Greetings. Welcome to the AudioCodes Second Quarter 2020 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] I’ll now turn the conference over to Brett Maas with Hayden IR. Brett, you may begin..

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

Before we begin, I’d like to remind you that the 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, 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 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’ 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 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 and is posted on this website. Before I turn the call over to management, I’d like to remind everyone, 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’d like to turn the call over to Shabtai. Shabtai, please go ahead..

Thank you, Brett. Good morning and good afternoon, everybody. I would like to welcome all to our second quarter 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 in the industry. We will then turn it into the Q&A session.

Niran?.

North America, 41%; Central and Latin America, 7%; EMEA, 40%; and Asia-Pacific, 12%. Our top-15 customers in aggregate represented 60% of revenues in the second quarter, of which 42% are attributed to our 9 largest distributors. Gross margin for the quarter was 66.7%, compared to 63.3% in Q2 2019.

Non-GAAP gross margin for the quarter was 66.9%, compared to 63.5% in Q2 2019. Operating income for the quarter was $8.8 million, compared to an operating income of $5.9 million in Q2 2019. On a non-GAAP basis, quarterly operating income was $10.7 million, or 20.1% of revenues, compared to an operating income of $7 million in Q2 2019.

Net income for the quarter was $6.6 million, or $0.21 per share, compared to net income of $4.8 million, or $0.16 per share in Q2 2019. On a non-GAAP basis, quarterly net income was $10.5 million, or $0.32 per share, compared to net income of $6.8 million, or $0.22 per share in Q2 2019.

During the quarter, the company raised $85.4 million in net proceeds from the public offering of 2.6 million ordinary shares at a purchase price of $35 per share. At the end of June 2020 cash, cash equivalents and bank deposits total $170.4 million. Day sales outstanding as of June 30 2020 were 51 days.

Operating cash flow generated during the quarter was $10.7 million. Now to providing an update on our guidance, we reiterate our guidance for revenues for 2020 to be in the range of $214 million to $222 million.

We now raising our guidance for non-GAAP diluted earnings per share, to be in the range of $1.18 to $1.24, compared to the previous range of $1.09 to $1.13 that we updated following the close of the first quarter 2020. I will now turn the call back over to Shabtai..

Thank you, Niran. We are very pleased to report strong financial results for the second quarter of 2020. As stated earlier in financial release, we enjoyed good business momentum in the quarter, both in the enterprise space and the service provider space.

There's no question in our market these days, the team collaboration is where the action is, when it comes to enterprise communication platforms, primarily because of the fact that the pandemic forced the enterprises to move employees to work from home, and rollout collaboration systems like Microsoft Teams, which end users found to be no longer just interesting, but clearly indispensable.

It must still if you want to preserve business continuity and recover fast from this current crisis. And so, UCaaS as cloud service and Collaboration became key to business resilience, and have taken center stage to the newly evolving digital workplace. Now let me touch on some recent theme collaboration market data that reinforces this statement.

According to Nemertes, a global research based advisory and consulting firm in collaboration use has dramatically grown in past few months. It says that 42% of enterprises currently have more than one Team collaboration application in years. Obviously, this number is growing on an on-going basis.

According to Nemertes, Microsoft teams are the clear leader at 14.3% followed by Cisco WebEx teams at 27%, Slack at 9% Google Chat at 8.5%. In another example, data from Eternity and Application Monitoring Company shows that between February 17 to June 14 this year, Microsoft teams use grew almost 900% while Zoom has grown 680%.

More data points from a Globus study of more than 545 organization found that 91% of the organization now support work from home up from 63% prior to the pandemic, and of the level of workforce 72% are now home based compared to just 34% before the pandemic.

Obviously, video conferencing has emerged as a core technology to ensure work from home, and nowadays, more than 91% of companies use it to support it. Nearly 30% says that they will use video for all of their meetings.

