Q4 2020 AudioCodes Ltd Earnings Call
[music].
Ladies and gentlemen, thank you for standing by our conference will begin shortly.
Once again, thank you for standing by our conference will begin shortly.
[music].
Greetings and welcome to audio coach fourth quarter and year end 2020 earnings conference call.
At this time all participants are in a listen only mode.
And answer session will follow the formal presentation.
What you require operator assistance during the conference. Please press star zero on your telephone keypad.
It is now my pleasure to introduce Brett Maas from Hayden IR. Thank you Bret you may begin.
Thank you hosting the call today are Shanghai adds Lindbergh, President and Chief Executive Officer, neuron Baruch, Vice President Finance and Chief Financial Officer before we begin I'd like to remind you that information provided during this call may contain forward looking statements related to audio codes business outlook future economic performance product introductions.
Plans and objectives related there too any statements, assuming assumptions made or expectations as to 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 audio codes 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 audio codes and its customers products and markets timing of products.
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 audio close to successfully integrate the products and operations of acquired companies into audio codes business possible adverse.
Packed from COVID-19, pandemic on our business and the results of operations and other factors detailed I didn't go as far as the U S Securities and Exchange Commission <unk> assumes no obligation to update this information. In addition, during the call audio because we refer to non-GAAP net income and net income per share value.
<unk> 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 was posted on the website 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 website at the conclusion of this call with that said that likes to look for.
<unk> share type. Please go ahead.
Thank you Brett good.
Good morning, and good afternoon, everybody I would like to welcome all for our fourth quarter 2020 conference call.
With me. This morning is neuron Bull Chief Financial Officer.
<unk> president to find out so for the codes.
Iran would start off by presenting a financial overview for the quarter.
I will then review the business highlights and summary for the core and then discuss trends and developments in our business in the industry.
He will then turn it into the Q&A session neuron.
Thank you shop, there and Hello, everyone.
Usual on today's call, we will be referring to both GAAP and non-GAAP financial result.
Earnings press release debt, we issued earlier. This morning contains a reconciliation of supplemental non-GAAP financial information that I will be discussing on this call.
Revenues for the fourth growth there well $58 7 million an increase of 11, 1% over the 52.8 million reported in the fourth quarter of last year.
Full year 'twenty 'twenty revenues were 228 million an increase of 10, 2% over the $200 3 million reported in 2019.
Services revenues for the fourth quarter, well 21 billion up 19, 9% over the year ago period.
So services revenues in the fourth quarter accounting for 35.8 per cent of total revenues.
On an annual basis services revenues increased by 16, 7% compared to the previous year.
The amount of deferred revenues as of December 31st 2020 was $69 2 million up from $62 2 million as of December 31, 2019.
Revenues by geographical region for the quarter with fleet is for those North America, 14% EMEA.
EMEA <unk> 35 per cent Asia Pacific, 19% in Central and Latin America six per cent.
Our top 15 customers represented an aggregate of 63 per cent of our revenues in the fourth quarter of which 49% was attributed to our 10 largest distributors.
GAAP results are as follows gross margin for the quarter was 71.4 per cent.
Operating income for the fourth quarter was $12 1 million compared to an operating loss of 26 million in Q4 2019.
Full year 'twenty 'twenty operating income was $38 4 million compared to operating loss of $9 6 million in 2019.
Net income for the quarter was $8 4 million or 24 cents per diluted share.
Compared to.
For a net loss of $8 2 million or 28 cents per diluted share for Q4 2019.
Full year 2020, net income was $27 2 million or 83 cents per diluted share compared to 4 million or 13 cents per diluted shares in 2019.
I would like to remind you that GAAP results for the fourth quarter and full year of 2019 were impacted by day expense of $32 2 million, we recognized in connection with the royalty buyout agreement.
Hey.
Non-GAAP results are as follows.
Non-GAAP gross margin for the quarter was 771 five per cent compared to $65 20 per cent in Q4 2019.
Non-GAAP quarterly operating income was $15 4 million or 26, 2% of revenues compared to operating income of $8 3 million in Q4 2019.
An increase of 86, 2%.
Full year 'twenty 'twenty non-GAAP operating income was 47 5 million compared to operating income of $28 2 million in 2019.
Non-GAAP quarterly net income was $15 2 million or <unk> 44 cents per diluted share compared to $8 1 million or <unk> 26 cents per diluted shares share in Q4 2019.
Full year 'twenty 'twenty non-GAAP net income was $46 7 million or $1.41 per diluted share comp.
Compared to 27.8 million or 80 cents per diluted share.
In 2019.
At the end of December 2020, cash cash equivalents bank deposits and marketable securities totaled $186 3 million.
Net cash provided by operating activities was $10 1 million for the fourth quarter of 'twenty, 'twenty and $38 5 million for 'twenty 'twenty.
Net cash provided by operating activities in both periods were impacted by debt 11, 6 million payment made in December 'twenty, 'twenty, which was the second installment pursuant to the royalty buyout agreement.
Day sales outstanding as of December 30 for 'twenty or 'twenty were 54 days.
On January 'twenty 'twenty, one we received court approval in Israel to purchase up to an aggregate amount of $30 million.
For additional ordinary shares.
