Good day ladies and gentlemen and welcome to AudioCodes' Fourth Quarter and Full Year 2021 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host Roger Chuchen, VP of Investor Relations. Sir, the floor is yours..

Thank you, operator. 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 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 of AudioCodes and its customers' products and marketing, timely product and technology development, upgrades and the ability to manage changes in market conditions, as needed, possible need for additional financing, the ability to satisfy covenants in the company's loan agreements, possible disruptions from acquisitions.

The ability of AudioCodes to successfully integrate the products and operations of acquired companies into AudioCodes business, possible adverse impact of the COVID-19 pandemic on our business and results of operations and other factors detailed in AudioCodes' filing 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 to our fourth quarter and year-end 2021 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 44%, EMEA 40%, Asia Pacific 12% and Central and Latin America 4%. Our top 15 customers represented an aggregate of 63% of our revenues in the fourth quarter of which 51% was attributed to our 12 large -- largest distributors. GAAP results are as follows. Gross margin for the quarter was 67.2% compared to 71.4% in Q4 2020.

Operating income for the fourth quarter was $9.3 million or 14% of revenues compared to $12.1 million or 20.7% of revenues in Q4 2020. Full year 2021 operating income was $39.5 million compared to operating income of $38.4 million in 2020.

Net income for the quarter were $7.3 million or $0.22 per diluted share compared to $8.4 million or $0.24 per diluted share for Q4 2020. Full year 2021 net income was $33.8 million or $1 per diluted share compared to $27.2 million or $0.83 per diluted share in 2020. Non-GAAP results are as follows.

Non-GAAP gross margin for the quarter was 67.6% compared to 71.5% in Q4 2020. Non-GAAP operating income for the fourth quarter was $13.5 million or 20.4% of revenues compared to $15.4 million or 26.2% of revenues in Q4 2020. Full year 2021 non-GAAP operating income was $53.8 million compared to operating income of $47.5 million in 2020.

Non-GAAP net income for the fourth quarter was $13.4 million or $0.39 per diluted share, compared to $15.2 million or $0.44 per diluted share in Q4 2020. Full year 2021 non-GAAP net income was $51.8 million or $1.50 per diluted share compared to $46.7 million or $1.41 per diluted share in 2020.

At the end of December 2021, cash, cash equivalents, bank deposits and marketable securities totaled $174.8 million. Net cash provided by operating activities was $4.3 million for the fourth quarter of 2021 and $47.3 million for 2021.

Net cash provided by operating activities in both periods were impacted by the $12.2 million payment made in December 2021, which was the third and last installment pursuant to the royalty buyout agreement. Days sales outstanding as of December 31, 2021 were 68 days.

During the quarter, we acquired 314,000 of our ordinary shares for a total consideration of approximately $10.7 million. In December 2021, we received court approval in Israel to purchase up to an aggregate amount of $35 million of additional ordinary shares. The court approval also permit us to declare a dividend of any part of this amount.

The approval is valid through June 19, 2022. Earlier this morning, we declared a cash dividend of $0.18 per share. The aggregate amount of the dividend is approximately $5.8 million. The dividend will be paid on March 1, 2022, to all of our shareholders of record at the close of trading of February 15, 2022.

Our guidance for the full year of 2022 is as follows. We expect revenues in the range of $277 million to $285 million and non-GAAP diluted earnings per share of $1.40 to $1.60. I will now turn the call back over to Shabtai..

SmartTAP, which is compliance recorder. So, in 2021, revenues grew nicely about 70%, and booking actually grew another 60%. So, all in all, the transition to Teams obligates companies who have compliance obligations to move their solution to a Team based solution. And this is where we come shining. We keep investing in the line.

We do intend to come up with a multi-tenant SaaS solution towards the second half of the year. So, all in all, very successful line of recording business. If I touch our Voca operation, Voca is a rich IVR application that is substantially more advanced than the previous product.

We started to develop a very advanced product, which allows conversational IVR. We have launched that solution second half of last year. We do see huge growth. And I can tell you that if we compare a number of opportunities created, we are starting to compare about 50 new opportunities versus just 14 in the year before.

All in all, we do expect the client to generate more than double revenues in 2022. Then coming to a very lucrative solution, we're talking about Voice.ai Connect. Voice.ai Connect enables chatbots to use voice input and output for the conversational AI platform.

We have very intensive activities with many partners in the market, most notably with Google and Microsoft, both. We just had a webinar with Microsoft about 2 weeks ago, where we hosted more than 1,000 participants from all over the world. That Webinar was run together by Microsoft and AudioCodes.

We then have seen a new Magic Quadrant Gartner report coming out a few weeks ago. I consider that out of the leading pack in the upper right quadrant, we've seen two partners that use us extensively.

One is integrating our Voice.ai Connect into their platform now serving many enterprise -- large enterprises solutions for bots, capable of handling both text and voice.

And then the other partner is very strong, relying on us on many different technologies relating to voice and actually they are building an AI First contact center around our contact center and Voice.ai Connect. So, all in all, more than 50 customers, more than 30 productions, we expect this line to almost triple in 2022.

So now you can understand the basis for being so optimistic that line that is gross booking of $5 million this year, we'll get to $25 million in the next 2, 3 years. This is just organic growth at this stage.

Talking about customers coming from -- talking about solution being deployed in the insurance, banking, automotive, energy service provider space. Now, two words about our acquisition made last November. We have acquired, as I mentioned, a private company developing virtual agents in Israel.

This is now part of our business line in the contact center in the company. We already started integration. It goes very nice, we added resources. We have starting to employ product management, a few more operational procedures just to make their operation very efficient.

Very active in the last pandemic with the omicron wave that basically triggered huge amount, volume of calls into contact center of medical service provider. Callverso virtual agent were very efficient in tackling just mentioned that on a daily basis, normal [indiscernible] usually, you have like 100,000 calls during the last few weeks.

The volume got to almost more than double and virtual agents were very efficient in tackling that. So, we do intend, obviously to extend their operation, but also take the technology and deploy it worldwide. With that, I believe I've exhausted my presentation for the session, and we will be turning the call into the Q&A.

Operator?.

[Operator Instructions] Your first question for today is coming from Ryan MacWilliams. Please announce your affiliation. Then pose your question..

Ryan MacWilliams from Barclays. So, thanks for taking the question, guys. It looks like the midpoint of your initial revenue guidance implies similar growth of this year. And the guidance going into next year stronger than the guidance you gave when headed into fiscal 2021.

So, Shabtai, given that there are investor concerns around a pull forward and cloud communications growth due to COVID, but then in light of this stronger guidance, can you talk about some of the indications you are seeing of an improved market opportunity as we head into this year? Thanks..

Right. Yes, unfortunately with the COVID, we all move to be kind of hybrid workers. In a hybrid mode, you need to be able to work from anywhere, not only from home, but from office and you need to travel between the two. Huge demand for UCaaS solution. It's growing, we've seen, we’ve quoted numbers.

Those trends both in UCaaS and contact center, we keep see them coming up.

And I can tell you that actually one of the question later on would be regarding headcount and the great resignation or ability to deliver, I'll tell you that our issues going forward and I think everybody in the world will be much more concentrated about the ability to deliver having enough people on board. It's another demand.

The demand is there, very strong. And we constantly adding people. I've mentioned, we added 110 last year, 30 every new quarter. It's all in the race to be able to deliver the demand that we are seeing..

Excellent. And then one for Niran. Niran, it looks like fourth quarter service revenues were slightly lower than the prior quarter. Just any puts and takes to call out there would be helpful. Thanks..

Yes, I wouldn't read too much into quarterly fluctuation in the service revenue growth loan. As you know we have professional services training in the service line. There can be fluctuation and can screw the quarterly growth rate. Our 2021 service revenues grew 24%, which is an improved growth rate from 16% in 2020.

So, there are fluctuations between, but I suggest not to look on a quarterly basis..

Excellent. Then last one for me. Shabtai, congrats on bringing on Dmitry. I may be a little biased here. But you mentioned the future for -- the potential future for more inorganic acquisitions going forward.

Any specific areas of the market that seem interesting? Or are there any, like software capabilities or things that your customers are asking for? Thanks..

Thank you. Well, we are focusing on our strategic market direction. And I think we have defined that to be the Microsoft Teams space. As such, and since we deliver managed services, I think our highest priority would be in that area to supplement and augment our ability to deliver more services in that specific space [indiscernible] Teams Voice.

Obviously, we are working also on the Voice AI, working also on contact center. We will be looking more for market reach rather than technology. We will be adding few smaller technology pieces, but that's not the focus. The focus is really gaining more market share..

Appreciate the color. Thanks, guys..

Thank you..

Your next question for today is coming from Greg Burns. Please announce your affiliation, then pose your question..

Good morning. Greg Burns with Sidoti and Company. So, I'm going to follow-up on the service line just in terms of the gross margins.