As a result, we've experienced in the second quarter, growth in most of the major market segments we participate in, including the U.S. market, the contact center market, and the service providers all IP migration markets. Underlying our success in the second quarter of 2020 is the financial performance.

That's when we refer to specific financial parameters. Revenue growth, we continue to deliver on our stated guidance to grow revenue this year by 9%. Delivering 8.1% growth in the second quarter growth brought our first of 2020 growth to 9.9 growth over the same period in 2019.

Growth was very strong in the use of SIP which grew well above 20%, however, decline of about above 15% in gateway revenues and decline of close to 1 million in technology revenue have limited the overall quarterly revenue to 8.1 as stated. Service revenues, growth over a year ago quarter was 3%.

However, taking into account seasonality in quarterly services revenue and the fact that we have reported growth of 25% year-over-year for the first quarter of this year, this basically puts us in an average services revenue growth of 13.2% in the first half of 2020.

Gross Margin expansion, we keep focusing on growing our software products and solution versus hardware offering, turning the company to increasingly become a communication software company. Software products in touch services grew to about 35% of total revenue in the quarter compared to just 25% in the year ago quarter.

Specifically, in the second quarter, we grew 50% above the year ago quarter. This better mix of software product, this quarter allowed us to improve gross margin to 66.9% as compared to 66.1% in the previous quarter, and 63.5% in the year ago quarter. Operating margin.

Operating expenses were substantially lower than planned in the second quarter, mainly due to the decrease in expenses in travel, HR related expenses and better FX rate.

As a result, OpEx has decreased to a level of 25.1 million versus 26.5 million in the first quarter and operating margin ended at 20.1%, a record quarter compared was just 15.2% in the previous quarter and 14.1% in the year ago quarter.

Net income growth, increasing sales year-over-year, coupled with lower operating expenses has driven a meaningful increase in earnings to a level of 10.5 million compared with 7.8 million in the previous quarter, and 6.8 million in the year ago quarter. That's an increase of 54.4% year-over-year. Cash flow was strong.

We kept producing cash from operating activities, delivering 10.7 million in line with or planned for the overall year.

Headcount; growth in headcount year-over-year for full time employees was 4.4%, adding to it, gross in outsource headcount, we grew overall 5.2% year-over-year, obviously adding more than 40 position over the year ago or that clearly demonstrate our confidence in continuous expansion of our business and success in coming years.

Finally, deferred revenues continue to grow and amounted to 65.1, an increase of 16.7% over the second quarter 2019.

As mentioned on our previous quarter investor’s call, I'd like to stress again, that with revenue growing steadily in past several quarters and deferred revenue is growing in a similar trend all along, our ability to meet the top line target of every new core we are stepping in is improved has the momentum, as the confidence in achieving the revenue target in coming quarter.

Now to review of the networking business line, networking business line kept growing 10.5% year-over-year and has reached a level of $51.9 million accounting now to 97% of our business in the second quarter of 2020.

With networking being the core of our business, it is important to note that in the first quarter of this year, networking business grew 12% over the first quarter in 2019. And so, on first half revenue -- our first half revenue in 2020 compared to the first half revenue in 2019 overall networking business is growing nicely. It is basically grown 11%.

At this stage, I believe that you know, we you know, anybody wants to monitor the progress of the company it makes sense put aside, side technology line and I think we should focus from now on networking, which is 97% of the business. Now the networking business comprises of two key business lines, UC-SIP and Gateways.

The UC-SIP business line grew nicely in the quarter versus a decline in our Gateway business. UC-SIP business line grew substantially well above 20% in second quarter 2020 and provides now to close to 70% of our business revenue in the quarter. Key to this growth were substantially increased year-over-year sales in OIC [ph] and MSPR product lines.

Revenue grew also in our central network management software business line, in our advanced routing management solutions.

The IP phone business line remained about flat compared with the revenue level of the year ago quarter, we attribute this less favourable performance to the set of new normal, which is practically hurting sales of on-prem devices, a trend, which we believe will persist in the near future as -- habits of organization will become more hybrid and will basically share it between on-prem presence and remote work practice in the new emerging digital workplace.

Noteworthy is the fact that revenue in the UC business line grew substantially above what we used to know in previous year, of 15% to 20% meaning that, that large business line and bear in mind, we did last year about 110. We target this year to do between 135 and 40 million.

This is a line that carries a gross margin of close to 70% and gross well above 20%. All-in-all, I think that is the key business line of the company. This is where we invest our resources, efforts and energy and I believe that continuing that momentum will bring the company substantially further in the future.

So please bear in mind that gross margin budget for this business line increase and now that it is 30% to 70%, this has provided definitely for the overall company growth of the gross margin to 66.9, and this is mainly due to the increased efforts of products and related services, and the transition to cloud communications. Now to Gateways.

In the Gateway business, we saw a second quarter in a row of declining revenue. Gateway business line revenue declined more than 15% compared to the year ago quarter. The Gateway business line now provides for less than 30% of the second quarter revenue and carries a gross margin of close to 70%.

That decline is mainly related to products, the products components, which declined above 20% year-over-year. Decline of gateway services was milder at less than 15%. Now to the Microsoft ecosystem, all-in-all the business in the Microsoft ecosystem was good. Growth in revenues was close to 20%, just on the heels of the first quarter.

In terms of highlights of our performance in Microsoft ecosystem, we saw a very strong uptake in Teams opportunities closure, and a very strong growth in the opportunities created. On the other hand, we've seen meaningful decline in cash for business related revenues. I'll refer to more numbers in the sequel.

Also, slowdown in IP phones sales due to the setup, new practice of organization. This is the result of the pandemic and the move to work from home. And we believe that as I've mentioned before, we believe that that trend will persist. All-in-all, Microsoft continued to report growth in demand for its cloud services end Teams.

To quote certain data points on that, according to Microsoft, investor call of last week, they have stated that 69 organizations now have, that have more than 100,000 users have moved to those Teams. Also, over 1800 organizations which have more than 10,000 users have been moved to those Team.

So all that tells you that on the enterprise levels, on the large enterprise companies, Microsoft Teams is a winner and this is where we sell. So that -- that that gives part of the explanation to why we are that successful in that range. I'll give you more data points. There was a survey done between the middle of February and June.

And basically, the survey was about to check the market share of the different Team collaboration application. Basically it shows that in that environment, Microsoft Teams grew from 11.4% to 34.3%. This was an increase of 300%.

On the contrary, Skype for Business declined and that will expand later on you know what we also see in revenues, it has declined from 75% to 44%. Also successful in that period was Zoom, growing 127%, Cisco WebEx was less successful growing about 50%. And then Slack showed 33% growth.

All-in-all, Team stands at the top of the table with more than 300% growth. On other fronts, we have early few wins in the AudioCodes Live initiative we announced in March 2020. This is primarily about applying professional services to the Microsoft team's environment.

Also we keep investing in advanced networking solution, Microsoft Teams in order to allow faster growth of Teams users. We anticipate greater support from Microsoft field sales in the new fiscal year of Microsoft in pushing for an elevated use of voice services as it relates to teams.

We believe that that should be a positive catalyst [Indiscernible] for efforts in coming year. Now to some early dramatic development in Microsoft revenues in the quarter. You all remember that we reported that we have sold more than 80 million of product and services in 2019.

That was primarily attributed about I would say 99% of Skype for Business, only about 10% to Teams. What we saw in the second quarter is a complete revolution. Skype for Business came down dramatically, Teams grew up dramatically. Skype for Business was down 28% from second quarter a year ago, and 20% down from the first quarter.

So 20% decline in the first quarter, however, Teams grew more than 336% year-over-year.

And that basically tells you and almost doubled quarter-to-quarter, so that tells you that growth of Teams have surpassed the decline of Skype for Business and now they notice we have managed to show growing Microsoft sales, it means that we have -- we are doing the transition from Skype for Business teams in a very determining assured way.

On another front, I mean, each quarter we measure each quarter by two key KPIs, one which is just reported the closure of opportunities and sales level, but the other one is really not less important as it relates to the future, and that is, the amount of new opportunities created in that quarter.

So with regard to create, generate [ph] new opportunities in the Microsoft space, I would like to know that while we saw a dramatic decline in new Skype for Business Opportunities, just like in the revenue side of the business, we saw Teams related opportunities doubling in creation year-over-year. To give you some sense for it.

Skype for Business new created application -- opportunities have declined more than 50% in the quarter, meaning less and less new opportunities created every quarter. On the other end, Teams is growing some substantially, almost double in terms of number of to opportunities – amount of opportunities in financial -- over a year ago quarter.

Now let me bring you -- get you some three examples, two important project we have done in the second quarter. I’ll talk first about one of the largest food manufacturers companies in the world in North America. They employ 150,000 employees.

They're an AudioCode’s customer for the past seven years, as they have deployed Skype for Business with our products, be it Gateway, Session Border Controllers, management, recording software, etcetera. Our overall revenue was down to date, exceeds many millions of dollars. And recently, I'm glad to say that recently they started rolling out to Teams.

For Teams, we have secured in the second quarter, half a million dealer for a Session Border Controller for Direct Route. This is delivered to a partnership with another big value added reseller, and we sell this as a service, a managed service.

Additionally, we’ve secured a 700,000 support renewal contract with their current Skype for Business solution. Another example is a Fortune 500 global manufacturer and market of packaging products. We’re talking about thousands of SIPs, using Teams fully managed service. It's a five years contract.

In second quarter, we've secured more than half a million in professional services. Third example is a giant Brazilian bank. This is a customer of ours for many years now.

Using go-our-gear in Genesys contact center environment, this is by the way it shows you AudioCodes strong position in the enterprise where we are able to provide solution and equipment not only for UCaaS, but also for the contact center.

So they started to roll out Teams with articles using go-on-SBC, routing manager and One Voice Operations Center to help them build the foundation of Times voice network. Again, it's a half million contract in the second quarter. Last, let me mention the large pharma enterprise with several ten thousand employees around the world.

We have a long standing relationship that have evolved their digital transformation from legacy IP PBX to Skype for Business, and now ultimately moving to Microsoft Teams. To date, we have generated about 3 million with this account, turning Session Border Controllers, Gateways, One Voice Operation Center and more services.

In this quarter, we have secured a Virtual SPC project with them. We basically are moving with them to the next stage in Teams. Now, let me move over to the SBC business line. Glad to say that 2020 is a very strong year for the line. We ended 2019 with more than $60 million in revenues. We now anticipate that in 2020, we will reach above $80 million.

So all-in-all we predict for more than 30% growth on SBC. Now we are clear a leader in SBC.

On June 24, we have issued a press release, where Omdia has released a report that says that AudioCodes has experienced a 24 year-over-year growth in SBC revenues in the first quarter of 2020 more than any of the other vendors covered in the report during the quarter.

AudioCodes is ranked second among enterprise SBC vendors in the report with 17% overall revenue market. So all-in-all very strong position in the SBC market. As we all know, the key application of SBC is around SIP Trunking, and also using transition to all-IP. We've seen dramatic growth in Teams that route using our SBC.

We now see few more new applications, namely, if you think about WebRTC that will be used for work from home. If you think about new voice network defined, think about virtualized and cloud migration. If you think about the telephony engagement for virtual agents.

So all-in-all, SBC is a very key network element in every new solution that's being deployed, and we know that we are sitting among the leaders in that market. In terms of the quarter specifically, this was a record quarter. Revenues reached well above $20 million.

We basically saw an increase of more than 10% quarter-over-quarter and more than 50% year-over-year. The business line carries a very high gross margin above 85%. We've seen good activity both in the service provider SBCCP [ph] and in the enterprise.

In terms of geosplit, 36% of revenues were in North America, 38% in Western Europe, the rest in Asia Pacific in color. We've seen strong bookings almost 50% year-over-year We also so an increase in new creative opportunities. So all-in-all, a very strong established line.

One key new development that's important that I keep talking about our transition to being a communication software company is that we try to increase the software content in every business line that we involve in. So just looking at the SBC line, where we started the year ago with software being providing about 26.8% over the overall SBC line.

Now a year after that the Software SBC accounts to almost 40%, so very strong increase above 50% in the software content of Session Border Controllers. Obviously, that's related to more deployments of virtualized SBC in public cloud and in private data centers. To give to two examples for wins, just as we did with Microsoft.

So we want a very lucrative contracting, interconnect as we see, with a very world known leading communication vendor in the space. Basically we're looking to expand service and operation in specific countries in Asia Pacific in color.

And there was a need for a high capacity, resilient as we see platform that will meet certain regulatory requirements. We were selected out of basically seven SBC containers, all of the known names in the industry.

Thanks to our flexible SBC capabilities, alongside the One Voice Operation Center Lifecycle Management, primarily due to real time voice quality monitoring. This win joins previous Session Board of Controllers and WebRTC wins with leading contract --as service providers in North America and Europe.

It demonstrate its real life constraint in need for faster deployment cycles create business opportunity for high scale SBC was pure play cloud providers as they scale up their service.

In another example, we talking about the world leading e-commerce vendor, due to the COVID-19 needs and due to regulatory requirements in a country, the company now has to move more than 10,000 of its customer support agents to work from home.

This customer is already a multi-million dollar account for AudioCodes which is purchased and deployed VoIP Gateways and Session Border Controllers. It's uncertainty [ph] is around our integrated WebRTC gateway that is a key differentiator versus main Session Border Controllers competition.

The customer like other mega enterprises, very strong internal development teams, and develop their own WebRTC client based on their own WebRTC and client as a [Indiscernible]. The WebRTC Gateway is needed for combination of the costs. I'll talk a bit also on the work from home opportunities.

As mentioned in our previous call, we see very fast ramp up in the need to provide good quality of service solution for contact center agents moving to work from home.

And thus, I can tell you that in previous months in the second quarter, we've seen an uptick in the number of new opportunities created, and we work to come up with a solution that will far exceed the capabilities of any other work home from quality monitoring and delivery solution. I'll mention more one very promising product for us.

Let me talk about the voice.ai gateway. We’re talking here about Session Border related development which adds on top of it the various components and allows basically to connect existing chatbots to voice and telephony channels. Now it's obvious that you know, with COVID-19 pandemic, the need for chatbots is increasing.

We are all locked into situation where we need to approach certain organizations in/or suppliers in our ability to as since we are all calling them by phone. We have two key province A, you know not all of us are accustomed to using chatbots, so that’s a problem.

On the other end, when you have too many phone calls coming into a contact center, you need to use more agents, and then you get a substantially longer wait times.

So we have developed the voice.ai gateway to allow connection of voice calls to chatbots and thus we can A, improve substantially the response time and B, also provide a lot of saving for the cost of those agents.

That product is already in use with several customers, I just mentioned that so far we have more than 50 opportunities created out of which 20 work related in the second quarter. Now we have more than 10 opportunities that were close to one. We have few already in production less than 10. The picture is very encouraging.

There's no such comparable capability these days at the level and performance we provide. And so we are able to get to work with many chat developers in both framework, vendors in the space, and also with some of the big names, you all know from the public network. So all-in-all, a very successful product, very successful activity.

I'll also mention, a quarter ago we announced collaboration with Google on the One-Click program, which is meant to allow to connect and provide phone numbers in the U.S. and U.K, to chat developers. I'm happy to say that there's been a lot of interest in that [Indiscernible] service. We had more than a 100 people signing in.

We have more than 10 active accounts right now. And we believe that that is a great lead generation tool for us for the growing chatbot world. Regarding services, I already mentioned, revenues just touch another angle, which is bookings. So in the second quarter, we grew very nicely in bookings 6.3%, compared to the same quarter year ago.

Very impressive is the growth of more than 40% professional services year-over-year. So all-in-all a very active quarters in terms of professional services. Finally, I'll come to our guidance. So in terms of revenues, we estimate Niran mentioned already, we reiterate our guidance from the beginning of the year, and see no reason to change it.

We feel fully confident in achieving it. As you mentioned you know the current range is targeting between 214 to 222. As regards to earnings, in second quarter 2020, we were able to meaningfully beat original plan and the analyst consensus.

For the rest of 2020, we believe that we will see similar patterns of revenue and operating expenses and thus we are confident in our ability to continue to grow earnings. As a result, we now update on earnings guidance and increasing earnings range from 109, 115 cents to 118 to 124 cents. And with that, I've completed my introduction for the quarter.

And we'll now turn the call into Q&A.

Operator?.

Thank you. [Operator Instructions] Thank you. And our first question comes from the line of Tal Liani with Bank of America. Please proceed with your questions.

Hey, guys. Thank you very much for the comprehensive overview of the quarter. I want to ask you, I want to go back to basics and understand first of all within Microsoft.

What's the current use of voice in unified communication? And what are the efforts done? What's the outlook for increased use of voice, because I understand that it's about unified communication and about Microsoft meetings, but it's more about the use of voice within the platform? So that's not number one? And number two, can you talk about your efforts with other players other than Microsoft meetings? And what can you do for other players? Thanks..

Shabtai.

Okay. Tal, Sorry, I was in mute. Thank you, Tal, thank you. Regarding voice, voice is definitely probably one of the most important ingredients in unified communications. You know, put it side with chats -- if you run statistics, statistics say that voice is the most preferred medium of communication.

Now Teams provide the voice capability for on that internally. There’s no need for voices, for voice services outside it. But, once you want to get a dial tone, once you want to talk with third party organization, you want to dial them or get a call, you need to add voice services.

That is on the connectivity side, very simple functionalities, sometimes very complex in terms of implementation, but essential to having a full, comprehensive, unified communications solution. However, I now think about the new world that's emerging.

And that's the world that knows to process the content, knows to take voice content and produce results from it.

So if we were talking about virtual agents, then if you want to save costs if you want to provide a service substantially faster than waiting on the line for an agent, you have today a technology that takes the voice part for that, and basically can apply speech-to-text, natural language understanding machine learning, few more technologies that will now take advantage of the content itself.

So, connectivity is key for connect to other organization. Content processing is key. So, voice is primarily a key technology within every communication solution. And that's the approach we take. Now regarding your question as to working with that organization, we definitely try to do that. We have partners.

I can name a few working for many years now with companies like 8x8, and RingCentral and Vonage. We announce certification for Zoom, we have growing opportunities with Zoom in 2020. We have announced partnership with AWS Chime. So all-in-all, we're very active, we work with some legacy names like Alcatel.

And we work also with companies in the contact center market. We worked with Genesys, and two more of the leading companies in the graphics market. All we know we have a broad play, and we try to work with more parties.

But at the end of the day, right now it seems that the majority of our growth and success will reside with Microsoft Teams, which is obviously a very dominant and successful player in the market..

Great. Shabtai, if I can just have a follow up on your first answer. So when you talk about analytics, can you discuss the reception you're seeing from clients? Are there -- what's the competition there? I'm sure that there are other solutions that can ride on top of any voice company and provide the analytics.

But what's the benefit of customers to go with you versus others? And what's the reception that you're seeing from clients?.

Right. A, we enjoy the fact that we are a very known brand and established vendor and supplier in the enterprise world. So we have access to a lot of the large enterprises I have mentioned before. So you know, selling up in an existing customer usually is easier.

Second, the company's early established, more than 20 years public many years in the business, very advanced sophisticated telephonic capability of quite an establish an organization with no functionalities. We have found ourselves several times competing with new setups.

At the end of the day, our scale, our brands, our capabilities, I'm able to throw resources into a project because it is important to me. We find ourselves preferable with customers, due to the fact that we are very established and strong vendor.

So all-in-all, one more data point is never discussing those cases is the fact that you know, contrary to the products, when you in the past, take a router, take a firewall, take anything that's “standard product”. The winner takes it all. So if Cisco was leaving the router market, it was very tough for other companies to plan.

Simply because that reached to the overall market. When you’re talking about cognitive services, when talking about speech, text and text-to-speech, you’re talking about languages. And here, that picture is completely different.

So that allows us to penetrate several markets in parallel, and basically will allow us to be much more successful because we will have the scale.

If AudioCodes can sell to, let's say the U.S., Germany, U.K., Japan and Australia, you bet that our ability to invest resources and get to results will be substantially better than an Australian based startup that will be maybe successful in Australia, but will find it hard to expand being a smaller platform.

So all-in-all, I think we're sitting in a very comfortable situation..

Shabtai, I'm just going to squeeze in one little, one small additional question and that's for Niran. Your revenues were roughly in line for the quarter, roughly in line with expectations, but your gross margins were almost 200 basis points above. And your operating margin was a lot more was almost 400 basis points above.

So, first, what drives this great margin performance? And second, what's the sustainability? What's the outlook for the next few quarters, what are the puts and takes for margins?.

Okay, so actually what drives the gross margin to 66.9% was mainly the increase in software revenue, the shop dimension in the call, more a professional services and all-in-all product mix was benefit there. This quarter, we had more revenues from SBC, which is in high gross margin.

And then less revenue is related to phones, which is in low gross margin. And we believe, it's sustainable for the coming quarters and even may improve because we are selling more and more software revenues..

Thank you..

Our next question is from the line of Samad Samana with Jefferies. Please proceed with your question..

Hi, good morning. Thank you for taking my questions. Maybe one to start with on a follow up on Teams is clearly outstanding. How much of that was Skype for Business customers migrating to Teams versus maybe organic net new Teams customers using voice? And then I have a follow up question.

Hello?.

Sorry to disappoint you Samad on that. I really do not have the data with me now. I will look into it and I will provide the answer.

But we've seen, I can tell you that we are seeing definitely a mix between you, Katherine [ph] and some of the customers already use -- sub mentioning some of the examples that you have already using Skype for Business and moving. But I don't have the actual division with me right now..

Okay, that's helpful. And then maybe just as a follow up to that.

If you think about generally the customers that are adding Voice to Teams through AudioCodes, any characteristics in terms of maybe the average size of the customer, or is it usually a full end-to-end deployment? All or is it a phased rollout? How should we think about maybe the ramp that individual customers have rolling out voice into Teams?.

Okay, that's actually a very interesting question. I'll tell you why. Because in the past, when Microsoft was selling mainly Skype for Business, large companies always took the time to do a pilot, deployed it with several branch offices, and then continued the deployment every quarter in coming years.

I think this is situation right now with teams is completely different. I think these days organization are moving out of necessity, nobody has the time to wait for a prolonged deployment. So, and because actually there's no deployment. I mean, we’re not talking about deploying, Microsoft servers, on prime; you're talking about using a cloud service.

So actually, you can think about companies going online with teams all across the company unless, of course they want to first try it with, a small group.

So that’s regarding that, I'm sorry, your first question was Samad?.

No you got you them both, but just to get that rollout cadence. And maybe just one final financial question. Clearly, the earnings was a solid performance this quarter.

