Audiocodes Ltd Q4 FY2020 Earnings Call

Greetings and welcome to AudioCodes's Fourth Quarter and Year End 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. It is now my pleasure to introduce Brett Maas from Hayden IR. Thank you, Brett. You may begin.

Thank you. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer; and Niran Baruch, Vice President of Finance and Chief Financial Officer. Before we begin, I'd like to remind you that the information provided during this call may contain forward-looking statements related to AudioCodes' business outlook, future economic performance, product introductions, plans and objectives related thereto, any statements assuming assumptions made or expectations as to any future events, conditions, performance, or other matters are forward-looking statements as the term is defined under U.S. Federal Securities Laws. Forward-looking statements are subject to various risks and uncertainties and other factors that could cause actual results to differ materially from those stated in such statements. These risks, uncertainties, and factors include, but are not limited to, the effect of global economic conditions in general and conditions in AudioCodes' industry and target markets in particular, shifts in supply and demand, market acceptance of new products and the demand for existing products, the impact of competitive products and pricing on AudioCodes and its customers' products and markets, the timing of product and technology developments, upgrades, and the ability to manage changes in the market conditions as needed, possible need for additional financing, the ability to satisfy covenants in the company's loan agreements, possible disruptions from acquisitions, the ability of AudioCodes to successfully integrate the products and operations of acquired companies into AudioCodes' business, possible adverse impact from the COVID-19 pandemic on our business and results of operations and other factors detailed in AudioCodes' filings with the U.S. Securities and Exchange Commission. AudioCodes assumes no obligation to update this information. In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share. AudioCodes has provided a full reconciliation of the non-GAAP net income and net income per share to its net income and net income per share according to GAAP in the press release that 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 the call. With that said, I would like to turn the call over to Shabtai. Shabtai, please go ahead.

Thank you, Brett. Good morning and good afternoon everybody. I would like to welcome all for the fourth quarter 2020 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 then 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 fourth quarter were $58.7 million, an increase of 11.1% over the $52.8 million reported in the fourth quarter of last year. Full year 2020 revenues were $220.8 million, an increase of 10.2% over the $200.3 million reported in 2019. Services revenues for the fourth quarter were $21 million, up 19.9% over the year-ago period. Services revenues in the fourth quarter accounted for 35.8% 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 31, 2020 was $69.2 million, up from $62.2 million as of December 31, 2019. Revenues by geographical region for the quarter were split as follows; North America 14%, EMEA 35%, Asia Pacific 19%, and Central and Latin America 6%. Our top 15 customers represented an aggregate of 63% 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%. Operating income for the fourth quarter was $12.1 million, compared to an operating loss of $26 million in Q4 2019. Full year 2020 operating income was $38.4 million compared to an operating loss of $9.6 million in 2019. Net income for the quarter was $8.4 million or $0.24 per diluted share, compared to a net loss of $8.2 million or $0.28 per diluted share for Q4 2019. Full year 2020 net income was $27.2 million or $0.83 per diluted share, compared to $4 million or $0.13 per diluted share in 2019. I would like to remind you that GAAP results for the fourth quarter and full year of 2019 were impacted by the expense of $32.2 million we recognized in connection with the royalty buyout agreement with the IAA. Non-GAAP results are as follows; non-GAAP gross margin for the quarter was 77.1% compared to 65.1% 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 2020 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 $0.44 per diluted share, compared to $8.1 million or $0.26 per diluted share in Q4 2019. Full year 2020 non-GAAP net income was $46.7 million, or $1.41 per diluted share, compared to $27.8 million or $0.80 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 2020 and $38.5 million for 2020. Net cash provided by operating activities in both periods were impacted by the $11.6 million payment made in December 2020, which was the second installment pursuant to the royalty buyout agreement. Days sales outstanding as of December 31, 2020, were 54 days. On January 2021, we received court approval in Israel to purchase up to an aggregate amount of $30 million of 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 top line revenue growth and operating margin expansion in 2021. For the full 2021 year, we currently expect revenues in the range of $240 million to $250 million and non-GAAP diluted earnings per share of $1.45 to $1.65.

Thank you, Niran. We're very pleased to report record financial results for the fourth quarter and the full year 2020. Let me talk first about several major milestones achieved throughout the quarter and the full year. First and foremost is the strong financial performance, which Niran just provided a detailed description of. I'd like to stress some of the most important achievements, which are strong expansion of our gross margin, operating margin, and a jump in net income, strong positive cash flow, all of which I will discuss further on shortly. Then it's the evolution of our enterprise business, now close to 80% of our business, growing 17% year-over-year. Third is the resurgence of three new growth engines for 2021 and going forward, namely Microsoft Teams, contact center, and conversational AI, all in the enterprise space heading into 2021. Then it’s the rapid transition of our solutions and services to real-time cloud communications, much was achieved in 2020. We now invest fully and accelerate investment in these areas driving momentum into more real-time cloud communication solutions. On top of this, we have substantially moved our focus in sales to the recurring revenue model as compared to previous years, where the majority of sales was conducted as CapEx transactions. To highlight this last point, in March 2020, we announced our AudioCodes Live initiative, which is a portfolio of professionally managed services designed to offer AudioCodes voice expertise products and solutions to enterprises via a flexible subscription-based managed service model. We have already made nice progress in the second half of 2020 and now see momentum building up into 2021. Now let me touch on the achievements made on the financial front. Overall company top-line revenue grew about 10% year-over-year. However, once you break down the revenue into key segments, enterprise and service providers, one can easily see the progress made in 2020 in the enterprise space, which consists mainly of Unified Communication (UCaaS) and contact center, growing 17% in 2020 and now providing about 78% of the overall company revenue. We expect this annual growth rate to continue well into 2021 and beyond, for reasons I will delve into shortly. Therefore, in our updated long-term financial model for the next three years, we can clearly see that the company’s annual top line will step up to a range of 13% to 15% growth annually, every year, in two years from today. UCaaS and contact center segments will drive this growth going forward. Furthermore, UCaaS is primarily driven by continued success in the Microsoft Teams space, where annual revenue grew over 300% year-over-year and more than 30% 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 working from home in the coming years, the new normal, we anticipate similar such growth in 2021 and beyond. Now, let me touch on the achievements made on the financial front to provide a more complete picture of revenue in 2020. I'll just add that while we grew nicely in the enterprise, we did not do so well in the service provider front, and technology. I'll say that we have experienced a decline in the service provider business, which currently constitutes about 18% of our business and has declined for about 10% year-over-year, along with a continuing small decline in the technology business, now providing for about 4% of total business. Thus, 78% of our business grew 17% while about 22% declined, resulting in an average of about 10% growth for the full year. Providing more color on growth in different business lines in 2020, the UC-SIP business line grew about 20% year-over-year. By the way, this will be the last time we report numbers on UC-SIP very simply as this indicator bundles growing business lines such as the SBC management software and routing software together with devices and hardware appliances using the service provider space and on-prem deployments. As these two last ones are bound to continue to suffer from the ongoing pandemic and are not essential to our business, we will drop the UC-SIP report. It's not going to be a good indicator to indicate our business health, we will obviously track our business through the development in our UCaaS, contact center, and conversational AI business. Revenue related to UCaaS as a whole grew close to 20% as well. All in all, we are talking about $140 million annually at the end of 2020. Revenue related to sales of Session Border Controllers (SBC) has jumped substantially for the full year, bringing this business close to the $100 million mark for overall 2020. That’s a real jump. Throughout the year, we had above 40% real cornerstone in our business going forward. Service revenue grew about 20% in the first quarter, and 16.7% annually. Managed services are growing substantially faster in the mix. So we are seeing significant emphasis on managed and professional services. Now, let’s talk about the growth engines which are becoming key factors for 2021 success and beyond. Entering 2020, Microsoft on-prem Skype for Business was our main growing business. However, with the pandemic growing in impact throughout the first quarter, two major trends evolved for the year: collaboration and work from home. These two trends became essential to preserve business continuity and workplace productivity in the enterprise world. These trends drove the accelerated transition to real-time cloud communication, and the introduction of a series of newer technologies we have developed, such as WebRTC, call automation processing, and intelligent assistants with virtual agents. As such, we emerge out of 2020 and head into 2021 with three new growth engines. The first and most visible one is Microsoft Teams, which became in 2020 the fastest growing business for us. It has grown more than 300% year-over-year and more than 30% in the last quarter over the previous quarter. Next to it, we saw accelerated growth in contact center activity, 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 automation and self-service drove growth in this space. The third engine is conversational AI which has become a top priority for many contact centers and the need to quickly and efficiently respond to incoming customer calls in large volumes while providing satisfactory customer experiences. Now to our long-term financial model, as we've mentioned before, gross margin and operating margin have demonstrated record levels in 2020. We ended the year with gross margin for the fourth quarter at 71.5% and 26.2% for the operating margin. By the way, talking about gross margin, we looked into our annual performance, and I'd like to draw your attention to the progress we have made in the past five years. We have grown our gross margin from about 60% back in 2015 to 68.1% in 2020. This is a result of the shift towards more revenues from hardware appliances to software solutions and services. So a very decent growth with expectations to continue in coming years. As mentioned, in the last quarter, we recorded a 71% gross margin. Operating margin has been well above the 20% level for the second consecutive quarter which is a notable metric for us. Let’s discuss our longer-term financial model. We believe that as we progress with our enterprise business, growing above 16% a year, we should steadily step up to an annual revenue growth of about 13% to 15% overall for the company over the next two to three years. Our gross margin is around 68%, and we believe the range we’ve defined is between 67% to 70% should be achievable at the end of this period. We are working on a strategy, actually defining a modified strategy for 2021. We see much more value in maintaining an operating margin above 20%, while also allowing a substantial portion of it to be directed towards growth and investment. Therefore, we will not aim for operating margins of 24%, 25% or higher, but will aim for above 20%, and reinvest the remaining into developing new areas such as conversational AI and more. So let me go now into specific business lines or interesting data points. First, let's discuss Microsoft business. In the fourth quarter, overall revenues were close to $30 million. This represents a growth of 18% year-over-year and close to 15% sequentially. For the full year, we saw a nice increase of about 19% compared to 2019 combined. However, as we all know, there was a significant shift in Microsoft's revenue mix between the two collaboration solutions. Entering into 2020, we started with about $84 million in revenue, of which about $70 million came from Skype for Business, with only about $13 million from Teams. That picture has substantially reversed in 2020. We are coming out with Teams substantially on top; Teams has grown to about $55 million in 2020, representing a growth of more than 300% year-over-year. Also, I'll mention that in the fourth quarter, we continued to grow sequentially with growth exceeding 30%. Skype for Business on the other hand showed continued decline, from an average of around $17 million to $18 million in a quarter, to less than $10 million by the end of the last quarter. Overall, a gradual decline which we expect will continue, but in terms of absolute million dollars, that will become less significant in 2021. Let's talk about new accounts. We definitely grew with a large number of new Microsoft Teams accounts in 2020. On an overall annual level, we grew more than 200% from 2019 to 2020. Looking at the fourth quarter data, approximately a third of the accounts were migrating from Skype for Business, while two-thirds of the accounts were indeed new accounts. So all in all, we see very nice growth in Teams and newly added accounts. As for the future, we have a substantial runway ahead. If Microsoft 365 is currently at about 270 million teams users, we were informed it had 150 million last October. I am confident we will hear new numbers as Microsoft releases their updates. So far, we believe that only about 10% of Teams users have implemented voice. Many organizations could express an intention of adopting Teams, but without a real necessity to use it as their telephony solution while maintaining their old PBX systems from previous manufacturers. As time progresses, we expect the benefits of using an integrated, comprehensive Microsoft solution will drive these organizations to migrate to Microsoft’s telephony solution as well, providing significant potential going forward. We have already observed that customers who have standardized on Microsoft Teams are not looking back. Reports indicate that more than 50% of enterprise users have chosen Teams over other players, and this number is expected to grow to approximately 60% over the next two to three years. To provide more on the Microsoft business, we launched SBC as a service on Azure a few months ago. It is available on the Microsoft marketplace in North America and will soon be available in other regions as well. It is very easy for customers to onboard Teams with just a few clicks. Additionally, we are seeing strong activity in the field. In several cases, we also collaborate closely with Microsoft's sales teams to help capture their accounts. We also made a significant investment in 2020 towards expanding our offerings for Microsoft Teams meeting room solutions. We will be entering the market with some of our newer products in that space in just a few weeks. Overall, we have seen a lot of activity and secured several significant new contracts during the quarter. For instance, we won a migration project from Skype for Business for a leader in the financial services world, providing session border controller technology alongside our management technology and professional services, totaling about half a million dollars. We have also secured a contract with a very large, world-leading service provider in Asia Pacific, expanding our services into several of their subsidiaries. Furthermore, we won a large project with a global leader in the chemical industry, implemented via a major service provider during their Teams rollout. Overall, a lot of success and activity related to Microsoft. From our standpoint, Microsoft now comprises about 45% of our business, totaling roughly $100 million out of the $220 million in 2020. Teams has now emerged as our most important business sector. Traditionally, we have targeted large enterprises, those with over 5,000 to 10,000 employees, but we are now beginning to focus on the midmarket through our AudioCodes Live offering. The Casella offering operates as managed services, providing various solutions through a three-tier program that has seen quite a bit of success in the latter half of 2020. As for our growth trajectory with Microsoft Teams, firstly, we plan to increase the number of active live users. Secondly, we aim to scale revenue from our essential program to the pro and premium services, allowing us to charge more on a per-user monthly basis. We also plan to