of that in other partners, simply because in other partners, it’s kind of a very unique position that we have with them in terms of collaboration.

So the main area where we meet our competition, as you’ve mentioned, Sonus, is mainly Microsoft Lync..

If we talking about the Microsoft Lync environment, could you break down how much revenue you see from that environment or you don’t break down that and if why -- could you please explain why you don’t break it out?.

Again, I’ll just talk generally about Microsoft. Last year, we sold north of $20 million this year. We plan to sell 40% above that close to $30 million. Substantially, most of the sales were media gateways and SBAs. We’ve seen very little but this year substantially more sales of session border controllers and we now look for IP phones to be sold too..

Okay. Good. Thank you. That’s from my side..

Sure. Thank you..

The next question is follow-up from the line of Dmitry Netis of William Blair. Please go ahead with your question..

Yes. Thank you. Two quick follow-ups guys, one on the previous question around software, how much did the software applications contribute in the quarter and what’s you're expectations there for the remainder of the year and maybe 2015? So that’s one and then Guy, on the receivable side, I mean, DSOs were up to 75 days.

Can you explain what’s driving that that distribution channel or there’s something else in there? Thanks..

Okay. So, in the application area, I think if we take into account all of the various and components. We have VMAS, which is mobility for service providers. We’ve got smart app, which is recording solution for the Microsoft market. We’ve got the element management system and SEM quality solution and few more application.

I think all in all we will see this year about $5 million, but I don't have that accurate number with me here. So just mentioned that number over the top of my head, but about $5 million I would say..

And regarding DSO, we mentioned that before we had sort of the back-end loaded quarter and we believe next quarter we will go down back again to the 69-70 days, obviously, to help our cash flow..

Thank you..

The next question is from the line of Rich Valera with Needham & Company. Please go ahead with your question..

Thank you. Question on the technology business, it was down pretty meaningfully quarter-over-quarter and you mentioned, you expected about $18 million from that this year. So that would actually imply some pickup in the technology business in the second half.

So just wanted to sort of gauge your visibility to that business, actually picking up a bit from the second quarter.

And then should we think of that as about $4 million per quarter business, more or less going forward and perhaps into ‘15?.

Yeah. Actually, it’s not really pickup but it's really more seasonality. In some of the lines, third quarter and fourth quarter are better than the previous ones. As to the rate, yeah, I think at this stage, we are at a rate of $4 million to $4.5 million a year, yes..

Per quarter?.

A quarter, I’m sorry, my mistake..

Perfect. Okay. Thank you..

Sure..

Thank you. At this time, I’ll turn this floor back to management for closing comment..

Thank you, Operator. I would like to thank everyone for attending our conference call today. Based on the strong business momentum and execution in the same quarter, we believe we are on track to achieve substantial growth and success in the year 2014 and continue to build a sustainable profitable operation for coming years.

We look forward to have you on our next quarterly call. Thank you very much. Bye-bye..

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation..