Good day, ladies and gentlemen and welcome to AudioCodes' First Quarter 2022 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. [Operator Instructions] It is now my pleasure to turn the floor over to your host Roger Chuchen. 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 and Dmitry Netis, Chief Strategy Officer and Head of Corporate Development.

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 on AudioCodes and its customers' products and marketing, timely product and technology developments, 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' 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 and 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. Good afternoon, everybody. I would like to welcome all to our first quarter 2022 conference call. With me this morning are Niran Baruch, Chief Financial Officer and Vice President of Finance and Dmitry Netis, Chief Strategy Officer, and Head of Corporate Development.

Niran will start off by presenting a financial overview of the quarter. I will then review the business highlights together with Dmitry and provide a 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?.

Thank you, Shabtai and hello everyone. As usual, on today's call, we will be referring to both GAAP and non-GAAP financial results. The earnings press release that we issued earlier this morning contains a reconciliation of the supplemental non-GAAP financial information that I will be discussing on this call.

Revenues for the first quarter were $66.4 million, an increase of 12.8%, of the $58.8 million reported in the first quarter of last year. Services revenues for the first quarter were $27.5 million up 26.2% over the year-ago period. Services revenues in the first quarter accounted for 41.5% of total revenues.

The amount of deferred revenues as of March 31 2022 was $76.8 million, up from $71.6 million as of March 31 2021. Revenues by geographical region for the quarter were split as follows, North America 48%, EMEA 34%, Asia-Pacific 14% and Central and Latin America 4%.

Our top 15 customers represented an aggregate of 60% of our revenues in the first quarter of which 48% was attributed to our 12 largest distributors. GAAP results are as follows, gross margin for the quarter was 66.9% compared to 68.4% in Q1 2021.

Operating income for the first quarter was $8.1 million or 12.1% of revenues compared to $10.1 million or 17.2% of revenues in Q1 2021. Net income for the quarter was $8.6 million or $0.26 per diluted share compared to $10 million or $0.29 per diluted share for Q1 2021. Non-GAAP results are as follows.

Non-GAAP gross margin for the quarter was 67.2% compared to 68.7% in Q1 2021. Non-GAAP operating income for the first quarter was $11.9 million or 18% of revenues, compared to $13.2 million or 22.4% of revenues in Q1 2021.

Non-GAAP net income for the first quarter was $11.2 million or $0.33 per diluted share, compared to $12.7 million or $0.37 per diluted share in Q1 2021. At the end of March 2022, cash, cash equivalents, bank deposits, marketable securities and financial investments totaled $144.1 million.

Net cash provided by operating activities was $0.9 million for the first quarter of 2022. Days sales outstanding as of March 31 2022 were 69 days. During the quarter, we acquired 720,000 of our ordinary shares for total configuration of approximately $20.9 million. We reiterate our guidance for 2022 as follows.

We expect revenues in the range of $277 million to $285 million and non-GAAP diluted net income per share of $1.40 to $1.60. I will now turn the call back over to Shabtai..

Thank you, Niran. Before we dive into the first quarter results, I'd like to inform you that way of preparing and placed a brief presentation on the quarter update to aid in our discussion today. Please refer to the Investor Relations section on our website. We're pleased to report solid top line results for the quarter, growing 12.8% year-over-year.

Revenue acceleration this quarter was mainly driven by ongoing strength in our Enterprise business, which grew over 15% year-over-year and accounted for roughly 85% of our revenues. Service revenues grew above 25% year-over-year and accounted for an all-time record of 41.5% of the total company revenue.

This is a proof of executing on our strategic priority by successfully transforming to Cloud services and recurring revenue model with AudioCodes Live Managed Services. The core of this success was our Unified Communication and Collaboration business, which grew over 20% year-over-year.

Unified Communication and Collaboration makes up roughly 85% of Enterprise business. Making up the majority of UCC, our Microsoft business grew above 25% year-over-year, representing an acceleration in growth from approximately 20% in '21.

Within that mix, Microsoft Teams grow over 50% year-over-year, as projected by several sources, including an industry research firm Wainhouse Research and analyst notes from Piper Sandler, Microsoft Teams voices are anticipated to grow at roughly 35% to 40% compound annual growth rate throughout 2025 which supports our confidence in multi-year runway for our Teams business.

Wrapping up discussion of UCC business, our Zoom Phone business also had an exceptional quarter, reaching all-time records and up 50% year-over-year. Shifting gears to the Customer Experience segment, which accounts for the remaining 15% of the enterprise business. Customer experience declined 8.5% on a year-over-year basis.

Owing to tough comparison from Russia business generating first quarter '21 X-Russian business, our CX segment would have been up roughly 10%. We continue to see great progress with our Conversational AI business, where total contract value signed during the core grew around 40% year-over-year.

We are well positioned to grow 50% in our conversational AI portfolio in 2022 compared to the previous year. We're glad to report that the acquisition of Callverso at the end of 2021 started to bear fruit with substantial increase in new opportunities for intelligent virtual agents solution for the contact center application.

Importantly, AudioCodes Live our managed services offering for UCC, CX and Conversational AI segments continue to see strong momentum. We exited the month of March $20 million ARR run rate and we expect our AudioCodes Live managed services to double again in 2022 to over $30 million from over $15 million in 2021.

Our pipeline continues to expand across core areas of business supported by long-term secular trends of migration of voice infrastructure to the cloud, hybrid work, and enhanced customer engagement and experience solution [indiscernible]. Shifting to margins. Our non-GAAP gross margin came at 67.2% versus 68.7% in the year ago quarter.

Owing to the $1.4 million higher costs associated in the quarter with the procurement of components in the open market. Excluding this cost, our non-GAAP gross margin would have been at $69.3 million. Non-GAAP OpEx increased 20% year-over-year, mainly due to three factors.

One the increase in headcount of 132 positions or up 17% and related budget and salaries on a year-over-year basis, all that done in order to support a growing business needs and expansion. Rising salaries in the R&D space in Israel is the second driver for higher costs and salaries.

So higher and rising salaries in the R&D space, where the booming local high tech industry drives shortage in skilled manpower and therefore drives higher salaries. And lastly, the impact of much lower NIS U.S. dollars exchange rate as compared to the first quarter '21 rates, which was probably hatched.

Non-GAAP operating margin was 18% versus 22.4 in the year ago quarter, which was impacted by higher component costs, increased hiring activity and less favorable edged new Israeli shekel, U.S. dollars rates. Excluding the higher component cost, the non-GAAP operating margin would have been at 21% in the core.

On the heels of this development, our non-GAAP earnings per share came in at $0.33 in line with our internal budget. This compares to $0.37 in the first quarter of 2021. Getting back to the guidance provided earlier this year.

We are raising our 2022 revenue guidance of $277 million to $285 million and non-GAAP EPS of $140 million to $160 million based on strong business fundamentals in our ability to navigate the supply chain issues.

That said there's no change to our long-term financial targets, which remain in the range of 13% to 15% long-term goal on the revenue growth about 67% to 70% on a non-GAAP gross margin, OpEx percentage of revenues within the range of 47% to 50%. And then non-GAAP operating margin between 20% to 23%.

I would like now to hand over the call to Dmitry Netis, our Chief Strategy Officer to give a brief overview of our strategic focus areas, after which I will provide more disclosure of different business lines.

Dmitry?.

Thank you, Shabtai, and hello everyone.

Since I joined the team in January, we have undertaken a deep dive into fine tuning of strategy to ensure that we have optimal plan in place to capitalize on the strong multi-year secular growth opportunities in our core market, which is mainly an enterprise market, and accounts for roughly 85% of our total revenue.

The remainder 15% is the service provider CPE segment comprising our hardware platforms. In terms of the enterprise business AudioCodes is the leading provider of voice services serving customers in two primary markets. Unified Communications and Collaboration Service, UCC, and Customer Experience Contact Centers, which we refer to as CX.

Voice remains a top interaction channel in digital transformation and will remain at such for a very long time. Voice is a high impact, high value channel mission critical to companies serving their customers and their employees.

We're seeing the next stage of evolution of voice not just in a traditional sense of telephony, but also in the non-telephony world, such as meeting assistants, IVAs, conversational AI, call recording, and even metaverse in the future. It is increasingly hosted in the cloud and consumed as a service, as in the case for instance, with Microsoft Teams.

The addressable market for voice services is expected to reach $72 billion TAM by 2025, comprised of UCC and CX, both of which are undergoing to shift to the cloud. Our approach here is simple, to be the most interoperable communications, platform as a service when it comes to voice services.

We focus strictly on the enterprise segment where 65 of fortune 100 multinational companies of customers of AudioCodes. And we believe this segment will ultimately drive the long tail of our CPaaS.

Our voice CPaaS platform incorporates a cloud native architecture of our session border controller or SBC, WebRTC gateways, and our voice CI Connect platform, powered by our IR call flow API's and enhanced by a voice quality monitoring, analytics, and orchestration tools.

On top of this voice platform, we offer meeting room solutions end-user devices in our AudioCodes Live subscription services that enable a one stop shop marketplace for our enterprise customers. This is what Microsoft and increasingly zoom customers value most.

This voice platform makes up the vast majority of our total enterprise revenues today split between the UCC and CX. Additionally, we offer a portfolio of productivity enhancing, software and conversational AI applications, which include our intelligent virtual agents called VICA from our Callverso acquisition.

This is an exciting market that recently Gartner and its piece called Contact Center Conversational AI and virtual assistant estimates to grow from $332 million to $13.9 billion by 2026. That's a 72% CAGR. Conversational AI market as a future -- is a future growth engine of AudioCodes.

And we're developing a number of new applications here, including conversational IVR for customer service called Voca. And our leading intelligence solutions, SmartTAP and meeting insights.

AudioCodes is a unique asset built on product lead engineering organization with a strong technology superiority in voice related services, keep strategic partnerships and a one stop shop approach. With that, let me now update you on the key pillars of our strategy. Our mission here is threefold.

First, we expand our voice platform and upsell Conversational AI apps into the UCC vertical by partnering with Microsoft Teams and zoom phone. Second, we expand our voice platform and upsell Conversational AI apps into customer experience vertical in partnership with Microsoft, Genesis, and other contact center and CRM platforms.

And third, we accelerate our transition to subscription services via AudioCodes Live for our customers. This move to manage services shifts the burden of managing complex voice infrastructure to us, freeing up resources of IT departments, to focus on more value enhancing initiatives of our customers.

As for AudioCodes, the economics here are quite equally compelling. Over the life of a typical 36 months managed services contract, we derive over 2x the economic value under recurring services versus a historical CapEx model.

Wrapping up this discussion, we're looking to execute on the aforementioned land and expand strategy by leveraging our strong voice CPaaS powered by our market leading cloud native session border controllers, call flow API's and management and orchestration tools.

Our past stellar performance has been recognized by Omdia, which ranked AudioCodes just this quarter as the number one enterprise SBC in the whole entire year of 2021 with 18.18% market share bypassing for the first time on the annual basis competitors, such as Oracle, Cisco, and Ribbon.

We're proud of this achievement, going from roughly 10% market share to nearly 20% in just three years. Our excellent execution track record, technology superiority and innovation engine give us confidence as we write the next chapter of our growth.

Lastly, consistent with the strategy we just outlined, we will also look to accelerate our organic growth via potential M&A opportunities. I will now hand the call back to Shabtai to discuss details of individual business lines.

Shabtai?.

Thank you, Dmitry. As discussed previously, Microsoft business grew above 25% year-over-year, representing an acceleration in growth from approximately 20% in 2021. We're pleased to see that the pickup in growth for Microsoft created opportunity to discuss on the last quarter translated into higher business growth this quarter.

Specifically, Microsoft Teams business grew above 50% year-over-year in the first quarter. Teams accounts additions in the quarter were 260 versus 206 in the year-ago quarter, the highest on record, which speaks to the accelerating adoption of Teams as the UCC platform in our market leadership in segments.

Importantly, Microsoft created opportunity continues to grow at a healthy rate. In the first quarter of '22, new opportunities, new Teams opportunities created, grew 51% year-over-year compared to 2021. Now let's talk through a couple of Microsoft important wins in the quarter.

The first one, we're working with the Tier 1 service provider, we have signed a 78 month contract as a global freight transport company selling articles live services for $5 million total contract value.

The deal calls for migration of 30,000 users to Microsoft Teams Voice, we want the engagement on the simplicity and broad capabilities of our solution versus those of our competitors underscoring the strong competitive position we enjoy in our market.

Second win, we are working with the large system integrator, and signed a contract with a multinational test care medical device company, enabling migration to Microsoft Teams from Cisco and Avaya by providing articles live minutes of this to 3,000 seats in the U.S. plus IP phone sales in the first phase of the deployment.

Discussion are ongoing that could take total deployment to over 50,000 seats globally worth several millions in total contract value. Now after reviewing these two deals, let's dive into the AudioCodes Live or as we call it, Teams Voice-as-a-Service.

Just to remind everybody since inception in mid-2019, Live Teams ended 2020 at about $7 million ARR as more than doubled in 2021 to reach above $15 million ARR and in 2022 as discussed earlier, we plan to double it again to above $30 million.

The background for this growth is obvious, based on growth demonstrated in the UCaaS market in the past 12 months, it is obvious that Microsoft Teams is the leading solution for large enterprises in North America and worldwide.

According to a recent Piper Sandler analyst report from October 2021, introducing a UCaaS market model for the next five years, Teams sits compound aggregate growth rate in coming years is about 34% quite steep growth that should support continued growth of our Teams Live Services.

This reports estimates about 4.2 million Teams seats for 2021, 8.1 million seats for '22 and 31.5 million for 2026.

AudioCodes Live success stems from the fact that it removes complexity from the process of integration with legacy enterprise telephony and provides a seamless, rapid and cost effective migration for Teams communication collaboration for enterprises.

AudioCodes Live provides among other things, a solution for that route as we see devices, network can use management product, and a complete set of automations of which are delivered on a recurring per user per month model. Now referring to some of the Live product announcements made in the first quarter.

Since the launch of our flagship, AudioCodes Live Teams, Direct Route managed service nearly two years ago, Direct Route is Microsoft terminology for bringing on career service. A strategic priority is to provide partners and end customers with flexibility in choosing the Teams Voice deployment options that best suits their needs.

To that end, we recently announced AudioCodes Live Express, which is a self service SaaS offering, offset on AudioCodes Azure Cloud for resellers, VARs and managed service providers looking to seamlessly and efficiently provision Microsoft Teams for services.

The beauty of this service is quick onboarding, and provisioning which can occur in minutes and is handled entirely in AudioCodes Cloud. We also recently extended capabilities of Live Cloud Managed Service, which simplify onboarding of Teams business customers or service providers offsetting the service provider cloud.

This service is also known as Microsoft Operator Connect.

Microsoft Operator Connect provides end users an alternative to procure Teams Voice from Select carrier partners directly through the Teams Admin Portal, Calls is the first publicly disclosed carrier using AudioCodes to offer this service on Microsoft Operator Connect, to-date there are roughly 25 partners on Microsoft Operator Connect and AudioCodes is working with many of them.

Just last week, we announced that AudioCodes has been named by Microsoft and Operator Connect Accelerator partner.

This is a new direction for Microsoft to enable 10s of additional to our managed service providers to offer voice service or Operator Connect with no infrastructure investments required and without the need to maintain ongoing API integration directly with Microsoft.

So, we have a vast array of different Live services offering, let me distill the primary differences between the different offering. So a flagship is Live Teams which targets enterprises and which enabled Teams via Direct Route.

This solution is sold to resellers and system integrators, the target are historical medium to large customer, usually we are talking about seat count of between 3,000 and 30,000 that often have a very complex telephony system environment and require customization. Second offering is Live Cloud, which is a white label SaaS platform.

It is sold to service provider to enable them to provide small to medium sized customers. And then lastly, Live Express which again is AudioCodes branded SaaS platform that enables resellers with no telephony experience to quickly onboard customers.

As discussed so far, Live basically targets the enterprise and this is where we derive for managed services today. Live Cloud and Live Express represents new Greenfield opportunities for us targeting small to medium customers likely fear office location and less complexity.

Now, let me shifting gears to Zoom Phone, I would like to discuss an emerging fast growing operational momentum at Zoom Phone was still a small percentage of overall business. Zoom Phone activity in the quarter sets another record and was growing more than 50% year-over-year.

Zoom has publicly discussed the strategic importance of upselling its core meeting customers with Zoom Phone. In the January 2022 quarter, Zoom added around 550,000 Zoom Phone sets up from zero 3.5 years ago, Zoom Phone launched in U.S., Canada in January 2019.

As the foremost Voice expert with the most comprehensive voice solution in the market, AudioCodes is uniquely positioned to benefit from this long-term upsell tailwinds. We are stepping up our investments in marketing activities around the Zoom platform and look forward to announcing new product launches on Zoom ecosystem in the coming months.

Following the revenue growth in the first quarter '22, we also know that we have seen a record in new opportunities created, so in the first quarter 2022, Zoom Phone new opportunities grew more than 50% year-over-year.

Now let me wrap up my discussion with Conversational AI segment which grew 40% year-over-year, and is expected to grow 50%, above 50% in 2022.