introduce new business application services this year. Shortly, we will be announcing our recording services, in addition to analytics voice and meeting analytics, conversational AI services, and more. So overall, this is the main focus of our company moving forward. Let's move on to our second priority: the contact center market. This market is rapidly growing, and there's no question that the COVID-19 pandemic has accelerated growth in this space. Currently, about 15% of our business falls within the contact center market, which grew by 15% last year. Overall, this market provides an excellent opportunity for us due to significant disruptions and the room available to apply advanced technology. As I previously mentioned, these disruptions stem from the transition to the cloud, the remote work setup, and the increased demand for WebRTC to ensure quality service. Moreover, the trend towards intelligent contact centers is emerging, advancing the need for conversational AI to efficiently manage customer engagements. So we are expanding our strategy; in the past, we primarily catered to Genesis accounts. We now aim to reach out directly to end-users, some of whom prefer to maintain their on-prem installations without transitioning to the cloud. Our solutions provide great value in maintaining these on-prem operations. Additionally, conversational AI offers substantial enhancements for automatic handling of self-service customer engagement. Overall, we are providing connectivity solutions, voice quality monitoring solutions, and preparing to offer virtual agent solutions and agent-assist solutions, which has proven to be a very active space. In terms of revenue, we didn't grow significantly from 2019 to 2020, remaining at about $30 million. However, in 2020, revenue grew to close to $35 million, a 15% increase. Throughout the year, we didn't break down revenues from different quarters, but we've consistently seen escalating revenues. We are ending the year on a strong note in the contact center market, as the use of conversational AI to improve customer experience and reduce costs continues to grow. It's estimated that already 30% to 40% of customers prefer to use self-service speech interfaces that do not involve human agents, which is projected to reach 70% by 2023. Thus, there's extensive room for growth in this segment. Let me now touch on our SBC operations, which are rapidly becoming a stellar performance area for our company, showing record revenues growing above 40% in the quarter. Overall, I mentioned we will reach close to $100 million compared to just over $60 million last year. The share of SBC sales within the Microsoft space grew substantially in the fourth quarter, and now constitutes over 50% of our revenues. Our geographical revenue distribution includes approximately 38% from North America, 34% from Western Europe, and about 10-11% from Asia Pacific and Central and Latin America. We are seeing strong booking growth moving forward, causing us to feel very confident about our performance in this segment. To break it down between product and services, I can tell you that product sales grew by more than 50% this year and we also grew steadily in services as well. One important note to make is that, as I indicated earlier, we've placed substantial emphasis on managed services. The SBC business line has seen our managed services grow nearly threefold this year. While we have seen substantial growth in SBC in 2020, it’s important to note that its hardware component has only seen modest growth, between 5% to 10%. The majority of the growth has come from software solutions. Specifically, our virtual SBC, utilized in data centers and the cloud, has grown more than 150% compared to 2019. Lastly, I’d like to discuss the conversational AI segment, which is poised to be our next major growth engine. This is a rapidly expanding market, significantly influenced by COVID-19 lockdowns worldwide. Booking and revenue in this sector grew more than 50%. Though we are still dealing with relatively small numbers, less than $4 million, we are targeting revenues above $10 million by the end of 2022. Our conversational AI division is seeing rapid growth and comprises three key business lines: one involves our Smartapp, which is compliance recording technology certified for Teams; the second is Voice AI Connect, which allows chatbot and textbots to be serviced and accessed via voice; and the third is our Voca operation that has seen tremendous success this year, growing more than 150%. Overall, the technology underpinning these three business lines is homegrown and combines innovative technologies with cloud cognitive services. Our extensive experience in networking, telephony, and SBC gives us a competitive edge in the market. Therefore we are optimistic about substantial growth in 2021, aiming for more than 50% in this line of business. We expect to see revenues reach the range of $5 million to $10 million by the end of this year. Furthermore, we are expanding our Voice AI Connect solution; previously focused on cognitive services, we are now adding recording capabilities, speaker verification, authentication, and incorporating additional technologies. In conclusion, we are positioning ourselves to provide a very comprehensive voice subsystem for conversational AI, which we believe will place us at the forefront of the competition. To reiterate what Niran mentioned regarding our guidance; in terms of revenue, we now forecast based on results in the fourth quarter and plans for the year, guiding for a range of between $240 million to $250 million. For earnings, as Niran noted, we have announced a range that is a bit wider than before, targeting $1.45 to $1.65. The rationale behind this wider range is due to the consistent positive outlook and performance tracking along the same lines as 2020. However, we also anticipate two significant changes in 2021: one regarding the U.S. dollar and New Israeli Shekel conversion rate, which we assume will impact our bottom-line earnings by approximately 10% due to the dollar's weakening in Israel; and two, we predict that our effective tax rate will rise to a projection of around 10% to 10%, resulting in an additional $0.10 impact on profits. Even with these factors considered, we remain confident in our growth and therefore provide a relatively larger forecast range. And with that, I've concluded my presentation. We'll now move to the Q&A session. Operator?

