Greetings. Welcome to AudioCodes' Third 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] Please note this conference is being recorded. At this time, I'll turn the conference over to Louie Toma with Hayden IR.

Louie, 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 relating to AudioCodes' business outlook, future economic performance, product introductions, plans and objectives related thereto, and in statements concerning assumptions made or expectations as to any future events, conditions, performance, or other matters are forward-looking statements as the term defined under 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 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, the timing of product and technology developments, 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 that is posted on the Web site. Before I turn the call over to management, I'd like to remind everyone that this call is being recorded.

An archived webcast will be made available on the Investor Relations section of the company's Web site at the conclusion of the call. With that said, I would like to turn the call over to Shabtai. Shabtai, please go ahead..

Thank you, Louie. Good morning and good afternoon, everybody. I would like to welcome all to the third 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 discuss trends and developments in our business and industry. We will then turn it into the Q&A session.

Niran?.

North America, 40%; EMEA, 38%; Asia-Pacific, 19%; and Central and Latin America, 3%. Our top 15 customers in aggregate represented 56% of revenue in the third quarter, of which 39% are attributed to our eight largest distributors. Gross margin for the quarter was 67.1%, up from 62.9% in the year-ago period.

Non-GAAP gross margin for the quarter was 67.4%, compared to 63.2% in the year-ago period. Operating income for the third quarter was $11.2 million, compared to $6 million in the prior year period, an increase of 87%.

Non-GAAP quarterly operating income was $13.4 million or 23.7% of revenues compared to operating income of $7.4 million in Q3, 2019, an increase of 80%. Net income for the quarter was $7 million or $0.20 per share, compared to net income of $4.4 million or $0.14 per share in Q3, 2019.

On a non-GAAP basis quarterly net income was $13.3 million or $0.38 per share, compared to net income of $7.4 million or $0.24 per share in Q3, 2019. As of end of September, 2020, cash, cash equivalents, bank deposits, and marketable securities totaled $176 million. Operating cash flow generated during the quarter was $10.9 million.

Day sales outstanding, as of September, 30, 2020, were 50 days. On August 5, 2020, we declared a cash dividend of $0.14 per share. The dividend, in aggregate amount of $4.6 million, was paid on September 1, 2020.

Now, to provide an update on our guidance, we now expect revenues for 2020 to be in the range of [$218] [ph] million to $222 million, compared to the previous range of $214 million to $222 million.

We anticipate non-GAAP diluted earning per share to be in the range of $1.31 to $1.35 compared to our previously revised range of $1.18 to $1.24 that we updated following the close of the second quarter 2020. I will now turn the call back over to Shabtai..

Thank you, Niran. We are very pleased to report record financial results for the third quarter 2020, our best quarter ever. Let me focus first on two key topics relating to our business growth and performance long-term. First is revenue growth. Second is our long-term financial model and the derived profitability.

We will then get to the highlights and major developments in the quarter. So, let's talk first about the top line growth. Communication and collaboration market keeps growing. We see increased demand for Microsoft Teams deployments. Entering 2020, UCaaS markets were to grow annually about 18%.

We clearly see higher demand building throughout the past six months. Same goes for the work-from-home trend and related technologies, very strong trend of adoption. Being well-positioned in the cloud-based collaboration market and nicely aligned with Microsoft Team solution, we enjoy strong trend of growth in the quarter.

Revenue grew 10% year-over-year. However, if we focus mainly on our growth engines, which at this stage provide together substantially above $100 million of revenue this year, we can say the growth was above 20% in several of the most important lines of our business. To name a few, UC-SIP business line grew about 20% year-over-year.

Revenue related to the Microsoft unified communication and collaboration application grew close to 20% as well. On an annual level, revenue in this space of Microsoft UCaaS would approach of level of $100 million this year.

Revenue related to sales of SBC, a business line that will cross a level of $80 million this year, grew substantially north of 20%, and lastly, service revenues grew about 20% with professional and managed services growing substantially faster in the mix.

Now to our long-term financial model, gross margin and operating margin have demonstrated record level, gross margin at 67.4%, operating margin at 23.7%. Now this is the second quarter in a row where operating margin is above the 20% level. OpEx was capped at about 43.7%. This leads to an operating margin of 23.7% and EBITDA margin of 24.5%.

So that's the core, but now let's talk about the long-term model, with higher sales of Software-as-a-Service and lower sales of hardware products, we can see a long-term gross margin for the following two-three years settling in the range of 67% to 70% range.

Assuming you can see OpEx capped at 46% to 48% to allow room for expansion and investment on top of the current situation. It is becoming clear that we have set the ground for sustainable operating margin of above 20% on the long-term basis. This is a very important development.

This is definitely a milestone in the company history with strong execution in current markets, and strong operational performance supports now a long-term level of 20% for the operating margin.

As for the future, we keep being focused on new two very strong growth areas; one is definitely Microsoft Teams and the activity around it and the second one is the Voice.AI business.

So, getting back to the actual business in the third quarter, all-in-all we have seen strong in our enterprise operations, about 80% of the business and growing well above 10% in the quarter and rather flat business in the service provider's area, which comprises roughly 20% of our overall company revenues.

The only sore point in the enterprise space was the sales for IP phone business line which continue to suffer from the work from home and stay at home trends, which practically have stalled procurements of office supplies such as phones.

Getting back to growth, the roots of growth and success in the third quarter and pretty much improved this year can be easily tracked to the changing work habits for organization in 2020 and beyond as a result of the COVID-19 pandemic.

There's no question that collaboration, work from home and the hybrid work model quickly become the new normal in today's world. In this new work environment, high quality remote site communications and highly efficient collaboration tools become key in every organization plans and agenda to maintain business continuity and remain competitive.

As such leading collaboration tools such as Microsoft Teams, WebEx and Zoom and others are taking center stage in enterprises accelerate transition towards digital transformation and more efficient operation.

This new 2020 scenario is the driver behind the fast growing trend of deployments of collaboration tools, and I believe is generally perceived to remain as a long-term trend much beyond 2020 and 2021.

Obviously, this translates to a driver for stronger demand and business momentum that we experienced in the UCaaS and context of the market where we focus in the past five years. So getting back to our financial performance, we discussed revenue growth already.

I also want to mention that we actually see the 10% growth year-to-date meaning that we see 10% growth for the full first nine months of 2020 as compared to the same period a year-ago.

On service revenues, growth over the year-ago quarter was 20%, revenues of professional and managed services were the key driver here growing more than 40% year-over-year.

This is a key investment area for AudioCodes going forward as we recognize the evolution in that end user companies gradually favor more and more managed services over buying products. Let's start gross margin, we discussed that already.

I simply want to mention that the majority of the gross margin expansion this quarter should be attributed to higher level of sales of software products and services as compared to other product sales. Providing more color on this on a year-by-year basis.

We saw revenue related to hardware declining 14% year-over-year, while both software and services grew, software sales grew 65% year-over-year and services grew 12% year-over-year.

Net income has increased in a meaningful way this quarter as a result of the increase in sales year-over-year and coupled with higher gross margin and relatively flat operating expenses. So, net income grew to $13.25 million, compared with $10.5 million in the previous quarter and $7.4 million in the year-ago quarter.

This represents an increase of more than 75% year-over-year, definitely a great achievement. Cash flow as we mentioned already kept producing cash from operations delivering $10.9 million in line with our plans for the overall year.

Headcount, growth in headcount year-over-year for full-time employees was 2.7%, adding to its growth in our outsource headcount we grew overall 5% year-over-year. Obviously adding more than 40 positions over the year-ago quarter clearly demonstrates our confidence in continuous expansion of our business.

Finally, the revenues continue to grow and amounted to $64 million versus $54.4 million year-ago, an increase of 17.6% over third quarter 2019. Let me relate to UC-SIP, the key business line is company, UC-SIP business line revenue grew nicely about 20% in the third quarter.

Key to this growth were substantially increased year-over-year sales in our SBC product line, revenue grew also in our Centralized Network Management software in our advanced routing management solutions.

On an annual level, we're looking at a business line, the UC-SIP which should grow this year to a level of above $135 million with a growth rate of above 20%. The SBC business line grew above 30% and is key in our UCaaS and cost operations. We're moving to larger portion of software as this implementation and more cloud installment and operation.

We also are enjoying good ramp in opportunities in WebRTC which bodes well for providing high quality voice communications over the Internet, a fairly standard scenario in today's market where work from home is growing fast. Similarly, great performance was achieved with our management and routing products and services.

However, one business plan did not perform and that's the IP phone business line.