This segment consists of five applications, SmartTAP or compliance-recording solution, meeting insights or meeting productivity service, Voca or conversational IVR, Solution voice AI Connect platform that transforms chatbots into voice bots and VICA, our intelligent virtual agent solution.

Let me highlight our intelligent virtual agent solution, the one we acquired from Callverso, which has been a driver of strong momentum in the first quarter.

As proof of strength and scalability for IVA solution, I would like to discuss a large customer in the medical space, Clalit, which is Israel's largest medical services provider serving over 4.7 million people with or IVA deployed at the company's contact center in 1,600 of its clinics.

Let me provide some data points that indicates a strong and successful IVA service, Clalit. We are talking here about the following metrics, VICA, the IVA handles daily more than 80,000 calls a day and up to 120,000 calls a day on peak call volume, that has resulted in roughly replacing 200 fewer human agents.

And then all that saving was translated into a cost saving of about 100 million new Israeli shekel or about $30 million. Following our success in the Israeli market with VIC virtual agent, we have planned to start addressing the global market in the second half of 2022.

An other area of strength within the conversation AI portfolio is the Voice AI Connect product, which parse voice interactions for the growing market of chatbots, continue to win more chatbot applications with the leading worldwide partners. We believe we are on track to more than triple ARR in 2022 compared to '21.

As such, we strongly believe that Conversational AI can develop into a new meaningful growth engine to fuel our growth going forward. This pretty much concludes my prepared remarks. I'd like to point out that in view of the strong growth anticipated for the UCC markets we serve.

Our top leading position is leading voice partners to the leading vendors and investments done and continued to be done to keep our momentum in the space. We are confident and optimistic as ever, about the strategic vision.

Our strategic vision and strong competitive foundation that we've built to capitalize on the multi-year secular growth opportunities in our core enterprise market, and subscription services. I'll stop here. And now we will turn the floor back to the operator for the Q&A session.

Operator?.

It's Greg Burns from Sidoti and Company. First, you had mentioned some impact from Russia. I didn't catch if you put an exact number behind it.

But what was the exact impact from Russia on the business in the quarter?.

Yes, we refer to existing business mainly in the CX market, where a large deal was deleted. So revenues compared to the first quarter of '21 were roughly very low. We do not anticipate any new opportunities for developing the Russian market in the coming future..

Okay. And Dmitry was talking about cross-selling opportunities. Can you just talk about what, what the tax rates currently are maybe with some of your applications into the Microsoft ecosystem? And how you see that developing over time? Thank you..

Yes, well, Dmitry defined our strategy of land and expand. So as we see that cloud is the must needed solution in the Microsoft Teams if you want to connect and use voice with the outside world. Now, we do have today probably the leading the best solution in the enterprise space. Once we are able to penetrate and account with that service.

We are offering within our managed services, more services attached to it. Those could be cell phones, meeting room services, call recording services solutions and others.

So all in all we take advantage of the fact that we have growth access to the Teams customer base that allows us to win with one area application and our service and then add on top of it more services..

But maybe just to understand where you're currently at versus what the goal is here.

What is the typical like attach rate for applications on top of the core Microsoft direct route offering?.

Right. So right now we have no statistics here with me to answer that. I'll mention just that. There's definitely an interest. Give you one or actually two areas, okay.

I think we need to realize TMC is the new PBX to win the world, right? We're coming from a world where there's been a lot of other PBX manufacturers such as Cisco, Avaya, Nortel, Lucent and others. And all that gear is going to migrate now and in the future to Teams.

Now every PBX has got auxiliary services, right? Take IVR services take recording compliance recording services. So if you add a PBX, let's say an Avaya PBX, and you needed to provide IVR solutions to your customers. Once you move to Teams, you need to establish a new IVR solution or a new compliance recording solution. So that's exactly what we do.

We have developed a very advanced IVR conversational, IVR solution. We have a very advanced compliance recording solution called SmartTAP. And in the past six, nine months, we've seen a rising number of Teams users who now on top of the die crowd and I want to use the IVR and/or the compliance recording. Hopefully that answer your question..

It does. Thank you..

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

Hey, it's Jack McGuire on for Ryan on Barclays. Thanks for taking the question. So on the two large live deals in the quarter, any color on how AudioCodes has brought into these deals? And is there any specifics around the pipeline for these kinds of deals now just going forward? Thanks..

Sure. So usually with our life services, we usually work directly in the mid-market through usually a set of local partners, Microsoft partners. When you go to large deals, such as those that I've mentioned here, the one that has to do with the health care, or the one with the freight transport services. Those are huge companies.