This might be similar -- a similar answer in terms of quarterly fluctuations, but what was driving the gross margin down on the service line this quarter? Is that kind of how we should expect? What we should be looking for in '22?.

Yes, it's a result of increasing our manpower at the customer service department. That's the main reason. With regards to gross margin at all, we are facing like all over the world an ongoing supply chain disruption. And this quarter we had made one-time purchases of components cost in the open market at higher cost to fulfill demand.

So, we estimate the gross margin impact from product sold carrying this higher component cost to be roughly 100 basis point in Q4. So, that's what we had in terms of gross margin both in service and as a total..

Okay. And Shabtai, you mentioned some shift in the revenue mix, given you're moving away from hardware to more like recurring service sales.

So the -- that the recurring revenue, I'd say if you sell a Live solution, does that go into the service revenue line item? Or is that product line revenue? Like -- where's that falling out on the income statement?.

Yes, it's definitely going into services. It's part of our managed services. And as you have said, it's growing. It's growing fairly fast. I can tell you that --- just give you a rough idea that at this stage, I've mentioned that Teams grew this year almost 70% compared to last year.

And Live is now in the full score, rising to more than 2020 between 20%, 25% of total Teams revenue. So, if Teams grows, Live will grow, managed services would grow..

Okay. And then lastly, you talked about Operator Connect, but Microsoft also launched Teams Essentials, kind of going more for the SMB space.

How might that impact your business? Is that something that could further accelerate growth for you in the Microsoft ecosystem?.

Yes, as a matter of fact, Microsoft essentially is really a plan targeting to lower prices of Microsoft Teams or small organization in that regard, it's definitely a boost to the Operator Connect.

Operator Connect will allow those businesses to connect to Teams, but if to make it even more attractive, they have lowered subscription rates for the smaller businesses..

Okay, great. Thank you..

Sure..

Your next question is coming from Samad Samana. Please announce your affiliation, then pose your question..

Hi. Great. With Jefferies. Thanks for taking my questions. So, I kind of want to unpack one of the comments you made, Shabtai, about the growth expectations, right. I know the formal guidance, but your view was that you guys should do better than that.

And I bring it up because I just -- if I think about last year, the initial guidance for 2021 was I think, like $240 million $250 million. And you guys are kind of squarely at the high-end of that initial range.

So maybe what gives you the confidence that you guys can outperform kind of the initial guidance set today versus when you think about your guidance last year, historically when you've guided.

Just is there any -- is there a change in the guidance framework? Maybe just help us understand what underpins it?.

Actually -- yes, thank you Samad. Yes, actually, I think I gave you a hint and let me go and get into the details, okay? So, we were kind of [indiscernible] last year to see Microsoft's revenues growing 20% a year, right. However, we didn't always -- we mentioned always, the Teams is growing and then Skype for Business coming down.

But we have never talked about the interrelation between the two when you compute growth. But now Microsoft call -- let's talk about the fourth quarter. So, in the fourth quarter, Skype for Business got to some very low level of about $4 million and Teams got to about $32 million.

Now remember that Skype for Business, let's say, declined let's say quarter-over-quarter by 10%. 10% decline in $4 million is $400,000. On the other end, if Microsoft is growing -- sorry, if Teams is growing, say north of 20% quarter-over-quarter, you take now 32, you at 20% of that you get another 6.4.

So, all of a sudden, you'll find that while we have suffered from decline of Skype for Business in previous years, in 2022, even more going forward is not going to overlay or overhang [ph] or impact growth at Microsoft.

So actually, I can tell you that if you do the math you will reach -- and assuming that growth will continue in Teams as we continue to invest in it, we will see growth in Microsoft, that's also 30%. So that gives you some flavor as to why we are more optimistic about the ability to reach those revenue levels and beyond..

Got you. And then just maybe one last question for me.

When you think about the growth versus investment philosophy, I think you definitely touched on it on the call, but how should we think about -- actually think about it kind of like, what's the -- I know you gave guidance, but what is the end goal growth level that you're trying to drive for? Is it to sustain in this low teens? Is it with the OpEx investments meant to get you to a range that's closer to 20%? I guess I'm just trying to understand how we think about the reinvestment philosophy, especially given the EPS guidance for 2022 to the growth level that you're actually trying to get to that's a durable growth level..