How should we think about maybe the investment philosophy for the back half of the year on expenses since if I heard the guidance correctly, there isn't, the guidance was just reiterated. So is the upside planning on being on reinvested or how should we think about OpEx trends maybe for the rest of 2020..

Okay, so OpEx indeed decreased from a level of 26.5 million in the first quarter to 25 million in the second quarter, it was mainly related to less expenses, related to travel and to HR related expenses. I could tell you that our planning for the second half of 2020 is to be still saving in this major expenses travel and HR related.

Moreover, we have a better FX rate, Israeli Shekel against the dollar and as such we believe the OpEx it will be increased, but not too much compared to the second quarter of 2020..

Okay, Well I appreciate you taking my questions. And thanks again for the time. Have a good day..

Thank you..

Thank you. [Operator Instructions] The next question is from the line of Rich Valera with Needham and Company..

Thank you. Shabtai, you've noted the conflicting dynamics in the Microsoft business with Skype for Business declining and Teams growing quite rapidly. How do you think that nets out for you kind of for the year for the year outlook perspective from Microsoft? And then taking that a level higher, UC-SIP sounded like its all very good growth overall.

So how do you think about kind of UC-SIP outlook for the year? Do you think that's kind of a 20% or better growth business overall for the year? Thank you..

Thank you, Rich. Yes, that is indeed a very interesting question. As I've mentioned before, take our 20 plus revenue for the second quarter give you a more -- one more data point that Teams and Skype for Business who are basically around the same level, give or take a million.

Now, the real question is, how fast Skype for Business declines, purchase orders, or Skype for Business related equipment decline versus growth in Team. We think a very strong pickup in Teams. Actually, as we speak, this is now July 28. Already, the current ramp up in the third quarter is substantially better than what we've seen in April.

So, I'm confident that at least based on data we have an end right now, that growth in Teams will more than outgrow declining Skype for Business. Also let's bear in mind that every time a business line is dropping, the majority of the drop occurs in the initial phase and then it basically it's waited out.

So all-in-all, we're pretty confident in our abilities to keep growing the Microsoft revenue for the rest of the year, and we believe we will see continued growth next year. Also, I'll mention that we all -- we try always to increase the new products and new services we offer in that environment.

So in many ways, our offering for Skype for Business was kind of altered more than a year, two years ago. And on the other end, we have, as I've mentioned, more investment in new offering new opportunities for Team. So all-in-all, we believe the Teams would be fully successful..

Got it. And just one more if I could on the service revenue, which I guess was a little light from a growth perspective this quarter, but it has shown some historical lumpiness.

How should we think about that going forward? Was that just kind of lumpiness? And should we expect that the kind of resume more of its historical growth trajectory?.

Yes, definitely. I mean, services basically has two components. One is the maintenance contracts. And the other one is professional services. Maintenance contracts it's already years, five, six years now that growth in a year is usually between 11% to 15%. And we believe we will see the same year.

So I mentioned already if you take into account the first half of the year, the growth was 13.2%. However, there's another component and this is the professional services, and here I think the picture is substantially rosier. We are growing substantially. There's much need, by the way, a philosophical point.

When people are saying at time [Ph], although they are productive and efficient, when it comes to new large projects that has to occur within a company, it's always substantially more difficult to put them to work and complete them when you have people distributed all around the place.

So you can assume that the needs or desire to move, to use more services from a party that can provide them, you can assume that that desire is growing. And therefore, we believe that professional services on a global basis will become a much more successful area for deployment. This is what we focus these days..

Got it. Thank you..

Thank you. We've reached the end of the question and answer session and I'll now turn the call over to Shabtai Adlersberg for closing remarks..

Okay, well thank you operator. I would like to thank everyone who attended our conference call today. With continued good business momentum and execution in our markets in the first half of 2020 we believe, we are on track to achieve another strong year of growth in our business.

We look forward to your participation in our next quarterly conference call. Thank you very much. Have a nice day. Thank you..

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