The go-to-market is usually true global system integrators. So in both cases, we have worked our way into the accounts to those partners..

Great, thanks. And then one more quick one any more specifics around how Callverso has been performing? And any key plans for the acquisition as you take it global on the second half? Thanks..

So again, we have -- I've been mentioned the number, but we've seen huge growth in the number of new opportunities for a virtual agent solutions. We are working right now in these really market, very strong on the medical, vertical, on the financial one, large utilities.

We are working in 2022 support that technology into a multi-tenant cloud based solution that we can deploy on a global basis. So it's work in progress. I assume, will probably launch it within the next six to nine months..

Thanks so much..

Sure..

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

Sure, it's Ryan Koontz with Needham. Congrats on nice Microsoft numbers. Great to hear that. Well if you could expand a little bit on the decline in contact center customer experience. Was that primarily attributable to Russia? Or was it something else going on there with your different partners you work with in contact center? Thanks..

Okay. Yes. So actually, the decline is tied up to few failures. So I'll name three of them. One is, as I've mentioned before the Russian market. The second one is to do with the delayed big above $1 million opportunity delay in the finance sector. Then we do see some of the players in the CX market.

I think there are name some of them are losing market share. So we had some decline. And lastly, obviously, we had some business with some large contact center player who is moving its business to the cloud, that has caused also some loss. But all in all, the space is fairly vivid, and then we do expect to recover from that declines score..

Right. Great. Thanks for that color..

Sure..

And on the gross margin headwind, does that primarily on IP phones there or your cloud appliances?.

No, not really. IP phone is fairly okay. Actually, it's other components, which are hard to outsource in the open market. Therefore, we try to get them through other we chose, and but that's not the phones. It's more the CPE gear, the service providers that we are..

Got it. Okay. That's all I have. Thanks so much..

Sure..

Your next question is coming from [indiscernible]. Please announce your affiliation, then pose your question..

Hey, guys, this is [indiscernible] from Jefferies. I work with Samad Samana.

Another quick one on margins, actually, how should we think about the shape of margin throughout the rest of the year? Do you have any visibility into how these costs are looking into Q2?.

Yes, with regard to the gross margin, procurement cost of components in the open market continue to accelerate in the first quarter. The component purchases in the open market at higher than expected cost in the first quarter of 2022 is expected to have residual impact on the second quarter as well.

Though at magnitudes that's less than first quarter, while we expect supply chain cost to remain temporary elevated for the rest of 2022, relative to 2021. We believe our supply chain situation should stabilize by the end of the year..

Got it. Thanks. And one more for me. How should we -- do you have any color on kind of Teams across GEOs, how it's performing? Is this still primarily driven by the Americas are? Can you provide any color there..

Sure, okay. All in all, we definitely see Teams continuing to grow actually, it's the -- my long-term basis of the numbers at quarters were like 4 million last year, 8 million this year. So yes, it's not going to stop. We do see more contingencies created, and I think we have a winning position in the market..

Got it. Thanks, guys. Congrats on the quarter..

Sure..

Your next question for today is coming from Tal Liani. Please announce your affiliation. Then pose your question..

Hi, its Madeline Brooks on for Tal Liani at Bank of America. Just want to dive a little bit more into the supply chain issues around the components. Last quarter I know this had been a concern as well. However it appears to be over emphasized this quarter, especially when I look at the supplementary slides.

I'm just wondering if this quarter with the magnitude of the component shortage greater than expected?.

Yes, actually, we see the trend continue also in the second quarter. So we believe it should be stabilized by the end of the year..

Okay, great. Thank you. That's it for me..

Sorry, this is Tal. I'm going to jump in. When you say stabilize does it -- is it going to worsen in the second half or is it -- I'm just asking you about the impact on gross margins and margins in general..

Yes, as you know, we believe that the second half will be better in terms of gross margin, if we compared to the first quarter of 2022, which was the lower side of our range..

And is the improvement because of supply chain or the improvement is because of other things like currency or anything else?.

We are one month ahead in the quarter and we see better both in supply chain and also in prices. So we need to buy less in the open market, less components..

Got it. Thanks..

There are no further questions in queue. I would like to turn the floor back over to Shabtai for any closing comments..

Okay, thank you operator. I would like to thank everyone who attended our conference call today. With continued good business momentum in 2022 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..

Thank you ladies and gentlemen. This does conclude today's conference call..