The court approval also permits us to declare a dividend of any part of this amount.
The approval is valid through July 19, 2021.
We continue to expect topline revenue growth and operating margin expansion in 'twenty and 'twenty one.
For the full 'twenty 'twenty one year. We currently expect revenues in the range of 240 million to $250 million and non-GAAP diluted earnings per share.
$1 45 to $1.65.
I will now turn the call back over to shop day.
Thank you and Iran.
We are very pleased to report record financial results for the full score and the full year 2020, Let me talk first about several major milestones achieved throughout the core and the full year.
First and foremost is the strong financial performance, which neuron just provided the detailed description of it.
I'd like to stress some of the most important achievements, which are strong expansion of for gross margin operating margin and jump in net income a strong cash flow positive cash flow all other.
I'll discuss are for their own in the following.
Then each day evolution for enterprise business.
Now close to 80% of our business growing 17% year over year.
It is the resurgence of three new growth engines.
For 'twenty, 'twenty, one and going forward.
Namely Microsoft teams contact center and conversational AI.
All in the enterprise space heading into 'twenty 'twenty one.
Then it's the rapid transition for our solution and services.
To real time Cloud Communications March was achieved in 2020, we now invest full force and accelerate the investment in these areas driving the momentum into a more real time cloud communication solutions on top of days, we have substantially moved our focus in sales towards to recur.
<unk> revenue model as compared to the previous years, whereas the majority of sales was done it's cash.
Capex transaction.
To highlight this last point in March 'twenty, 'twenty, we have announced or are they cause the live initiative, which is a portfolio for professional and managed services designed to offer.
He called the voice expertise products and solution to enterprises via flexible subscription based managed service model. We have already made nice progress in the second half of 'twenty 'twenty.
And now see the momentum building GAAP into 'twenty 'twenty one.
Yeah.
Now let me touch on the achievements made on the financial front overall company top line revenue grew 10% about 10% year over year. However, once you break down the revenue into key segments.
Surprising service providers, one can easily see that the price made in 'twenty 'twenty in the enterprise space about 78 per cent of our business today with substantially higher and more impressive.
Enterprise business, consisting mainly of a unified communication Ucas and contact center grew 17% in 'twenty 'twenty and now provides for about 78% of your World Cup into revenue. We expect this annual growth rate to continue well into 2021 and beyond for.
Since I will dwell on shortly there for you know our updated long term financial model for next three years, we can clearly see that the company annual top line will step up to a range of 13% to 15% growth annually every year in two years from today.
You cast them contact center segments will drive this growth going forward. You guess is driven mainly by continued success in the Microsoft teams Space War annual revenue grew by over 300 per cent.
On a year over year and more than 30 per cent compared to the third quarter of 2020.
Additionally, we experienced higher than originally planned revenue coming from the contact center business, which grew over 15% in 2020 with the world adopting substantially more collaboration and work from home.
In the coming years for the new normal so to speak we anticipate similar such growth in 'twenty 'twenty, one and beyond.
Now, let me touch on the achievements made them.
For National front to provide a more complete picture of the revenue in 'twenty and 'twenty I'll just add debt, while we grew nicely on the enterprise we didn't do so well on the service provider front end technology, I'll say that we have experienced a decline in service provider as a business.
<unk>, which is now about 18% of business and which has declined for about 10% year over year.
And also continuing small decline in the technology business, which not provide for about 4% of business.
So 78 per cent of business grew 17% about 22% decline and that gives you the average of about 10% growth for the full year.
Providing more color on growth in different businesses business lines in 2020, yes.
He used to Sip business line growth about 20% year over year by.
By the way this would be the last time, we will report number so on UC Sip.
Very simply it's day syndicator band is growing so for base business line, such as the SBC management software and routing so for together with devices and hardware appliances, using the service provider space and in on Prem deployments.
These two last ones are bound to the continues to suffer from the ongoing pandemic and not essential to our business. We will drop the UCC proposed a it's not going to be a good indicator to indicate our business health, we will obviously, a tricky business true the divi.
Element in our Ucas and contact center and in conversational AI business.
Revenue related to your cash it's a whole grew close to 20% as well all in all we're talking about 140 million annually at the end of 'twenty 'twenty Rev.
Revenue related to sales of session border controllers SBC have jumped in the fourth quarter, bringing this business line very close to 100 million level for overall 2020 day.
That's a real jump the overall year, we sold above our 40 plus percent.
A cornerstone in our business going forward.
Service revenue grew about 20 per cent of the first quarter, a 16.7 annually.
Professional and managed services growing substantially faster in the mix. So that's for emphasis on our managed services professional services. Those are growing very fast actually on an annual level, we're talking about hum about 30% per year, which is a nice growth.
Now, let's talk about the growth engines, which is becoming key factor for 'twenty 'twenty, one success and beyond.
Entering 2020, Microsoft on Prem Skype for business was our main growing business. However, with the pandemic growing an impact throughout the first quarter two new key major trends evolve for the year collaboration and work from home. These two trends became essential to preserve book.
Continued T and workplace productivity in the enterprise World.
These trends drove its a result accelerated transition to rip them cloud communication and the introduction of a series of more new key technologies.
Debt, we have developed such a swipe or to see call automation processing intelligent assistance and virtual agents as such when you merge out of 2020 and add into 'twenty 'twenty, one with three new growth engines. The first and most visible one is the Microsoft teams, which became <unk>.
2020, the fastest growing business for us that's grown more than 300 per cent year over year and more than 30 per cent in the last quarter over the previous quarter net.
Next to it we saw accelerated growth of the activity in the contact center, where a series of disruptions in the space related to the transition to cloud supporting high quality communication for work from home agents over the open Internet and the increased need for call. It a mission and self service dry.
Our growth in this space.
Third engine is the conversational AI, which has become a top priority for many contact centers you need to quickly and efficiently respond and Andrew customer calls coming in in large masses. It's people, who are locked at home and providing a satisfactory customer experience.
No harm to our long term financial model.
We've mentioned before gross margin and operating margin of demonstrated as record levels. In 2020, we ended the year with gross margin for the fourth score at 71 five per cent and $26 two per cent for the operating margin.
By the way talking about gross margin you know we looked at into our annual performance and I'd like to draw your attention to the progress we made in the past five years, where gross margin step from about 60% for back in 2015 to $68 one per cent in 'twenty 'twenty. This is a reside.
So from the shift.
It makes it for revenues from our hardware appliances, more and more into software solution and services. So a very decent growth. We believe we will continue to grow in coming years. Hum. Obviously, you know the last quarter as I've mentioned, we did 71.
Defense operating margin. This is the second quarter in a row, where operating magic news well above the 20% level, which is kind of for a mark for us. So net net there could be for some under longer term financial model.
We believe that we will keep progressing with our enterprise business.
Growing above 16% for year, we believe that we will step up gradually.
In a mayor of for two to three years into our annual revenue growth of about 13% to 15%.
Overall for the company our gross margin we are at 68, we believe that our the range, we define 67 to 70.
Should be able to.
ROE beyond that at the end of this period.
We would obviously work out of a strategy and actually we are defining kind of fame modified strategy for 2021.
We see much more value in keeping operating above 20, but still along a big portion of it to be applied to growth and investment. So we will not try to achieve a 24, 25% operating margin and above we will end.
Debt opt for 20% plus and then investing the remaining into developing a new areas for us such as conversational AI and likes.
So let me go now into the specific business line or more and more interesting data.
Data points, let's first let's talk obviously on the Microsoft business.
In the fourth quarter, our overall revenues were close to $30 million.
This represents a growth of 18% year over year.
And close to 15% sequentially for.
For the full year are we so a nice inquiries of about 19% compared to 2019 combined.
Over Ah as we all know there was a big big shift in mix you know Microsoft revenues between the two different collaborations.
Our solutions entering into 2020, we entered with about $84 million for revenue of which about 70 million came from Skype for business only about 13 million came from teams.
That picture is substantially reversed in 2020, we're coming out with a team substantially on top tims has grown just to give you an idea as I've mentioned 300 per cent year over year I'm looking at 13 million in 2019, we should.
Look no into we've done about 55 million in 2020, so that that would be growth also I didnt mentioned debt in the fourth quarter. We kept growing sequentially grew more than 30 per cent Skype for business from the other rent declined the decline from a level of you know.
Do you ever think of an average of 17 18 million in the quarter. We ended up the last quarter with less than 10 million. So all in all a gradual decline I would say that the decline as I've mentioned in previous quarter as kind of a hum.
So we do expect continued decline, but obviously in terms of absolute you know millions of doors, our debt will be less in 'twenty 'twenty one.
Now, let's talk about new accounts. So are we definitely grew with a large number of new Microsoft teams accounts in 'twenty 'twenty I'm on a overall annual level I'll tell you debt. We have grown substantially we are growing more than 200 per cent from 2019 to <unk> 20.
20.
We have a we have seen the numbers I mean.
Roughly if you look on the fourth quarter I'll give you a data points year debt about you know one one third of the accounts, where our accounts migrating from Skype for business and about two thirds of the accounts.
Were actually new accounts, so all in all a very nice growth on teams and new accounts are I suppose the future. So we kept saying you know we have a very long runway ahead of us.
Microsoft You know 265.
You know is now with about 270 million claims was announced to have 115 million last October.
Confident would here in new numbers, it's Microsoft for Atlas is there a number it's today so.
So for we believe it's only about 10 per cent of the teams users have implemented voice very simply we know for a fact that as Microsoft tried to become you know are the dominant player in index market are the intention was puts really more into cash.
Operation Chats and meetings and and voice was not they are.
Requirement. So many organization could leave up with their old P. P. Ex it could be in other company P. B ex one of the previous manufacturers that are named Avaya named Cisco named Mitel any other so people could stay with their P. B act, but still get onboard with <unk>.
Ames using the corporation and meetings, we believe that as time goes by the benefit of using an integrated solution or coming from Microsoft will basically drive the migration of for those into Microsoft telephony solution as well so definitely a lot of potential.
Going forward.
We've heard that customers, who have standardized on Microsoft teams really not looking back the product is working well and has become an important part of their daily work and we've seen it in surveys that you know these days.
The enterprise you know surveys show that more than 50 per cent already selected Microsoft teams over other players and actually that number is expected to grow in about two to three.
Three days from E. Three years from today to about 60%.
Oh more on the Microsoft business so.
Yeah.
We have launched sbcs for service on Azure, a few months ago.
It is available in Microsoft marketplace in North America will soon be available in other regions as well basically are very very easy for customers to get on board teams by clicking a few times on the keyboard and getting connected.
Also we enjoy.
Strong activity in the field, we eat in several cases, we also meet with.
With the field.
That sales field stuff for Microsoft are helping winning accounts.
So we had a oh right a big investment in 2020 into expanding our meeting room offering for teams. So we just getting to market with some of our newer products in that space.
We're getting to market with our meeting inside shortly a two or three weeks from today. So all in all I'm definitely and activity there now.
For you.
New wins in the quarter. So I'm you know we want a leader a team's project.
Actually my question project from Skype for business from one of the leaders in the financial services World basically we have provided there or our session border controller technology, and our management technology and all in all I'm all set some professional services so.
So a nice mix about half a million project. We won a large project with a very large a world leading Asia Asia Pacific service provider.
We have expanded into several of their subsea.
Subsidiaries.
We have provided their SBC as a service it's running on Azure and we plan to expand into few more subsidiaries are we won a world leader in chemical products for the car industry are we working through a very large service provider who provides a a fully managed service.
As part of their since rollout a lot of success. So all in all our Aladdin for activity in Microsoft.
Assuming debt well knowing that Microsoft is now 45% of business right about 100 million out of the 2200 20 in 'twenty 'twenty, Tim Snow becomes the most important business for us traditionally we've been selling to the enterprise. This companies that have 5000 10000 and.
More employees, we know starting to target the mid market with our other codes for life or Frank as I've mentioned before they could sell it all for rank as a managed services offering providing many solutions we offer it in like a three tier now program and and we enjoy quite a success in.
Second half for 2020.
How do we grow from here on Microsoft teams. So first is obviously, we intend to grow and the number for the cause of lab users. That's why I mentioned the second dimension is trying to scale up in revenue from the essential program to the Pearl and premium services well, we can charge for more on a per user.
As per user per month basis are we do intend to.
Two introduce new business application services. This year, we will shortly announce or recording services are we.
Several times being selling contact center solution from partners. We work with are we will be providing our analytics voice analytics and meeting analytics shortly.
Recessional AI services and more so all in all this is the main focus of the company going forward.
Now to take you through the second priority in the company, which is the contact center market.
We this is a fast growing market no question that COVID-19 pandemic. So your accelerated growth in this space.
Right now about 15% of our business basically are.
The contact center market grew 15% last year all in all.
This market is a great market for us very simply a lot of disruption or the other for them to apply our technology advancement I've mentioned the transition to cloud I've mentioned work from home.
And Warburg TCA to maintain quality of service I've mentioned the trend to intelligent contact center that's emerging.
It's basically providing a much greater role to conversational AI to deal with customers.
Inputs and requests.
So.
Basically we are expanding while in the past our play was majority, Iran. Genesis business, we now see more entry into other names in the industry, then basically a quite expands the reach of for a solution to other contact center vendors also.
So while we have changed a bit our strategy that instead of trying to focus on the verdant themselves such as Genesis.
And and and we've mentioned throughout the years names for like five nine and 19 contact we now intend to go more towards end users some of them prefer to stay on Prem and nuts transition to cloud and then they find our solution are fairly helpful in allowing them to maintain this on prem.
Operation on top of that conversational AI gets a big boost for automated and lingo for a self service customer engagement.
So we providing debt market you know connectivity solution, our voice quality monitoring solution whereabouts to see virtual agent solution an agent assist solution all in all fairly active space in terms of revenues.
We didn't grow much between 19 to 18, we said, it's about 30 million level. In 2020, we're revenue grew to a close to 35 million debt 15%.
Throughout the year, we didn't broke down yet revenues from different cores, but we can easily see debt we've been stepping up in revenues throughout the year, so ending the year on a strong note on on the contact center, obviously conversational AI.
That's a build to improve customer experience and reduce cost is growing can use. It is estimated that already a 30 or 40% of customer prefer to use self service speech interfaces not involving a human agent. It is predicted the towards 2023.
That percentage would grow to 70% so a lot of room to grow there.
Let me touch on our SBC operations, because this is turning to be a a stellar performance in our company are.
With a record revenue are growing as I've mentioned above 40% in the quarter. All in all as I've mentioned, we will grow to close to 100 million from just 60 million plus a low.
Last year the share of sales of SBC into the Microsoft Microsoft Space grew substantially.
First core are now it's a more than 50 per cent.
Wherever rather a nice geo split about <unk> 38 per cent.
Revenues in North America about 34% in Western Europe, and about a 10 to 11 in Asia Pacific and then color we've seen strong bookings growth going forward. So we feel very confident in our ability to perform here.
On a if I'll do the breakdown between product and services I'll tell you that product grew more than 50% this year.
We also grew very nicely on the services one very important to note no to make here is that we as I told.
Told you in the beginning we put a lot of San Francis on managed services just to tell your debt in the SBC business line. Those services has really jumped in and almost tripled in the year. So we started from a low number of a million millions in the SBC managed service and now we have grown to close to three.
Times in debt.
Also very important.
Being question you know many times about.
You know, what's the portion of software versus hardware I'll tell you that while we so huge increase in SBC in 2020.
The hardware portion of it almost is not growth did grow but I'm a very mild.
You know between five to 10 majority of the growth really came from the sulfur and now you know virtual SBC, you know and and.
And it's being used in data centers and in the cloud are basically SBC. So for our solution grew more than 150 per cent of school prior to 2019. So.
Give or take you know all of the SBC use the same software load the same technology.
It's a great success and the gross margin is really high there.
I'll just mention also on the SBC side that we've seen nice growth on web RCC as a result of the move for us to work from home and we've grown more than 50%. So definitely interesting. The last area I'll touch is conversational AI, which is really seems to be oh, our nexgen growth engine.
Its very fast growing market with COVID-19 pandemic definitely driving debt.
With the lockdown situation in many countries in this world are booking and revenues grew more than 50 per cent filled we are talking about small numbers less than 4 million, but we do have a target of targeting above 10 million Ah in two years by the end of 'twenty two.
To conversational AI business grow fast. It does include a tree different business line. One is recording services. It's a small tap which is a compliance recording we just got certified about a month ago for teams you're the second company 35 for Tim.
So that that's the sales nicely. We also as I've mentioned before are going to introduce meeting inside in a major way in teams Oh shortly.
Second line is the force Yeah, I connect voice that connects to basically allows a chat bots and and and and textbooks to be serviced and approach are enabled by voice. So in you have today hundreds and thousands of different chat bots, you know used day.
Ali signed me some could be used as millions you know take the service provider, allowing customers to reach out true messaging.
And and Whatsapp and like in messenger. So if you want to allow all the public to access those same services by voice, that's definitely worth always say I connect khamsin and we enjoy quite a success thirty's or a book operation, which was very successful this year.
Growing more than 150% all in all the technology you know using all of those three business line has been homegrown. It's a combination of some homegrown cognitive services technologies are we using conjunction with Microsoft and Google and AWS cloud.
Cognitive services and above all.
Or huge experiencing networking telephony and as we see it really gives us an advantage as compared to other players in the market. So all in all other very exciting business I'll, just say that you know are we definitely intend to grow.
From 'twenty 'twenty, one substantially about 50% in this line. So I do expect to see it popping to the range of five to 10 million at the end of this year.
One more very important.
No to make his debt we are expanding our solution for voice AI connect while in the past, we just oh for its connection to cognitive services, mainly and two analyst solution now, we're talking about adding recording capabilities to adding a speaker for very free cash.
So application to eat and for you more technology. So all in all we believe that will come with a very comprehensive voice sub system for current recession I wish you would basically leave us a fairly at the top of the competition.
Finally to find a complete my presentation I'll just repeat what a neuron mentioned in terms of guidance. So Joseph revenue. We now guide based on the results in the fourth quarter and plans for the year are we guiding for a range of between 240 to 200 and for.
50 million.
As for the earnings its neuron met a guy that Oh, we have announced arranged it's a bit wider than before are we talking about a $1.45 to wonder line 65 cents here reasons for it.
The business outlook is good and tracking along the same line of success in 2020, So we see no different in that they're.
They're going to be two two new changes in 'twenty 'twenty. One one is there's a big change in the U S dollar and.
New Israeli shekel conversion rate, which you know will we assume that this will impact the bottom line or for earnings by about 10%. So unfortunately.
With the U S. Those are weakening in Israel are we going to lose like seven or 8% in terms of applying it to.
Salaries and debt, that's where it results in about 10 cents and the profit second is that we believe that this winter of 'twenty 'twenty one.
Our new effective tax rate is going to be raised and it's going to be right to a level, we predict of 10% to 10%. So that will basically lead to additional impact of about 10 cents. All in all we still believe that it will keep growing but we therefore.
Provider a relatively.
No larger I'm back.
Band of $4 45 to 165.
And was that I've ended my presentation I will move now to the Q&A session.
Operator.
Thank you we will now be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
In a press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.
And our first question is coming from the line of Rich Valera with Needham <unk> Company. Please proceed with your questions.
Thank you and good morning.
Chapter I first question around your long term top line growth target of 13% to 15% just wanted to clarify are you thinking about that as kind of a 2023 target or just what timeframe that is and then what specifically do you expect to drive the acceleration of the top line growth over that timeframe. Thank you.
Okay, Yeah. The answers to the first question, yes, we we view that try and just supplying to 'twenty 'twenty tree, where does the confidence come from.
So.
Last year, we grew 10%.
What drove it was 18% in enterprise and decline of about 10% in service provider. We believe that service for very a decline will basically flatten out. So you know our plants and assumptions, we do not see the service provider business declining.
Essentially for where it is a day once we keep growing 17% on the enterprise you'll see gradually every year a growth in the top line. So yeah. Our guidance if you take the midrange of feet.
245 debt represents roughly 11% growth and we believe as we will step up into.
Any new single year, you'll see that growing at least for 13% if not tomorrow.
Got it and then maybe this one's for in Iran.
Your product gross margins were very strong in the fourth quarter and just wonder if you could talk about what drove them to be so much stronger was there anything nonrecurring in that and how youre thinking about your gross margins in 2021.
Yes, so indeed, there gross margin for the product there was a very high relatively to the previous quarter.
Drove that is the product mix of shop dimension SBC grew very nicely and this is the very high gross margin there.
And most of it is actually a software and services.
With regards to 'twenty and 'twenty one.
The shutdown mentioned on our longer three years model.
We believe 67% to 70%.
Gross margin is.
As is typical.
Okay. That's overall gross margin.
Yeah.
Got it and then just a final one from me on clarification on the SBC business.
You said I think it grew to close to $100 million. If you could just say you sort of what that was on a percentage basis for the entire year.
And then could you clarify what percentage of SBC was in fact software. This year. It sounds like that percent must have gone up based on what you said, but just wondering if you could provide the actual percentage of SBC revenue that was software based in 2020.
Right. So yeah first yeah, we we have approached the hundred million level in SBC.
Okay that debt that's a that's a number.
I don't have.
Here.
With me the right split between software and outdoor but again I want to urge you to.
To change a bit the way you know it's being perceived.
Guys listen all of our hardware was develop you know 710 years ago. Okay. It's a median for thousand Mediant 800 long list of other products, but that is something that was developed and we do nothing gauge need just to give you an idea debt out of 300.
50 employees in R&D.
15, guys in hot rolled doing fixes and the flight issues et cetera, So no and they load the low this one load we do release you know a new workload every seven.
Seven to nine months, and that's basically a low debt going to be sitting on everything both into virtual machines, that's running on public clouds on our data centers and then running on top of hardware on the hydro debt you know servers, that's where design several years ago, but still you know the customer pays for it.
And other intellectual property the SBC, that's really for the hardware. So all in all I think good now as time goes by Oh, and one more by the way very important point to make when you're talking about data centers.
Its premises and or in the cloud you're talking about sulfur and this is what we sell we sell virtual software. However, when you go to offices. When you go to branch offices, which every large company as there's no way if you want to optimize cost and efficiency for those branch offices, you need to use the <unk>.
<unk> device. That's how are those devices are going to include a firewall or router and SBC switch and a few more so calling this an SBC hardware is really there.
Doesn't make sense.
It's all about so for us so that's the way you should look upon it and I you know I'm not mentioning the gross margin but.
You can bad debt the gross margin on the hardware and software combined.
It's very very high north of just throw a number north of 80 85 per cent.
Right, Okay. Thanks for that clarification and I'll pass it along thanks.
Okay. Thanks.
Thank you. Our next question is coming from the line of Ram I would like to share with Barclays. Please proceed with your questions.
Thanks, Congrats on a strong finish to the year.
Shanghai can you kind of go a little bit deeper when you say you're on the <unk> side, you want to go closer to the end user and talk more on that a little bit with their on premise focused clients as well it sounds to me more like Avaya type customers.
Do I read that correctly like how do I have to think about that that strategy and then I had one follow up.
Okay. So yeah, we've not mentioning names in and this is not really limited to one one per or more.
I think when you're going to a large end users you find probably some resistance in moving the solution to cloud simply because in terms of cost is going to be substantially more expensive for them. So large companies do not necessarily rush.
To move to cloud still you know well the more advanced solution are going to be applying into the cloud. So some of these end users for themself, a with a need let's say for web RTC just to provide high quality of service to their own based agents in or they need to use conversation.
Yeah, just to be able to you new automation of customer calls and sales service. So we find a need in the markets and not only with the name you've mentioned to really be able to upgrade the capabilities of on Prem solutions and we have seen you know.
A large number I mean, I think more than 10 in adjusted in the second half of 2020. So we believe this could be a trend that we can walk in and by the way. It happens also with Genesis accounts, who are the accounts that debt.
Trent.
Yeah, Okay, and then how do you.
On the on the team side.
How do you think this will play out like in terms of where are we in terms of your penetration on new teams are.
Mens and and where do you see that overall teams trend going thank you.
So all in all you know as I've mentioned, you know we've been growing nicely in terms of our quarterly sequentially in in new accounts from Microsoft teams and actually are looking into the charter in front of me you know a relatively the pace of our scaffold.
This customer moving into teams is kind of a flat. So we're talking about more than 100 tell you more than 100 accounts a quarter moving but then on new accounts and things, we see like a about a 20% growth in terms of number of new accounts. So it's going forward and again I want to see.
The point I was making that.
While Microsoft was very.
Explicit in a convincing customers use teams for collaboration and meetings there was no much pressure on them.
To move to teams voice of the customer could have.
Keep using his old P b ex.
S conversational AI capabilities.
Capabilities grow meeting our capabilities grow there will be you know antibody that stuck with an old P. B assets will just add few more doors for us license and will move into a more comprehensive advanced voice solution. So we believe that we should see I'm you know I don't think we.
I have a problem keeping up with the 10, 20%.
Gross per year in Microsoft teams.
Okay perfect. Thank you congrats.
Sure. Thank you.
Thank you. Our next question is coming from the line of Ramsey El <unk> of.
Of Jefferies. Please proceed with your questions.
Yeah, sorry. This is smarts tomorrow, I'm, not quite sure where Ramsey snap came from but thanks for taking my questions. Nonetheless, and yeah. Congrats again on a strong finish to the year, maybe just the first shop tie.