Thank you. We will now be conducting a question-and-answer session. Our first question is from Rich Valera with Needham & Company. Please proceed with your questions.

Thank you. Good morning. Shabtai, 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. Yes. The answer to the first question is yes, we view that range as applying to 2023. Where does the confidence come from? Last year, we grew 10%. What drove that was 18% in the enterprise and a decline of about 10% in service providers. We believe that service provider decline will flatten out. Henceforth, in our plans and assumptions, we do not see the service provider business declining substantially from where it is today. Once we keep growing 17% in the enterprise, you will see gradually every year growth in the top line. So, based on our guidance, if you take the mid-range figure of $245 million, that represents roughly 11% growth. We believe that moving forward each year, you'll see growth potentially reaching 13%, if not more.

Got it. And then maybe this one is for Niran. Your product gross margins were very strong in the fourth quarter. And just wondering if you can talk about what drove them to be so much stronger? Was there anything non-recurring in that? And how you're thinking about your gross margins in 2021?

Yes, indeed, the gross margin of the product was very high relative to the previous quarter. This is primarily driven by the product mix; as Shabtai mentioned, SBC grew very nicely, and this is a very high gross margin area, mostly comprised of software and services. With regard to 2021, as Shabtai mentioned, we believe a gross margin of between 67% to 70% is achievable.

Okay. That's the overall gross margin.

Yes.

Got it. And then just a final one for me, clarification on the SBC business. You said I think it grew to close to $100 million. If you could just say sort of what that was on a percentage basis for the entire year? And then, could you clarify what percent 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 can provide the actual percentage of SBC revenue that was software-based in 2020?

Right. Yes, so first, yes, we have approached the $100 million level in SBC. That’s accurate. I don't have the right split between hardware and software revenue right now. But I would urge you to change how it's perceived. All of our hardware was developed years ago and does not receive much focus. Out of 350 employees in R&D, around 15 are working on hardware repairs. The key focus now is new loads released every seven to nine months. This load works across everything, both virtual machines and public clouds and new servers run by old hardware systems. As people primarily use SBC for the intellectual property associated with the software rather than the hardware, we need to understand that SBC is primarily software. Thus, given the progress towards cloud and data centers, most growth has come from software. Our virtual SBC and associated technology saw a growth of 150%. So while we’ve seen growth, most of it has come from the software side, which is where we project strong margins. Given the rising use of cloud-based infrastructure, things are very promising.

Right. Okay. Thanks for that clarification. And I'll pass it along. Thanks.

Okay, thanks.

Thank you. Our next question comes from the line of Raimo Lenschow with Barclays. Please proceed with your questions.

Thanks. Congrats on a strong finish to the year. Shabtai, can you go a little bit deeper? When you say on the contact center side you want to go closer to the end user and talk more about that little bit on-prem focus client as well. That sounds to me like Avaya type customers. Do I read that correctly? How do I have to think about that strategy? And then I had one follow up.

Okay, so yes, we’ve not mentioned names specifically. This isn't limited to one player or more. Major enterprises might not rush to cloud adoption for many reasons like cost. While some of these end users seek to achieve additional benefits from their on-prem installations, we noted a significant need for upgraded capabilities. Many companies will examine contact center upgrades to help optimize their business operations as we experienced with over ten significant wins in the second half of 2020. We believe we could access this market shift more effectively. By the way, we do also work with Genesis accounts and additional ones too.

Yes. Okay. And then regarding the Teams side, how do you think this will play out? In terms of your penetration on new Teams deployments, where do you see the overall Teams trend going?

Overall, as I've mentioned, we've observed nice growth in our quarterly sequentially in new accounts on Microsoft Teams. Actually, I’ve got data showing that the pace of Skype for Business customers transitioning to Teams has stabilized at over 100 accounts per quarter. For Teams, we see about a 20% increase in terms of new accounts overall. Thus, at a high level, growth remains strong, and while Microsoft pushes Teams for collaboration, there's been lesser pressure for customers to transition to Teams voice. Therefore, many find themselves continuing to operate their existing PBX systems. However, we expect that as the benefits of an integrated Microsoft solution become clear, many customers will eventually move into Teams voice.

Yes. Okay, perfect. Thank you. Congrats.

Sure, thank you.

Thank you. Our next question comes from the line of Ramsey El-Assal of Jefferies. Please proceed with your questions.

Yes. Sorry, this is Samad Samana. Not quite sure where Ramsey's name came from. But thanks for taking my questions nonetheless. And congrats, again, on a strong finish to the year. Maybe just the first, Shabtai. 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 Teams for voice?

It's tough for me to answer that question simply because it requires assumptions about certain end-users who might prefer to stick to on-prem installations for reasons like security. Quite frankly, I don't have detailed analytics tools to look into specific accounts. What I can tell you is that overall, we're seeing gradual growth; we've recorded more than 100 accounts migrating over the last two quarters. However, specific numbers are tough for me to provide.

Great. This next question may be for Niran or anyone else who wants to answer it. We appreciate the disclosures regarding full-year numbers and growth rates. However, is there any possibility or thought about reporting the monetary value of how large your Microsoft business is on a quarterly basis? Since, as you mentioned, that is the most critical aspect of the business moving forward, we are wondering if we might receive more consistent updates on that in dollar terms.

Yes. We are not providing it on a quarterly basis. The numbers we provide are not audited by our auditors; they are based on internal reports. So we can provide it historically on a quarterly basis.

Got you. And then maybe just a last question. We saw the news around the buyback extension. Just curious, maybe more broadly speaking, what the philosophical approach to that will be? And how we should think about the execution of that or just maybe the logic behind asking for an increased buyback?

The intent is that sometimes the market gets irrational, as we all know. We have our view of the fair value of our business relative to other market assets. When we find it beneficial, we will engage in buybacks. It's not that we will engage in the same strategy we had before as we count the multiples, etc. We are proud to state we produce a lot of cash flow. Before paying the $10 million to $11 million to the Israel Innovation Authority, we generated about $50 million. One of our board members mentioned that’s a big portion of offerings. Hence, our cash allocation priorities are M&A, dividend payments, and then buying back shares. We continuously weigh the situation and make decisions accordingly.

Great. Congrats on the quarter and nice to see the stock having a strong move this morning. Take care.

Thank you, Samad. Thank you.

Our next question comes from Walter Pritchard with Citi. Please go ahead with your questions.

Hi, thanks. I'm wondering if you could just talk to the decision to pull back from selling into the UCaaS providers and instead focus on the end users. So you just talk a little bit about that decision? And as the Teams adoption goes forward, how are you seeing customers choose conductivity options there?

There appears to be some misunderstanding. I didn't mention that in conjunction with UCaaS. In that sector, we’ve been present for a long time. We often work indirectly and/or directly with end-users. What I've mentioned specifically is in relation to the contact center market. Traditionally, we worked with the vendors to access end-users. With increased migration to the cloud, we've found a need for a direct market-approach for the on-prem section. We expect we'll be able to serve this market more efficiently. We employ the same sales force. We currently have more than 200 staff involved in sales and support roles that can sell not only UCaaS, but also contact center solutions. Therefore, this isn't solely a transition, but we're enhancing our strategy and sales approach.

Got it. And then just I guess, relative to Microsoft and Metaswitch, in terms of their offerings, on that front you talked about, your SBC as a service that rolled out in the quarter. What are you seeing in terms of the market with customers looking at those different offerings and understanding it’s quite early?

We haven't noted any particular challenges. At this stage, we are in the process of developing our own offering. As you've heard, we now have the SBC as a Service approach, developing our managed services. We believe this will be competitive even if competitors engage.

Great. Thanks for taking my questions.

Sure. Thank you.

Thank you. Our next question comes from the line of Tal Liani of Bank of America. Please proceed with your questions.

Hi, guys. Good morning. Good afternoon. A few questions. First, can you give us an update on Zoom? You had an announcement before. I just want to know what the experience has been so far. Second, can you clarify how it works with Microsoft Teams? Sorry for the basic question, but how does the sales cycle happen? I mean, do you sell to them, or do you sell to the enterprise? Who selects the technology behind it? I'm trying to understand the drivers. Maybe we'll do these two and then I’ll come back with more questions.

As for Zoom, we initiated a thin layer of Zoom phone activity earlier in 2020, and by the fourth quarter, we're starting to see some uptake. We expect to see further opportunities arise in 2021, as Zoom recently announced that they’ve surpassed 1 million Zoom Phone users. We anticipate growth from this end in the upcoming year, but we’ll need to see how the next six to nine months unfold before providing further information. As for Microsoft Teams, discussions typically occur with the CIO and the IT manager at the end-users’ level. Ultimately, he is the decision-maker. Implementation is fulfilled by partners, where the partner proposes a final solution for the end user. The end user purchases the equipment and voice solutions directly from partners who, in turn, buy those services from us.

And in your view, what's the win rate? Or can you tell us about the competitive landscape in these types of accounts?

We believe that due to the fact that we have cultivated a very comprehensive portfolio over the years, not solely products, but real solutions that combine various offerings with management and analytics tools, alongside some compelling conversational AI technology has provided us with an edge. Our offering is significantly more comprehensive than that of the competition. While competition does exist, we've not experienced overly tough competition, in fact, it has lessened.

Great. Shabtai, two more quick ones. One is, can you discuss the environment in 2020 and its sustainability? In 2020, many employees started working from home, needing to invest in collaboration tools, with Teams being one of them. Do you have concerns that 2021 may bring tougher comparisons since companies procured what was necessary in 2020? Any concerns about sustainability as we look to 2021?

I'm an optimistic guy, so it’s hard for me to voice pessimism on this point. I'll make the following arguments: In contact centers, we genuinely commenced a completely new growth cycle due to work-from-home measures. The demand for WebRTC has surged, as has the need for conversational AI. Our SBC solutions need to support this migration and thus present a massive potential. So in contact centers, we find ourselves in the initial stages of this transition. Concerning Microsoft Teams, I see no evidence of a slow down. I don't expect to witness any decline in demand—quite the opposite. Only about 10% of Microsoft Teams users have engaged with voice features thus far, and that’s a huge growth area. I’ve seen no proof of a decline nor indications that we have plateaued in any area.

Got it. Lastly, this may sound trivial, but in your press release, you mentioned that you went through what happens when you get a COVID vaccine. My last question is regarding the court approval for buybacks mentioned in the release. I’d like to understand the procedure, as I’ve found it interesting that court approval is mandatory. Why can't the board simply decide in Israel? How is that structured?

Hi, Tal. In Israel, anytime you want to distribute dividends or execute buybacks, you are required to file an application to seek court permission for that unless you hold sufficient retained earnings from the past two years. If you look at our GAAP financials, you will see that our buyback and dividend distributions have already exceeded retained profits from the last two years.

Got it. Thank you. Congrats on a great quarter.

Thank you.

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