So as mentioned before, we continue to experience substantial decline in the sales of desk phones in the third quarter, this is the second quarter in a row, we attribute this performance to the statum new normal, which is total sales of on prem devices, a trend which we believe will persist for at least the next nine to 12 months, habits of organization will become more hybrid.

Touching the gateways, in the Gateway business, we've seen an increase in the third quarter compared to the first two quarters of 2020. In fact, third quarter 2020 Gateway revenues were about flat as compared to the year-ago quarter. This relates to two large deals in international markets.

The Gateway business line provides for about 30% of the third quarter revenues. Talking about the general decline year-over-year which we look at about 15% from the previous year, the decline is primarily related to the Products component, which declined about 20% year-over-year.

On the other end, service revenues were about flat year-over-year pretty much what we expect on an overall annual level for this year. Now let's provide more color and more information on our Microsoft Teams operations.

We mentioned in our earlier call three months ago that according to a market research report that the use of collaboration among companies is growing dramatically in the past few months. According to that report, Microsoft Teams was the clear leader at 40% followed by Cisco WebEx at 27%, Slack at 9%, Google Chat at 8.5%.

Relying on a more recent research, and based on two financial analyst reports issued this month, we see growing use of Microsoft Teams in the enterprise and the mid-market organization.

To give you some more data on that, we just so a research note issued by an analyst from Morgan Stanley, where he has cited that Microsoft Teams, they've done a CIO survey, and they're seeing dramatically increasing trend of CIOs standardizing on Microsoft Teams.

To mention data, while two years ago, only about 27% of those CIOs have standardized on Teams. In 2019, that number grows to 40% and this year, that number grew to 51%, so definitely a very strong adoption and recognition of the fact that Microsoft Teams is the leading collaboration solution in the enterprise market.

I can bring you another data point where basically CIOs were requested to say which would be the collaboration tool that the company will standardize on going forward. This year, the division was as follows, Microsoft Teams 51%, Zoom 10%, Slack 6%, Cisco WebEx 9% and few more.

Going and asking them about what do they believe will be the situation three years ahead. Basically, Microsoft Teams stood at 61%, Zoom remained at about 16%, Cisco declined, Slack declined et cetera.

So, all in all, we see growing recognition of the fact that Microsoft Teams is the leading collaboration tools and again this is where we put all of our resources in.

To give you another data point from another analyst that issue that you report this quarter is counting them on others the fact that there is a broad adoption of Microsoft Teams is sighting more than 1800 companies with more than 10,000 employees and is also using the sentence that investors are considering the Microsoft to be an existential disruptor to the cloud communication ecosystem.

So as you can all imagine, this is a great, basically, basis for operation. Yes, it relates to us. So, year-over-year, we grew 18.5%, and on a sequential basis, we grew 11.8%. Basically, we've seen a rate of new opportunities created in the core growing very nice.

We'll touch the division between Skype for Business and Teams in a minute, but we saw a relatively moderate decline in Skype for Business in the third quarter as compared to the previous quarter, while we saw a very strong uptake in Teams in the quarter.

About two months ago or about actually about a month ago, within part of a user event of Microsoft called Ignite, we can tell you that we have seen a lot of new announcements and enhancement to the Teams application among them in the ARFA meetings recap on voice and calling devices.

In general, I would tell you that there was another user conference, Zoom Tapia Conference about few weeks ago, where there was a large emphasis put on Zoom Phone.

All we can see and hear from the market is that probably going forward, the area of voice communication will become the key area where there will be a big effort put into winning the sales between Microsoft and Zoom. So definitely that will be a very favorable trend for us.

Also we see investments in the year getting more, more seats to use Teams as a cloud solution and we'll talk about that, I assume, in coming months. So, all in all, a very nice activity in the quarter, just to give you kind of a sense for the split of revenues in the quarter.

So, this quarter, we saw Teams substantially getting above Skype for Business. While in the second quarter of this year, revenues are kind of almost relatively split 50:50 among the two. In the third quarter, we definitely saw Teams taking off and capturing 60%, this Skype for Business capturing 40%, so very mild decline in Skype for Business.

So, going into the numbers, on a year-by-year basis, Teams revenue grew for us more than 400% year-over-year, and about 30% on a sequential basis. To touch another aspect, when we're talking about new Microsoft Teams accounts, one, I can tell you that we see a continued increase in the number of new accounts per quarter.

I can tell you that in terms of year-by-year, we've seen more than 150% increase in the number of new end user accounts created versus the third quarter of 2019, and about 20% more new accounts on a sequential basis when we're comparing to the second quarter of this year.