Right, thanks. Yes, if you take a step backwards, right, and you'll take a higher-level perspective over several years, right, starting from, let's say, 2020 and looking into 2025. Up to 2020, we have been very cautious with growing our OpEx. So just to give you an idea, in 2020, our OpEx grew only about 3.5% over the previous year.

however, as planned in 2021, we have invested heavily and actually we grew OpEx in '21 14.6%. And in our plan, we are planning not less of an effort in 2022. So, just think about a huge investment that we will be applying, we've applied half of it already in '21. We'll be doing that as well in '22.

But you will see according to our internal business model, we predict that we'll keep revenues growing at least 50% and above organic. We should be growing given 16 and 17, but we need to be well into the year to be more confident about that.

But even more you will see the net income line all of a sudden leaping from '23 and beyond, because at some point there will be no more in need to invest that much. So, it's major investment than in '21, '22. Now the result of it would be, revenue growth 15%, 70% annual organic and beyond. And then obviously improved net income line..

Great. Thank you so much. I'll pass it on to the next analyst. Appreciate it..

Thank you..

Your next question is coming from Ryan Koontz. Please announce your affiliation, then pose your question..

Sure. I'm with Needham & Company. Obviously, the Teams ecosystem really gaining momentum here globally. I wonder if you could share any color you have on different segments where you are seeing they're having success.

Is it primarily in U.S where the core of their business is coming from and how they're doing outside the U.S and moving down market? I know you mentioned that the new SMB offering, but any color you can offer on kind of how Teams is faring across different market segments, would be really helpful. Thank you..

Right. Thank you, Ryan. Again, Ryan, I don't think does any specific vertical that shines out. But definitely, as you have mentioned, U.S is substantially leading in deployment of Teams more in Western countries such as the U.K., Germany and few more countries, Canada, France, etcetera, the Scandinavian. So, it's still in the infancy.

Again, if I relate to the Piper Sandler report, a very small portion has been deployed so far. So, a lot of things to come. But then again, the western world is leading by far..

Okay, that's super helpful. And I get one quick follow-up, I could. Any call you have on deal size in terms of seats.

Are you seeing very, very large enterprises start to opt more into the UCaaS offerings now, or are we still kind of in the smaller enterprise and mid-market that's the fast adopters today?.

No, Teams is by far deploying in the S&P in a major way. I think we are deployed in close to, I think we have heard Teams deployed in over 90% of the S&P 100. So, the focus is really on large enterprises and lately on mid-market. It's only now that they're starting to try to attract to the smaller businesses, but that that's where the focus is..

Super helpful. Thanks a lot..

Sure..

Your next question is coming from Tal Liani. Please announce your affiliation, then pose your question..

Hi, Shabtai and Niran. This is Tal from Bank of America. I have two questions. First one, it's on the margins. Your R&D and G&A went up 15% and 20%. So, your EPS is going down, while your revenues are going up.

What's the outlook? Can you explain? What are you investing in? What are the projects and then what's the outlook for expenses? And the second thing is I wanted to also ask you about the margins.

Any impact of, I think you touched on it when you spoke about gross margin, but any impact of supply constraints, any impact on your ability to deliver at least on the legacy side, and what's the status of you getting enough components? Thanks..

Yes, hi, Tal. So indeed, OpEx on an annual basis increased 14% year-over-year. If we split it between R&D sales and marketing and G&A, R&D was 13%, sales and marketing 17% and G&A 6.8%.

So, all in all, we are planning to, as Shabtai mentioned, we are planning to invest more in OpEx to support our revenue growth mainly in the area of sales and marketing and customer service. So that's with regards to the OpEx.

With regards to the gross margin, as I mentioned, we are -- as you know, everybody is suffering from the supply chain disruptions. Specifically for this quarter, we had an impact of about 100 basis points since we had to buy some components at the open market at higher cost.

While we expect a similar gross margin impact at the first quarter of 2022, we do believe this is a temporary issue..

Got it.

So, going back to your first answer about expenses, is it the one-time phenomenon that your expenses are going up or it's going to stabilize after or do you envision that margins -- operating margins keep coming down next year?.

No, for 2022, we are planning to increase OpEx. And that's why our guidance for the EPS, the midpoint of that was flat and by that if we jump to 2023, we will definitely need to invest less in terms of growth year-over-year than we add this year and in 2022..

Got it. Great, thank you..

You're welcome..

There are no further questions in queue..

Thank you, operator. We would like to thank everyone who attended our conference call today. We continued good business momentum and accelerate growth in 2021 and strong underlying market trends in our industry. We believe we are on track to another year of growth in 2022. We look forward to your participation in our next quarterly conference call.

Thank you very much. Have a nice day. Bye-bye..

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation..