Hello and welcome to the AudioCodes's First Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder this conference is being recorded. It’s now my pleasure to turn the call over to Roger Chuchen. Please go ahead sir. .

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 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, 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 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 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 from 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 its website. Before I turn the call over to management, I would like to remind everyone that this call is being recorded.

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

Thank you, Roger. Good morning and good afternoon everybody. I would like to welcome all for our first quarter 2021 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance at AudioCodes.

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

Niran?.

we expect revenues in the range of $240 million to $250 million and non-GAAP diluted net income per share of $1.45 to $1.65. I will now turn the call back over to Shabtai. .

Thank you, Niran. We are very pleased to report strong first quarter 2021 financial results ahead of our internal budget and continued progress in our business. Most important, we have been strong in the markets. We have seen a strong market for three main growth engines namely, Microsoft business, Contact Centers and Conversational AI.

In the Microsoft business, Team’s and Skype for Business, business grew above 20%. However, most notably, our U.S. market showing increased activity in view of the decline in pandemic. We saw better environment for new creative accounts and businesses. Very stronger book-to-bill trend which strong put – presents growth ahead.

Contact Center, we have seen strong pickup in activity. Conversational AI growth of more than 100% year-over-year in total.

Importantly, first quarter industry dynamics further underlines the notion that collaboration to work from home remains center stage in 2021 and beyond, even post-pandemic and presents long-term growth prospect for us echoing strong performance in our North America services operation and continued as we see business strength, the outlook for 2021 and onward is positive.

Talking about the growth in services, AudioCodes live continues on track with the initial plan and we’ll talk more about it later on.

Also, with the return throughout the strength continues in several countries for our devices, IT phones, desktop phones, video conference devices showed meaningful improvement from 2020 though magnitudes of recovery could be capped going forward by the well-known ongoing chip supply constraints and shortage.

So touching on the key highlights of the first quarter, total revenue grew 15.1% year-over-year, an improvement as compared to the 11.7% growth back in the first quarter 2020. Growth driven mainly by a secured growth opportunity within the Unified Communication-as-a-Service in Contact Center markets. Service revenues grew 23.3% year-over-year.

Service revenues were driven by strength in professional managed services offering. Most important, we made ongoing progress in pivoting to recurring revenues with strong traction experienced with our AudioCodes live offering. In terms of the first quarter 2021 revenue, let me go by segments.

Referring to the 13.1 overall company year-by-year revenue growth, it is important to note the growth in our key markets UCaaS and Contact Center were substantially higher. UCaaS accounted for over 65% of revenue and grew above 15% year-over-year. Contact Center accounts for over 12% of revenue and grew above 20% year-over-year.

So combined, and that is the enterprise operations we have, we now see more than 80% of our revenues growing at the rate of 15% year-over-year, which is substantial growth above the overall company growth. Two more segments, Voice AI I've mentioned, grew over 100% still less than 2% of revenue at this stage.

The decline was seen in the service provider and technology, which finally make up the balance of revenues down in the quarter.

Now, to reiterate our three year financial model targets, growth, which was 15% in enterprise revenues in the first quarter provides strong support for our rate targets 2021 outlook as well with our long-term financial model. The model calls for 13% to 15% growth of revenues, we did 13.1%.

Non-GAAP gross margin, we define in the range 67% to 70%, we ended up doing 68.7%. OpEx as a percentage of revenue, we said we would cap it at 47% which came to 46.3% and then when we are talking about the non-GAAP operating margin, we said the range to be between 20% and 23%, we ended up at 22.4%.

Now let’s focus on two more key developments in the quarter. This is the focus on real-time cloud communication and on transition to recurring revenue. A recurring theme in our operation for the past several years has been increased focus and rapid transition for our solution and services to real time cloud communications.

We continue to invest in cloud services automation and in Software-as-a-Service solution development and we see further growth in this space. Much was achieved in 2020. In the first quarter of 2021, we have increased and accelerated investment in this area driving the momentum in 2021 and beyond.

On top of this, we have substantially moved our focus in sales towards recurring revenue model and an increasing percentage of revenue now comes from recurring revenue sources versus the historical model of CapEx sales of our net working year. To further highlight this, let us now transition to recurring revenues.

In March 2020, we announced AudioCodes’ live initiative, which offers AudioCodes’ voice expertise product and solution to enterprises via very flexible subscription-based managed services model. We have made good progress through the second half of 2020 and into the first quarter of 2021, and now see the momentum growing and expanding.

By mid-2021, we expect this line to cross the $10 million ARR mark and reach $15 million ARR by the end of the year, more than doubling 2020 levels.

Our booking or total contract value of this business is already several tens of millions of dollars and it is signed with large number of enterprises who have already started or about to start the UCaaS deployments with us.

This fast-growing business is a tangible proof to our superior technology in the areas of connectivity, management, automation tools, services and adjacent applications to the user solutions. I am confident that this business will keep growing and represent a very significant portion of AudioCodes value in coming years its recurring revenue basis.

Now to Microsoft operations in the quarter. First quarter 2021 business grew over 20% year-over-year. Microsoft business is now 45% of overall business. We target $120 million by the end of the year growing above 20% on top of 2020. We’ve seen accelerating opportunities in the market, some of which focus more in the mid-market.

We have seen lot of activity around Direct Routing-as-a-Service and we have seen dozens of opportunities in booking and in pipeline. We also enjoy a lot of success in our business development efforts in the field. We have seen increased success in the field, identifying new large enterprise opportunities.

By now, we are getting several qualified deals every week. The average size is few thousands. Similar success now is picking up in certain countries of Europe where we see cooperation with the local teams of Microsoft. Now to the mix of revenues in the Microsoft space.

In terms of mix revenue – the mix of revenues, Microsoft Teams witness growth of 170% year-over-year, whilst cap of business declined moderately less than 10% sequentially and about 50% year-over-year. All in all, we see much success in growth in the Microsoft business.

We – talking usually about revenues, but I think it’s more important to talk about what’s evolving about what I would call a book-to-bill ratio. So we have seen an acceleration of overall teams’ business opportunities in the first quarter having increased over 100% on a year-by-year basis and over 30% relative to the prior quarter.

This metric is good leading indicator pointing to ongoing momentum in our Microsoft business. So, all in all, substantial new team’s opportunities developing for us going forward.

As to the mix of accounts, where does they come from? So, we are around about 100 give or take opportunities per quarter coming from our old Skype for Business installed base but the growing number on Team’s.

So all in all, comparing first quarter 2021 to the first quarter 2020, we have seen an increase of more than 50% year-over-year in terms of number of accounts moving to teams. To highlight some top wins in the first quarter in the Microsoft space. Talking about a large private company from food industry.

This is a long-term AudioCodes customer that started with us with Skype for Business. We have a gradual journey from Skype for Business to Team’s. We had a huge PO for replacing competitor presence. Also we are providing Direct Route-as-a-Service through the live essential service.

Another big account in the U.S., a company well-known in the financial space. They are basically on track with the Team’s migration project from Skype for Business. We have done large professional services project for augmenting in-house capabilities. We brought a project in Asia Pacific, we are talking about a bank in APAC.

We have provided a mixture of products and services including gateways, Session Border Controllers, management, central management, routing capability, management capability for subscribers and professional services.

Fairly competitive win against a competitor from this space and we in that specific deal we have been partnering with a local large service provider. So how do grow from here? We have a clear plan. We are going to grow the number of AudioCodes live users. We are going to scale up in revenue to AudioCodes live professional and premium services.

We are going to introduce new business application services in upselling. So that would including recording services, contact center services, analytics, meeting space services, and Conversational AI services. Now, going to the second large market, Contact Center, that is a very fast-growing market. Revenue is now about 15% of our business.

We target growth of above 15% year-over-year. This market is going through several disruptions. Firstly the transition to cloud, also work from home evolves as a main trend. So WebRTC becomes the mainstream to maintain quality of service when communication goes over the internet lines.

And then we are engaged in investing in the new emerging intelligent contact center and there we have a greater role to our Conversational AI. All in all, this breadth of different technologies allows us to expand our business in the past. We have been much more focused on working very closely just with Genesis.

These days we are expanding our work to work with more contact center vendors and also working with end-users. So, the focus on contact center end-users are in contrast to the past contact center vendor focus help us a lot in expanding the business. All in all, Conversational AI gets big boost for automated and bring self-service customer engagements.

So all in all, a very successful quarter for Contact Center. As I have mentioned before, we’ve grown revenues of more than 20% over the years or the quarter. As I have mentioned, we have expanded beyond the Genesis environment. So we are now selling into some other large contact center vendors in a meaningful way.

EMEA was very strong for this quarter and we do see the same developing in the second quarter, the current quarter. We also engage much in new Voice AI technologies. As you recall Voice AI connect that helps to connect with voice to chat bots and that activity is becoming fairly successful.

Let me touch for a second on our SBC operation, which is our most important product. Last year, sales reached short of $100 million. We plan to grow this year by another 20%. Quarter was very successful. We grew 30% above the year ago quarter. We have seen a very strong booking growth, more than 40% year-over-year.

We, all in all see lot of activity in the space on various different projects, different technologies. For us, this space represents a lot of opportunity. Microsoft revenues in this space continued to grow 70% year-over-year.

In terms of geo split, the majority of revenues came from Europe about 40%, about 25% and above from North America, 13% from APAC and the rest from CALA and Israel. Now let me get to the smallest growth engine that stand very important and very exciting, I am talking about Conversational AI, our next-gen growth engine.

Our Conversational AI business includes the following lines, it includes recording services, that smartapp for Team’s and making insights. It includes also the Voice AI connect to connect, voice to chat bots and then we have the Voca for Conversational IVR. We’ve seen strong business. As I’ve mentioned, revenue grew more than 100% year-over-year.

The rise in this area stems from the fact that technology relies a combination of homegrown cognitive services technologies such as speech-to-text, text-to-speech, machine learning, NLU, NLP, and then cloud cognitive services and SBC networking telephony expertise which sound for competition just in the cognitive service area lack some of these components.

Long-term growth potential, that business line ended up in 2020 at about $3.6 million. We now target to grow more than 50% this year and we target to reach $10 million by the end of 2022.

Growth is driven by trends in the UCaaS and Contact Center and meeting industry and the trend for self-service and customer call automation in the contact center markets. Smartapp, which is our solution for complex recording, enjoyed a lot of success. We just got certification for Team’s about three months ago.

We are one of the few got that certification. We have seen pipeline growing significantly driven by the increased compliance recording needs from using number of Team’s users in the enterprise space. So very successful operation there.

I’ve mentioned also Voice AI connect, our industry-leading voice-enabling chatbot technology plays a vital role in enabling contact centers to support the increasing call volume arising from the ongoing shift to visual engagements. We are preparing for production with several customers and are on track to achieve 1 million ARR by the end of 2021.

We will continue to provide updates on this exciting emerging business going forward. So all in all, a very successful operation. With that, I have concluded my presentation and like to move the call to the Q&A session. Operator, please go ahead. .

[Operator Instructions] Our first question today is coming from Samad Samana from Jefferies. Your line is now live. .

Hi. Good morning and congrats on the strong results. It’s good to see you could figure off with strong numbers. So, Shabtai, maybe first, Team’s growth continues to be very exciting and I know you dug into it – about the quarter somewhat in your prepared remarks.

But when you think about the go to market motion, are you guys hiring more sales reps to sell into that Microsoft installed base to drive voice into Team’s or maybe what’s AudioCodes is doing as an organization to address that opportunity from a go to market perspective?.

Thank you, Samad. I am really glad you brought that up. I didn’t mention headcount and headcounts really changed dramatically. We grew 6% over the last year. So we added another 45 employees to the 745 employees we had then.

A majority of these positions are with our sales and services organization and as you can expect, because we see lot of growth in the U.S., most of it is really occurring in the U.S. So yes, and that contributed just in the past two weeks we have approved between 10 and 15 new positions for the sales and services organization.

There is a lot of activity and we are going to support that. .

Great.

And maybe on the pipeline again, your confidence in the environment, definitely ran through on the prepared remarks, but when you think about how you measure it in terms of either a client inbound request or sign-ups for demos, anything that maybe kind of tangibly that AudioCodes measures that points to what the pipeline looks like or how healthy the pipeline for Team’s related deals is?.

Yes, we are. We definitely track that internally. We have analytics. Each of this gives, actually moving more and more into recurring revenues. We are measuring the pipeline.

We are measuring the contract’s value that is accumulated and we measure the – obviously, the execution how much was deployed, how much – you need also to – by the way to simulate that. Every organization it’s tough to move into AudioCodes live and our managed services really deploying only a very small portion of its operation initially.

So, it will be very natural for an organization to start with just few hundreds, right. The proof-of-concept may start with 100 or 200. But at the end of the day, this organization is about 300 or above. So, what we basically tell you is that, and I have driven in terms of total contract value.

We have not counted the thousands, we have counted only the hundreds. So there is a lot of accumulated potential there. And as we continue to deliver well on our promises with the growth as I have mentioned tens of millions of contract value that is what’s developing within the scope of the year now. So, a lot of activity. .

And great, maybe just one last one for me, for either of you, but the profitability continue to be nicely above our expectations. And so, I saw that that AudioCodes repurchased $10 million worth of shares in the quarter.

Maybe how should we think about the rest of what’s left in terms of that $30 million buyback? And if there is any appetite to maybe expand the buyback level given the current valuation?.

Right. So, right now, I mean, by we are taking a position where we need to relaunch a new purchasing effort every six months. So the current one basically adds like $25 million in total, out of which we already executed some $10 million. So, we are left with about $14 million for the rest of the six months that will end somewhere in July.

Again, based on the situation there, based on what makes sense for us, I think that we see lot of value in this buyback, because we definitely want to invest where we believe the investment makes sense. And right now, that is what’s happening. .

Great. I’ll turn it over. But congrats again on the quarter and thanks for taking my questions. .

Sure. Thank you, Samad. .

Thank you. Our next question today is coming from Raimo Lenschow from Barclays. Your line is now live. .

Hey. Thanks for taking the question and congrats from me, as well.

Can you talk a little bit about the strength in the call center market, like, how much of that do you think is that you figure is kind of more like pandemic, kind of one-off emergency versus really strategic changes to what’s going on in the industry?.

I think pandemic really puts lot of weight on the issue of moving the agents from the facilities into working from home, right? There was no other choice.

So, - but, during that process I think many of the vendor – at the end-users actually found out that the cost of using agents at home is substantially lower than the cost of maintaining data protection on-prem, on facilities. So, there is a natural saving when that force is sitting at home. So, obviously, that is a driver that’s going to stay.

Beyond that, the production of the cognitive services technology and industry I think help moving from human agents operations. This was a 100% two years ago. 80% now and according to research, people believe that in three years from today, only about 30% of the agents will remain human.

So, it’s really the evolution of the technology completely works – to the pandemic that is driving that shift. Beyond that, there is the shift from the premises to cloud which makes sense usually for a smaller company, but then provides a lot of efficiency for the vendor. So, not all of it. I think it’s mainly the work from home.

It’s the WebRTC, quality monitoring end-to-end over the internet, those are technologies that evolved due to the pandemic, but they are going to stay with us. .

Okay. Okay, perfect.

And then, if you think about your ongoing migration like towards more software way from hardware, can you talk a little bit about, like, are there any more active steps you need to do as an organization to kind of cheat that or do you think it’s just a natural evolution?.

It’s an evolution. I mean, we have started that journey like, three years ago. We’ve done great steps. We are improving quarter-to-quarter and I believe that today, there is no single application that’s developed internally that does not rely on cloud communications – built in cloud communication.

So, everything that needs to take into account DevOps, Software-as-a-Service, automation tools, et cetera, analytics, all of that is being developed as we go into 2021. So, I assume that in less than two years we will be fully cloud-based. .

Okay, perfect. Thank you. .

Sure. .

Thank you. [Operator Instructions] Our next question is coming from Greg Burns with Sidoti & Company. Your line is now live. .

Morning. You gave the relative growth rates between Team’s and Skype for Business.

But can you just give us the mix of revenue like, how much revenue from Microsoft is still for Skype for Business?.

Yes, I can tell you from the pro forma, so, all in all, I think revenues topped $25 million or above. Out of that, Skype for Business accounted for, give or take about $8 million and the rest of it came from Team’s. .

Okay. Great. Thanks.

And then, when you look at the Team’s market in terms of voice penetration within the user base, can you just give us an update on where that stands? And have you seen any change in the trajectory or the pace of voice adoption within the Team’s user base?.

Yes. I think we are seeing in 2021 greater emphasis on voice. It may relate to competition coming from other companies making voice more important this year. Also, if you want to play on the top-line of the vendors of UCaaS, you really need to have all of the different components. And this drives some other companies to invest a lot in voice.

I would mention also by the way, this did not came up during the discussion that we have made some very nice steps in selling also into the Zoom environment. The Zoom phone which was less visible in our operation last year, started to pick up end of last year.

First quarter was really strong, above more than double the business we had in the fourth quarter. So I guess that, greater emphasis by all of the other players, - RingCentral and now seeing services that combine their offering with Team’s. I think all in all, the voice space is getting more importance these days. .

Okay. Great.

And then, in terms of live, can you maybe – what is embedded in that those ARR targets, the $10 million by mid-year, $10 million by the end of the year and also maybe the number of seats, the relative seismic counts and ARPUs?.

Right. So, basically, we are talking about companies will – our target is mainly thousands of fits, but the projects do start with type of a hundreds. In terms of services we do provide the first more – most basic services Direct Route SBC.

On top of that, we provide management, on top of that, we provide other routing services, call recording services in the future also some cognitive services. So, it’s a stack of the trajectory start to push it as Team’s Voice-as-a-Service.

And when you are deploying voice like Team’s voice, you really need a stack of technologies to provide overall processing. So, it’s SBC, it’s routing, it’s management, it’s devices, it’s meetings, et cetera. And then, that’s what’s consist the Team’s Voice-as-a-Service. So, as we will discuss, call it before AudioCodes live. .

Okay.

When you look at that stack of the unlocking technology stack required to stand up like a sea and then also these – some of these incremental applications you are talking about cross-selling or selling into that universe, where you think – where do you think ARPU to get to? Or where do you see it may be starting?.

Okay. It’s – yes, it’s a great question. We can start as low as $1 when the service is the most basic one. But when you stack up all of the different capabilities, or when you need to connect to the lot of PBX or to provide more advanced services, the ARPU can go up to 4, 6, 7, et cetera. So, you can make the average.

So, but, this is the range where, I would say, 1 to 7 is the range where we should on off. .

Okay. Great.

And then, just lastly, how are you going to market with live? Do you have any like direct or internal sales force selling that? Or you just going all through the channel?.

So, we are working with the channels. I mean, we have not changed anything in our go to market. We actually include our partners in the game.

Obviously, we have them where the – like the knowledge and/or the expertise, but the go to market is indirect still for some very large customers who have hundreds of thousands of employees in some cases, we do have some direct touch. But the majority of the service is indirect. .

Okay. Thank you. .

Sure. .

Thank you. The next question today is coming from [Indiscernible] from Needham & Company. Your line is now live. .

Thanks for the question and thanks for the color on the Microsoft ecosystem.

Are you seeing the – within that area, are you seeing any shifts in the competitive landscape? Are you seeing new vendors get approved? And then, second question on the products side, are you seeing any shifts toward more of a SaaS model there? Or is it still more kind of a license approach? Thank you. .

Sure. So, generally, there are not too many newcomers, right? We have seen announcements from companies like 8x8, RingCentral and Vonage offering services like that growth. Nothing more than that. So, all in all, in terms of providing a full technology stack for it seems, I think we do not see much competition at this stage.

I am sorry, the second question related to, growing the SaaS?.

Yes, changes in the product model.

Are you seeing just more of a license model?.

Yes, obviously, yes, it was that. Right, actually, we did deploy, actually that you mentioned is because, in the first quarter, if we have deployed the new service that would go live essential or Azure. This is a completely SaaS solution that we are going to offer management Solution-as-a-Service, et cetera.

The trend again is indeed to move substantially more from services and managed services into SaaS solutions, yes. .

Thanks so much. .

Sure. .

Thank you. We have reached the end of our question answer session. I would like to turn the floor back over to management for any further or closing comments. .

Thank you, operator. I would like to thank everyone for attending our conference call today. With continued good business momentum and execution in the first quarter of 2021 and previous quarters, we believe we are on track to achieve another strong year of growth and expansion in 2021.

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

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today..