With regards to -- we so far we discussed about revenues, so cloud opportunities. We also monitor the creation of new opportunities, opportunities that have just been created and not close yet.

So, with that in mind, we can tell you that the Skype for Business side of the business, we have seen about 40% decline year-over-year meaning less and less new opportunities or often for the Skype for Business. Interestingly enough, there're definitely new opportunities in that market segment.

However, once we go to Teams, I can tell you that we have seen on a year-by-year basis an increase of more than 270%. So a very strong increase year-over-year with Microsoft Teams that trend is fairly visible across all the previous months in 2020 and we already see October rising above September, et cetera, so good activity on that.

All in all, I can tell you that we're doing great business out. The application that's capturing most of the activity in that market is the Teams Direct Route as we see. Here we can report as we are enjoying a great success. Again, comparing on a year-over-year basis, we grew more than 200%.

Another area of growth for us, and we invest a lot of efforts is the area of managed services. About six months ago, we have announced AudioCodes Live for Microsoft Teams. AudioCodes Live basically provides a managed service to full voice-enabled Teams.

The core service includes Teams Direct Route connectivity, tenant management, user life management and few more functionalities. All in all, we definitely started to see lots of activity in that area.

Again, I'm coming again to the fact and there are some market reports saying that with the evolution of cloud services, we see more and more companies consuming managed services against purchasing equipment or solution as in the past. So, all in all, we do invest a lot in our managed services activity.

I can just tell you that we have a long-term plan, a five-year plan. We're going to add resources actually many positions just to make sure that we keep growing on the managed services side of the business. We've already seen in this second-half of 2020 we see growing monthly recurring revenues from several accounts. Just to name few notable deals.

One is in Asia Pacific. We're talking about an Asian bank that had to migrate from Skype for Business online and some legacy PBX systems to Teams. Definitely COVID-19 increased the urgency of that. We supplied products few years ago to that bank as part of their Microsoft Skype for Business journey.

Now, they are at the point where as a needs or migration service, and thanks to our experience with both Skype for Business and Teams. We are clearly the selected vendor to do that.

This opportunity is worth several hundreds of thousands of dollars in professional services alone and demonstrates our ability to keep generating business from our large Microsoft installed base.

Another deal is with a North American financial services company was more than 50,000 employees, which is moving to Teams, they need a Direct Route as business solution to connect to the PSTN and to their existing Cisco-based system.

We address this requirements with our Mediant CE, which is our cloud-native SBC deployed in the customer private cloud data centers. Together with professional services, the PO received this quarter was close to $0.5 million. Another one is a huge U.S.

healthcare company that is handling pharmacy benefits and healthcare services and operating across 150 countries globally. They're running a multi-year contact center aggression project that due to COVID-19 is seeing many of the agents working from home.

The total life value of this project is worth millions of dollars more because in the third quarter, specifically, we generated about $500,000. Looking ahead, this customer transition to intelligent contact center solution, we see further opportunities with our WebRTC and conversational AI solutions.

We believe that this is a great example of a large-enterprise contact center project that keeps evolving, and generating more and more business for us based on customer satisfaction. And this basically concludes my presentation.

Again, I will just mention what Niran said earlier in the call, that we are updating our guidance in terms of revenue, we are narrowing the range of $214 million 00:00:53] to $222 million to a range of $218 million to $222 million, roughly setting the midrange of $220 million, that should provide for about 10% revenue growth this year.

On the earning side, we are substantially updating the guidance. Previous guidance was for, which was by itself elevated, it was $1.18 to $1.24. We now upgrade it to $1.31 to $1.35. And that's it. With that, I have completed my introduction to the call, and I will turn the call to the Q&A session.

Operator?.

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] And our first question today comes from the line of Richard Valera with Needham. Please proceed with your questions..

Thank you, and good morning. Shabtai, a question on the Microsoft business, if I heard you right it was up nearly 20% I think this quarter, and that last quarter, I think it was up only modestly.

You had suggested so clearly an improvement there, and it sounds like the big difference may be that the Skype for Business piece did not decline much this quarter. So just wanted to understand that the conflicting dynamic there. Obviously Teams I think is doing very, very well.

Last quarter the declines in Skype for Business nearly offset it, but do you think we're past the worst of the Skype for Business declines? Do you think you've got a relatively stable base there and that we're now on kind of a positive growth trajectory for the overall Microsoft business going forward?.