On the Skype for business installed base, how much of that do you believe is left to convert over to teams for voice and what percentage do you think realistically you could convert over to to teams for voice.
Tough for me to answer that question simply because a a one needs to assume that will be you know certain portion of our you know at.
The end users, who would rather stick to on Prem.
Installation and not moved to the cloud for for many reasons could be you know a security and others and and quite frankly, I don't have a very you know detailed analytic tools that would allow me to look into the specific okay.
Let's say, it's a trend that.
I can tell you are the only data points I can give you his debt as I've mentioned before debt. It has been growing throughout the year in the last two quarters I see that number from or Skype for business accounts flattening above 100, and some but really have no idea.
On Oh, it's going to keep we'll keep reporting that's the only thing I can do it.
And this one may be for for neuron or for for you I I whoever wants to take it back and we appreciate all the disclosures that you that you give them around and kind of full year numbers and and growth rates, but is there any chance or is there any philosophical thought around giving a reporting the dollars around how big your <unk>.
<unk> business is kind of more precisely on a quarterly basis, just given that that's you know as you noted that that's the most important part of the business on a go forward basis. We're just.
Senior for or maybe get more color on that on a on a consistent basis in dollar terms going forward.
Yeah, So somewhat high we are not providing it on there.
A quarterly basis.
Number three we provide are not audited by a buyer.
Our auditors based on internal reports that we have so.
We can provide it historically on it for.
Orderly basis.
Gotcha and then maybe just a last question yeah. We saw the news around the debt buyback extension just curious maybe more broadly speaking what the what the philosophical approach to that will be and how we should think about the execution of that or just maybe.
The the logic behind asking for an increased buyback.
Right. So the idea is that you know sometimes the market gets irrational right. I mean, we all know that those those times and you know we have our view on on the fair value of what we do compare it to the value of other assets in the market and when we will find it.
You know beneficial for us we'll engage on the buyback it's not that we are intent to go for the same strategy. When we add are we going to.
Look on the multiples etcetera, but all in all I'll tell you debt you know we are no I'm glad to say that we are a big producers of cash flow I'm, you know before paying the 10 million or 11 million to the Israeli law.
Innovation of authority, we have produced about 50 million 50 million you know one of our more board member told me you know, it's a half of a.
Offering right. So we went for this thing a lot of cash in terms of cash allocation have been answered that question. A few times priority goes into M&A other than to a dividend, but a payment and then through buyback and again, we will weigh the situation over time and decided accordingly.
Great and congrats again on the quarter and nice to see it start having a strong move this morning take care.
Thank you for not thank you.
Thank you. Our next question is coming from the line of Walter Pritchard with Citi. Please proceed with your question.
Hi, Thanks, I'm wondering if you could just talk to you mentioned some pullback from the selling into the day you catch providers and instead focused on the end users for you just talk a little bit about that decision and how you're seeing as the teams adoption goes forward, how you're seeing customers choose connectivity options, there and if theres been any.
Any change relative to what you've seen more recently.
Yeah, I think there's some confusion I have not mentioned that in conjunction with your cash in your cats, well I E. In the UK, we do it for a long time right. I mean, we we are selling are sometimes indirect or direct to the end users its really what I've mentioned on the call.
Related more to the contact center market, where our go to market you know up to low last year was substantially on working with the vendor themselves to reach to the end users are we found that with you know.
The more I would say a day move to cloud, which really moves the world from being an all from market to be being a twofold. You know are on Prem and cloud market. We found that in order to service better are the on Prem.
A portion of it are we better develop a hum.
Direct go to market for those in Europe, obviously, you can imagine debt. We will use the same sales force at this stage, we have more than 200 people you know both in terms of salespeople and pre sales and any sales manager or getting into account would be able to sell not only a U K solution, but also.
So the solution.
That's a it's not any one big big Big clarification, when that selling cortex ore guys I mean, let's be very.
Very clear about it we do sell a complementary technology and solution that help to improve okay. So are we selling wherever you see we're setting our SBC for access for selling AR technology.
Technology called click to call. This allows calling over the internet, we will be selling conversational AI. So those were those who will be the type of solution that we will be selling.
Got it and then just I guess relative to Microsoft and met a switch in terms of their own offerings on that Andy you talked about your your SBC as a service that rolled out in the quarter. What are you seeing in terms of the market with <unk> with the <unk>.
Customers looking at those different offerings of understanding it's it's quite early.
Yeah.
Oh, we haven't seen any of that quite frankly.
Not seen we may.
But right now we are developing our own offering goods you have heard we develop you know a sbcs for service approach with developing managed services approach.
You know, we believe that we will be competitive even if ever you know that debt.
Great. Thanks for taking my questions.
Sure. Thank you.
Thank you. Our next question is coming from the line of Charlie Ani of Bank of America. Please proceed with your questions.
Hey, guys. Good morning, good afternoon.
Few questions first can you give us an update on zoom you had an announcement before I just want to know what's the experience so far.
Second.
Can you I wanted to understand how it works with Microsoft teams and sorry for the very basic question, but.
But how does the sale cycle happened, meaning do you sell to them or do you sell to the enterprise, whose selecting the technology behind it and I just I'm trying to understand the drivers.