Right, well, I think we all recognized that definitely Teams is capturing center stage, and most of the new organization trying to go for a Microsoft collaboration will settle on the cloud solution Teams which is substantially more advanced.

However there's going to be a long tail, and I think we saw that -- I think in the second quarter we saw the worst of the decline in Skype for Business, which I think went from about, in terms of revenue, went from around $15 million in a quarter -- actually last year, if you take the average of 2019, the average for Skype for Business was about $20 million.

In the second quarter of this year, Skype for Business declined abruptly to about I think it was $11 million. This year we saw a modest decline of about 10%. My opinion is that we will keep seeing Skype for Business declining at a moderate rate there.

There's going to be definitely a long tail here as some of the companies who have settled in past on Skype for Business still need to complement and complete their deployments. On the other hand -- and there are a few such organizations that will make a decision, think about defense, think about country regulatory issues.

You will still see some business remaining on Skype for Business. So I think we have seen the worst of it in the second quarter, and as you have clearly said, in the third quarter we already are in the first quarter where that decline is not going to affect much the growth in Teams..

Got it, that's helpful, and then you mentioned a couple of the hardware, I guess, related products that were challenged, but specifically IP phones and Gateways. It sounds like Gateways actually had a pretty good quarter relative to the recent quarters.

Just wondering how you're thinking about the kind of sustainability of that business at kind of a flattish level, and then on IP phones, it sounds like they've probably -- do you think they've kind of reached a level on an absolute basis that's stable? I know that's obviously taken a big hit from the work-from-home dynamic, but do you think maybe they're also stable as we look forward?.

Right, so on the Gateway side, we currently expect in 2020 a decline of about 15% compared to the previous year, right. However we always need to bear in mind that the revenue number is a combination of about two-third of product revenues and about one-third of service. Usually the service is not damaged at all, okay.

Think we've seen kind of flat revenues on the Gateway service. Where we see the decline is really more on the product side, which compared to last year level the decline is about 20%. Now, we do believe that is tied up -- the level of sales of Gateways is usually tied up to a country's plans regarding transition to all-IP.

We've seen some countries deferring plans, let's say, this year as a result of the COVID-19 situation, where they could not send teams to deal with the product installation in the field. We, on the other hand, saw two new countries starting to move that way, more specifically U.K. and Japan.

So all in all, my expectation is we will keep just like as I've mentioned for Skype for Business, we will probably see another decline next year and the year after that.

It will be substantially more in the product side, less on the service side, but then on the other hand, assuming in a year from today the pandemic situation will fade away, I will not rule out that we will decline another maybe 10% this year -- next year, et cetera, but again, we assume there's going to be a very long tail, because think about large countries which have not started the shift yet.

Think about countries with more than one billion people population, those countries has not started yet anything. So think about many countries, think about the Asia-Pacific region where there's going to a need for Gateways. So that's on the Gateways side. On the IP phone, we may probably have seen the worst of it.

I can tell you that [technical difficulty] that as of the beginning of September they've seen more requests for phone. We know Microsoft is pushing that also. At the end of the day, it's all [technical difficulty] and that's about it.

If you ask me, I don't see any new vendors entering the space, so basically the number of players is surely limited, and we definitely are with a very advanced new offering on the Microsoft team. So we would probably wait for 2021 to see some increase in that line..

Okay, that makes sense. Thank you, Shabtai..

Sure..

The next question comes from the line of Greg Burns with Sidoti & Company. Please proceed with your questions..

Good morning. In terms of the Teams, it seems like you're seeing, based on some of the conferences you've been at, an increased focus on voice from the vendors.

[Technical difficulty] adoption standpoint, where do you see voice in terms of [technical difficulty] adoption or penetration rates right now? I think it was at like [technical difficulty] the last time you gave us an update, but [technical difficulty] trending in the market? Thank you..

Right, so basically the numbers that we have quoted a few months ago were coming from other sources in the market. We've not seen new numbers coming up. So it's tough to say whether that's above 5%, 10%, et cetera. I mean our business is growing. Our voice business is growing, as I've mentioned, 20% year-over-year.

I assume that the general Teams application is growing substantially faster. At this point I have no such data. We assume however that that's a long tail that's created for us, and therefore we should see a very good market for our voice capabilities..

Okay, and in terms of Voice.AI, can you maybe give us an update on some of the projects or the beta implementations you have on that side of the business.

How much revenue do you expect in that business this year, and maybe what -- how much that business is contributing in terms maybe operating losses, like how much decremental margin is coming from that Voice.AI investment? Thank you..

I'm sorry, Greg, I missed your last 10 seconds.

Could you please repeat the question?.

Yes, I was just looking for an update -- yes, I was just looking for an update on Voice.AI, how --.

Okay, right..

How are some of the projects you've been having on there, the revenue and maybe how much in terms of loss -- I know you're investing in that business..

Sure..

But how much is that contributing to the operating….

Yes, so all in all, we definitely see -- yes, all in all we see a lot of activity on the Voice.AI front.

As I've mentioned, one application we are focusing on is meetings recap, where one can get meetings that were held, and generate automatically decision, action items, and a summary of the meeting that will be captured by AI and will be distributed to project and task management systems.

On the other end, you'll be able to get to some meetings that you have missed because you were not able to attend them. So meetings recap, that that application was announced by Microsoft last September, and in -- or our Meeting Insights solution is definitely targeting that. We're going to embed it into Teams hopefully within the next 60 days.

Another area is our Voca business. Generally these days, when people who are stuck at home the use of phone is increasing substantially, and you can think about a lot of organization and institutions who are getting thousands and tens of thousands of phone calls, and not being able, obviously, to put so many agents to respond to those calls.

There's a need for virtual agents that will handle those calls. We see a lot of trends. We are basically in the midst of making a lot of investment and a project in this space. So definitely the whole area of virtual agents and conversational IVR is big.

And another area is where you have the world of the bots, chatbots, which are communicating by text only, and we have a very unique -- a very powerful solution called Voice.AI Gateway that allows you to connect by voice, both speak and listen to voice information, and we are partnering with many companies.

We've been told that there's no other such solution of the same quality in the market. So all in all, just give you a higher level perspective of what's happening. So last year, I think we did above $2 million in revenue this year -- in revenue and bookings. This year, we expect between $3 million and $3.5 million in bookings, so growth of about 50%..

Okay, and that the costs associated with that side -- that part of the business?.

Okay. So, yes, last year I think it cost us about between $3 million and $4 million in operating expenses. This year it will decline by about 20% to 30%. We're very hopeful that actually next year, we will definitely avid substantially reduced. So, all in all, the trend is positive, and we have lower expenses going forward..

Okay, great. Thank you..

The next question is from the line of Walter Pritchard with Citi. Please proceed with your question..

Hi, thanks.

Just couple of quick ones on -- I missed an hurricane split or the networking revenue, could you give that number?.

We did not. Actually at this stage, technology is down to like maybe 4%, and networking is like 96%. There's no much change in the quarter. So, we assume that we -- I think we think we will basically just keep reporting the company as networking. That's about it..

Okay, and then on the expenses, just curious there, you gave some helpful color around long-term.

How do you think about just especially related to sales and marketing, the levels this quarter? How much that was suppressed by COVID, lots of travel and how you expect that to bounce back? I mean, I don't think anybody knows timing for sure, but how, what sort of color could you give us around how suppressed those expenses were relative to the environment?.

Hi, Walter, this is Niran.

So, in terms of sales and marketing expenses, same as last quarter, we still have some lower expenses related to travel and also marketing events, but as Shabtai mentioned, this is going to be the new standard going forward, we will not see let's say our travel budget next year will not be the same as it was originally planned for this year.

So we definitely will continue to see some saving going forward..

Great, and then just on -- you gave some commentary around software I think in the last quarter, you talked about 35% of the mix, just wondering, given the comments that you gave here on software revenue, where was that in the quarter, and how do you expect that to trend from the 35% that you talked about last quarter?.

Yes, so software revenues out of the total is approximately the same as last quarter about 35 or so percent..

Okay, thank you..

You're welcome..

Your next question is from the line of Raimo Lenschow with Barclays. Please proceed with your question..

Okay. Thank you.

Shabtai, could you talk a little bit about what you're seeing when people go around Teams? So you talked about the new accounts kind of growing really nicely for you, but then also, I assume there's a fair amount of Skype for Business customers updating? Are they increasing their footprint within an account? So is that a broader adoption of teams when they move over? Or is it just a one for one kind of update from Skype to Teams, and I had a follow-up?.

Yes, I think we generally see companies, the whole transition from Skype into Teams is not only due to the fact that Teams is a Cloud solution, but also the fact that Microsoft is in a very continues ongoing basis, adding new functionality to Teams as prepared.

So Skype for Business is really is a product that gets sold, but not really making any progress from the release.

So all in all, you can imagine that there are two kinds of Team accounts, some that sought to transition, and I've mentioned that a large Asian bank, wanted to add a Skype for Business solution and now wants to upgrade to add more functionality, and we see that happening definitely, that's one source of new accounts for us, and obviously, on the other end, you can see new companies who simply want to go to more advanced collaboration tools and consider Microsoft to be the best solution, so they're coming from different environments, it could be Cisco, Viya, and/or others.

Right now, I think more -- we see more such new accounts as compared to accounts as we move from Skye for Business to Teams. So, it's a mixture, but definitely, the new accounts are the majority at this stage..

Yes, okay, perfect, and then, can you just remind us you talked earlier how the -- about your vision around gross margins and OpEx level.

Could you just remind us is gross margin improvement is just that mix effect, or how do you have to think about that?.

Yes, it's continued -- I mean if you look on our gross margin along the years, you can see continuous gradual improvement. That is basically due to a multi-year long process of declining hardware revenues. We are keeping all foreign investment these days mostly in 90 - 95%. So, that is the source.

I mean more software -- take SBC, SBC which is a major line for us, serves more than $80 million a year. In the past, it was a completely hardware business line.

I think in the last sales review of the line, two weeks ago I think it was mentioned [technical difficulty] of the SBC sales are related to software either on prem, but definitely much more on cloud on Azure, AWS et cetera. So, we are simply moving to more Software-as-a-Services.

I have mentioned the larger focus of investment in services, so that will drive gross margin higher very simply..

Okay, perfect. Thank you. Congratulations, great quarter..

Sure. Thank you, Raimo..

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 first just as a follow up on the operating expense question asked earlier by another analyst. OpEx was on a dollar basis down quarter-over-quarter slightly, and down again just a little bit year-over-year.

Do you think that the current OpEx level as you mentioned should stay around here, is that enough to support low double digit overall revenue growth for the next several years? I guess how should we think about that growth, profitability -- or, I guess like growth, investments, and profitability balance?.

Hi, this is Niran. So, yes, indeed in the third quarter we saw a lower level of OpEx expenses relatively to the second quarter. That's a result of the summertime more and more employees are taking vacation. So, if you look historically, the third quarter is relatively low than the second and the first quarter.

Q4 is expected to be few hundreds more, but all in all, we still -- we are currently working on the 2021 planning, but all in all as I said before, the saving due to the COVID is here to stay mainly on travel, and, we will see OpEx increase in the next quarter and so, but not as we originally planned..

Okay, great, and then, maybe Shabtai one on a different Teams question.

When customers are adding voice leveraging AudioCodes with Teams, are they typically buying the -- do you know if they care buying the calling plan through Microsoft, or are they bringing their carrier in that circumstance? I am just trying to understand maybe what parts they want to leverage with Microsoft's environment for versus AudioCodes versus the carriers?.

Okay. Thanks, Samad. Actually, this is a good point. In the past, I think we've heard going backwards like 6-12 months, we saw kind of a 50:50 split between Microsoft calling plans and the use of direct route for break-out to the PSTN.

We have lately heard about a new trend where basically where Microsoft is lowering its emphasis on calling plan, and basically calling plans are more it looks like going to use more the direct route.

So from what we heard, I can quote from another analyst annual report that 85% of cloud voices on Teams likely will utilize third-part direct routing, and Microsoft appears to be less interested in telephony, [technical difficulty] free calling option. So, we expect to see a very vivid direct route as we see business compared to the past..

Great, and just lastly a quick housekeeping question, can you just maybe give us an idea of what level of the book to maintenance contracts are sitting at, and how that year-over-year growth looks through the third quarter?.

So, booking -- in terms of support contract booking is increasing in our plan about 13 to 15% year-over-year growth..

Okay, great, very helpful, thank you again for taking my questions, and congrats on a solid quarter..

Sure, thank you..

Thank you. At this time, we've come to the end of our question-and-answer session. Now, I'll turn the floor back to Shabtai Adlersberg for closing remarks..

Thank you, Operator, would like to thank everyone who attended our conference call today. With continued good business momentum in our markets and execution in the first nine months of 2020, we believe we are on track to achieve another strong year of growth and expansion of our business.

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

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