Hum.
Maybe we'll do we'll take one day one we'll do these two and then I'll ask my other questions.
Okay, that's related to zoom, Oh, we have a thin layer of a zoom phone activity.
Earlier in 2020, but towards the fourth quarter, we've seen some uptake we are you know I'm.
Also been reported that we see more opportunities are coming up in 'twenty 'twenty, one you know zoom.
It's about a few weeks ago that they've reached a level of for 1 million you know zoom phone users. So we do expect that going to 'twenty to 'twenty. One you know we will win more zoom phone accounts I think the only thing. That's left is really wait for the next six nine.
And then then I'll provide more information, but we definitely see a change from 2020.
As through Microsoft teams I'm always you know the discussion is you know at the end of the day with the CIO and the I T manager for the end users.
And basically he is the one that's making the decision.
How we fulfill that usually is being fulfilled by partners. So we have partners in the field.
Which based on the final solution proposed to the end users.
No debt and uses the bank debt is buying the equipment in our solution from the partner and the partner in return buys it from us.
And in your view, what's still what's the win rate or can you tell us about the competitive landscape in these kinds of accounts.
We believe that due to the fact that we have capture other years to develop a very comprehensive portfolio.
Not only product, but really solutions, where we combined several products and add on top of them a management solution a recording solution.
And analytic solution and few more lately also conversational AI a volcker type.
Our.
Offering is substantially more comprehensive than competition are the only competition. We had in the past is now seems to be focusing much more on the service provider business. So quite frankly, I think we're doing fairly well in this environment.
No theft competition always competition, but not.
Hum too strong.
Great stuff day, two more quick ones.
One is.
Can you discuss the environment in 2020, and the sustainability, meaning in 2020.
Employees started working from home, we had to invest in collaboration tools team is one of them.
Do you have concerns that you have tougher comps for 2021 and that incorporates both what they needed and now they can slow down any any concerned about sustainability of what we've seen in 2020.
You know I'm I'm I'm, an optimistic guy so tough for me to be the significant I'll tell you. The following okay in contact center, it's pretty obvious that we just started it.
Completely new cycle right to work from home, we've seen wherever it to see growing substantially faster conversational AI is growing fast same for SBC solution that needs to support cloud migration. So in contact center, we really are in the first inning of the sink as weak.
Go for Microsoft teams again, you know I have no reasons to believe that we will quote unquote see customer already got their needs back in 2020, and there's no more accounts are quite frankly, you know, it's I mentioned, you know only about 10% of.
Microsoft teams users.
If applied teams voice.
And we believe that's a huge huge growth.
Area for us so.
I do not share.
But again you will go through the year, but in every single quarter since the beginning of the year. We've seen growth Ive mentioned were growing for score of 30% over the third quarter. So right now I have no evidence that it's line go or no.
Changing.
Got it my last question is the stupid question not that my other questions were very smart, but.
In your press release, you mentioned you went through Oh, that's what happens when you get a COVID-19 vaccine.
My last question is.
You mentioned in your press release that you got court approval for a buyback.
Right for the question just to understand a lot.
And that kind of the procedure why is there a court approval why can just the board decided I don't know how it works with Israeli companies.
Hi, This is Noah.
In Israel.
You would like to distribute a dividend or to do buybacks.
You need to file an application to get caught permission for debt unless you have a sufficient retained earning over the past two years. If you will go to our GAAP financials, you will see that day, we already both barak or distribute dividend.
More than two years GAAP profit.
Got it thank you.
Congrats on a great quarter.
Thank you.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is coming from the line of Robin gas a focused capital. Please proceed with your question.
Thank you for taking my question a follow up question regarding the.
Teams.
Moving into PBX and voice.
And competition there.
Just the first to verify that I understand correctly your solution would be.
Needed.
Do you have other opportunities there.
If this PBX to the cloud.
Teams voice would be based on the Microsoft teams.
<unk>.
My understanding is that that is.
Competition there.
Thank you Kash.
Leading companies like.
Central most for jumping on the.
Voice opportunity.
Operating there.
PBX in the cloud. So this is my question competitive dynamics there.
Is it correct that you have solution would not be needed for all of US you got some thoughts.
Yeah.
Right I E are you you're definitely right. Okay definitely the there's competition arising from the middle of 2020 by Ucas other ucas players such as ring Central line that's bad.
Telling customers, Okay, you've settled on Microsoft teams, but for telephony.
You know either you already are using mine or you want to use mine instead of using you know Microsoft telephony and in a low for you a solution I'll tell you that that is a a for competition, but I will tell you that I believe that our long term are the capabilities.
And the services that we are offering for Microsoft teams voice and telephony with Super see those offered by other companies Oh businesses voice Oh. This is the only thing we do.
And you know just you judge for coming out with meeting inside I don't think you'll see any comparable capability in other companies. So yeah. It's a competition we know to fare.
Thank you.
Sure.
There are no further questions at this time I would like to turn the call back over to management for any closing remarks.
Okay, well. Thank you operator, I would like to thank everyone for attending our conference call today.
With continued good business momentum and execution towards the end of 'twenty 'twenty. 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 very much have a nice day bye bye.
Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time.
Have a great day for a great evening.