Audiocodes Ltd Q1 FY2022 Earnings Call

Good day, ladies and gentlemen and welcome to AudioCodes' First Quarter 2022 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. It is now my pleasure to turn the floor over to your host Roger Chuchen. Sir, the floor is yours.

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

Thank you, Roger. Good morning. Good afternoon, everybody. I would like to welcome all to our first quarter 2022 conference call. With me this morning are Niran Baruch, Chief Financial Officer and Vice President of Finance; and Dmitry Netis, Chief Strategy Officer and Head of Corporate Development. Niran will start off by presenting a financial overview of the quarter. I will then review the business highlights together with Dmitry and provide a summary for the quarter and discuss trends and developments in our business and industry. We will then turn it into the Q&A session, Niran?

Thank you, Shabtai and hello everyone. As usual, on today's call, we will be referring to both GAAP and non-GAAP financial results. The earnings press release that we issued earlier this morning contains a reconciliation of the supplemental non-GAAP financial information that I will be discussing on this call. Revenues for the first quarter were $66.4 million, an increase of 12.8% from the $58.8 million reported in the first quarter of last year. Services revenues for the first quarter were $27.5 million, up 26.2% over the year-ago period. Services revenues in the first quarter accounted for 41.5% of total revenues. The amount of deferred revenues as of March 31, 2022, was $76.8 million, up from $71.6 million as of March 31, 2021. Revenues by geographical region for the quarter were split as follows: North America 48%, EMEA 34%, Asia-Pacific 14%, and Central and Latin America 4%. Our top 15 customers represented an aggregate of 60% of our revenues in the first quarter, of which 48% was attributed to our 12 largest distributors. GAAP results are as follows: gross margin for the quarter was 66.9%, compared to 68.4% in Q1 2021. Operating income for the first quarter was $8.1 million, or 12.1% of revenues, compared to $10.1 million, or 17.2% of revenues in Q1 2021. Net income for the quarter was $8.6 million, or $0.26 per diluted share, compared to $10 million, or $0.29 per diluted share for Q1 2021. Non-GAAP results are as follows: non-GAAP gross margin for the quarter was 67.2%, compared to 68.7% in Q1 2021. Non-GAAP operating income for the first quarter was $11.9 million, or 18% of revenues, compared to $13.2 million, or 22.4% of revenues in Q1 2021. Non-GAAP net income for the first quarter was $11.2 million, or $0.33 per diluted share, compared to $12.7 million, or $0.37 per diluted share in Q1 2021. At the end of March 2022, cash, cash equivalents, bank deposits, marketable securities, and financial investments totaled $144.1 million. Net cash provided by operating activities was $0.9 million for the first quarter of 2022. Days sales outstanding as of March 31, 2022, were 69 days. During the quarter, we acquired 720,000 of our ordinary shares for total consideration of approximately $20.9 million. We reiterate our guidance for 2022 as follows: We expect revenues in the range of $277 million to $285 million and non-GAAP diluted net income per share of $1.40 to $1.60. I will now turn the call back over to Shabtai.

Thank you, Niran. Before we dive into the first quarter results, I'd like to inform you that we have prepared and placed a brief presentation on the quarter update to aid in our discussion today. Please refer to the Investor Relations section on our website. We're pleased to report solid top-line results for the quarter, growing 12.8% year-over-year. Revenue acceleration this quarter was mainly driven by ongoing strength in our Enterprise business, which grew over 15% year-over-year and accounted for roughly 85% of our revenues. Service revenues grew above 25% year-over-year and accounted for an all-time record of 41.5% of the total company revenue. This is proof of executing on our strategic priority by successfully transforming to Cloud services and a recurring revenue model with AudioCodes Live Managed Services. The core of this success was our Unified Communication and Collaboration business, which grew over 20% year-over-year. Unified Communication and Collaboration makes up roughly 85% of Enterprise business. Making up the majority of UCC, our Microsoft business grew above 25% year-over-year, representing an acceleration in growth from approximately 20% in 2021. Within that mix, Microsoft Teams grew over 50% year-over-year, as projected by several sources, including an industry research firm and analyst notes from Piper Sandler. Microsoft Teams voice is anticipated to grow at roughly 35% to 40% compound annual growth rate through 2025 which supports our confidence in a multi-year runway for our Teams business. Wrapping up discussion of the UCC business, our Zoom Phone business also had an exceptional quarter, reaching all-time records and up 50% year-over-year. Shifting gears to the Customer Experience segment, which accounts for the remaining 15% of the enterprise business. Customer experience declined 8.5% on a year-over-year basis. Owing to tough comparisons from Russian business generating first quarter 21 inadequate Russian business, our CX segment would have been up roughly 10%. We continue to see great progress with our Conversational AI business, where total contract value signed during the quarter grew around 40% year-over-year. We are well positioned to grow 50% in our conversational AI portfolio in 2022 compared to the previous year. We're glad to report that the acquisition of Callverso at the end of 2021 started to bear fruit with substantial increases in new opportunities for intelligent virtual agents solutions for the contact center application. Importantly, AudioCodes Live, our managed services offering for UCC, CX, and Conversational AI segments continue to see strong momentum. We exited the month of March at a $20 million ARR run rate and we expect our AudioCodes Live managed services to double again in 2022 to over $30 million from over $15 million in 2021. Our pipeline continues to expand across core areas of business supported by long-term secular trends of migration of voice infrastructure to the cloud, hybrid work and enhanced customer engagement and experience solution. Shifting to margins. Our non-GAAP gross margin came in at 67.2% versus 68.7% in the year-ago quarter, owing to the $1.4 million higher costs associated in the quarter with the procurement of components in the open market. Excluding this cost, our non-GAAP gross margin would have been at 69.3 million. Non-GAAP operating expenses increased 20% year-over-year, mainly due to three factors. First, the increase in headcount of 132 positions or up 17% related budget and salaries on a year-over-year basis, all that done in order to support a growing business needs and expansion. Rising salaries in the R&D space in Israel is the second driver for higher costs and salaries, given the booming local high-tech industry which drives a shortage in skilled manpower and therefore drives higher salaries. Lastly, the impact of a much lower NIS to U.S. dollar exchange rate as compared to the first quarter 2021 rates, which was probably hedged. Non-GAAP operating margin was 18% versus 22.4% in the year-ago quarter, which was impacted by higher component costs, increased hiring activity, and less favorable exchange rates between the Israeli shekel and U.S. dollar. Excluding the higher component cost, the non-GAAP operating margin would have been at 21% in the core. On the heels of this development, our non-GAAP earnings per share came in at $0.33 in line with our internal budget. This compares to $0.37 in the first quarter of 2021. Getting back to the guidance provided earlier this year, we are raising our 2022 revenue guidance to $277 million to $285 million and non-GAAP EPS of $1.40 to $1.60 based on strong business fundamentals and our ability to navigate the supply chain issues. That said, there's no change to our long-term financial targets, which remain in the range of 13% to 15% long-term revenue growth, about 67% to 70% on non-GAAP gross margin, OpEx percentage of revenues within the range of 47% to 50%. And then non-GAAP operating margin between 20% to 23%. I would like now to hand over the call to Dmitry Netis, our Chief Strategy Officer, to give a brief overview of our strategic focus areas, after which I will provide more disclosure of different business lines.

Thank you, Shabtai, and hello everyone. Since I joined the team in January, we have undertaken a deep dive into fine-tuning the strategy to ensure that we have an optimal plan in place to capitalize on the strong multi-year secular growth opportunities in our core market, which is mainly the enterprise market, and accounts for roughly 85% of our total revenue. The remaining 15% is the service provider CPE segment comprising our hardware platforms. In terms of the enterprise business, AudioCodes is the leading provider of voice services serving customers in two primary markets: Unified Communications and Collaboration Service (UCC), and Customer Experience Contact Centers (CX). Voice remains a top interaction channel in digital transformation and will remain so for a very long time. Voice is a high impact, high value channel mission critical to companies serving their customers and employees. We're seeing the next stage of evolution of voice not just in a traditional sense of telephony, but also in the non-telephony world, such as meeting assistants, IVAs, conversational AI, call recording, and even the metaverse in the future. It is increasingly hosted in the cloud and consumed as a service, as in the case for instance, with Microsoft Teams. The addressable market for voice services is expected to reach a $72 billion TAM by 2025, comprised of UCC and CX, both of which are undergoing a shift to the cloud. Our approach here is simple: to be the most interoperable communications, platform as a service when it comes to voice services. We focus strictly on the enterprise segment where 65 of the Fortune 100 multinational companies are customers of AudioCodes. We believe this segment will ultimately drive the long tail of our CPaaS. Our voice CPaaS platform incorporates a cloud-native architecture of our session border controller or SBC, WebRTC gateways, and our voice CI Connect platform, powered by our IR call flow APIs and enhanced by a voice quality monitoring, analytics, and orchestration tools. On top of this voice platform, we offer meeting room solutions, end-user devices, and our AudioCodes Live subscription services that enable a one-stop shop marketplace for our enterprise customers. This is what Microsoft and increasingly Zoom customers value most. This voice platform makes up the vast majority of our total enterprise revenues today split between the UCC and CX. Additionally, we offer a portfolio of productivity-enhancing software and conversational AI applications, which include our intelligent virtual agents called VICA from our Callverso acquisition. This is an exciting market that recently Gartner, in its piece called Contact Center Conversational AI and virtual assistants, estimates to grow from $332 million to $13.9 billion by 2026. That's a 72% CAGR. The conversational AI market is a future growth engine for AudioCodes, and we're developing a number of new applications here, including conversational IVR for customer service called Voca and our leading intelligence solutions, SmartTAP and Meeting Insights. AudioCodes is a unique asset built on product-led engineering organization with strong technology superiority in voice-related services, key strategic partnerships, and a one-stop shop approach. With that, let me now update you on the key pillars of our strategy. Our mission here is threefold. First, we expand our voice platform and upsell Conversational AI apps into the UCC vertical by partnering with Microsoft Teams and Zoom Phone. Second, we expand our voice platform and upsell Conversational AI apps into the customer experience vertical in partnership with Microsoft, Genesis, and other contact center and CRM platforms. And third, we accelerate our transition to subscription services via AudioCodes Live for our customers. This move to managed services shifts the burden of managing complex voice infrastructure to us, freeing up resources of IT departments to focus on more value-enhancing initiatives of our customers. As for AudioCodes, the economics here are quite equally compelling. Over the life of a typical 36-month managed services contract, we derive over 2x the economic value under recurring services versus a historical CapEx model. Wrapping up this discussion, we're looking to execute on the aforementioned land and expand strategy by leveraging our strong voice CPaaS powered by our market-leading cloud-native session border controllers, call flow APIs, and management and orchestration tools. Our past stellar performance has been recognized by Omdia, which ranked AudioCodes just this quarter as the number one enterprise SBC in the entire year of 2021 with an 18.18% market share, surpassing competitors such as Oracle, Cisco, and Ribbon for the first time on an annual basis. We're proud of this achievement, going from roughly 10% market share to nearly 20% in just three years. Our excellent execution track record, technology superiority, and innovation engine give us confidence as we write the next chapter of our growth. Lastly, consistent with the strategy we just outlined, we will also look to accelerate our organic growth via potential M&A opportunities.

Thank you, Dmitry. As discussed previously, Microsoft business grew above 25% year-over-year, representing an acceleration in growth from approximately 20% in 2021. We're pleased to see that the pickup in growth for Microsoft created opportunities to discuss on the last quarter, translating into higher business growth this quarter. Specifically, Microsoft Teams business grew above 50% year-over-year in the first quarter. Teams accounts additions in the quarter were 260 versus 206 in the year-ago quarter, the highest on record, which speaks to the accelerating adoption of Teams as the UCC platform in our market leadership in segments. Importantly, Microsoft created opportunity continues to grow at a healthy rate. In the first quarter of 2022, new opportunities created grew 51% year-over-year compared to 2021. Now let’s talk through a couple of Microsoft important wins in the quarter. The first one, we're working with a Tier 1 service provider, we have signed a 78-month contract with a global freight transport company selling Articles Live services for $5 million total contract value. The deal calls for the migration of 30,000 users to Microsoft Teams Voice, highlighting the engagement on the simplicity and broad capabilities of our solution versus those of our competitors, underscoring the strong competitive position we enjoy in our market. Second win, we are working with a large system integrator and signed a contract with a multinational test care medical device company, enabling migration to Microsoft Teams from Cisco and Avaya by providing Articles Live minutes of this to 3,000 seats in the U.S., plus IP phone sales in the first phase of the deployment. Discussions are ongoing that could take total deployment to over 50,000 seats globally worth several millions in total contract value. Now after reviewing these two deals, let's dive into the AudioCodes Live or as we call it, Teams Voice-as-a-Service. Just to remind everybody, since inception in mid-2019, Live Teams ended 2020 at about $7 million ARR, more than doubled in 2021 to reach above $15 million ARR, and in 2022, as discussed earlier, we plan to double again to above $30 million. The background for this growth is clear; based on growth demonstrated in the UCaaS market in the past 12 months, it is evident that Microsoft Teams is the leading solution for large enterprises in North America and worldwide. According to a recent analyst report, introducing a UCaaS market model for the next five years, Teams' compound aggregate growth rate in the coming years is about 34%, quite steep growth that should support continued growth of our Teams Live Services. This report estimates about 4.2 million Teams seats for 2021, 8.1 million seats for 2022, and 31.5 million for 2026. AudioCodes Live success stems from the fact that it removes complexity from the process of integrating with legacy enterprise telephony and provides a seamless, rapid, and cost-effective migration for Teams communication collaboration for enterprises. AudioCodes Live provides, among other things, a solution for direct routing, where service management service providers can manage their products and a complete set of automations of which are delivered on a recurring per user per month model. Now referring to some of the Live product announcements made in the first quarter. Since the launch of our flagship, AudioCodes Live Teams, Direct Route managed service nearly two years ago, our strategic priority is to provide partners and end customers with flexibility in choosing the Teams Voice deployment options that best suits their needs. To that end, we recently announced AudioCodes Live Express, which is a self-service SaaS offering built on AudioCodes Azure Cloud for resellers, VARs and managed service providers looking to seamlessly and efficiently provision Microsoft Teams services. The beauty of this service is quick onboarding and provisioning which can occur in minutes and is handled entirely in AudioCodes Cloud. We also recently extended capabilities of the Live Cloud Managed Service, which simplifies onboarding of Teams business customers or service providers offsetting the service provider cloud. This service is also known as Microsoft Operator Connect. Microsoft Operator Connect provides end users an alternative to procure Teams Voice from select carrier partners directly through the Teams Admin Portal. Calls is the first publicly disclosed carrier using AudioCodes to offer this service on Microsoft Operator Connect. To date, there are roughly 25 partners on Microsoft Operator Connect and AudioCodes is working with many of them. Just last week, we announced that AudioCodes has been named by Microsoft an Operator Connect Accelerator partner. This is a new direction for Microsoft to enable tens of additional managed service providers to offer voice services or Operator Connect with no infrastructure investments required and without the need to maintain ongoing API integration directly with Microsoft. So, we have a vast array of different Live services offerings. Let me distill the primary differences between the different offerings. Our flagship is Live Teams, which targets enterprises and enables Teams via Direct Route. This solution is sold to resellers and system integrators, targeting historical medium to large customers, usually speaking of a seat count of between 3,000 and 30,000 that often have a very complex telephony system environment and require customization. Second offering is Live Cloud, which is a white label SaaS platform. It is sold to service providers to enable them to cater to small to medium-sized customers. Lastly, Live Express is again an AudioCodes branded SaaS platform that enables resellers with no telephony experience to quickly onboard customers. As discussed so far, Live basically targets the enterprise, and this is where we derive our managed services today. Live Cloud and Live Express represent new Greenfield opportunities for us targeting small to medium customers likely with fewer office locations and less complexity. Now, let me shift gears to Zoom Phone. I would like to discuss the emerging fast growing operational momentum at Zoom Phone while still being a small percentage of overall business. Zoom Phone activity in the quarter set another record and was growing more than 50% year-over-year. Zoom has publicly discussed the strategic importance of upselling its core meeting customers with Zoom Phone. In the January 2022 quarter, Zoom added around 550,000 Zoom Phone sets, up from zero 3.5 years ago. Zoom Phone launched in U.S. and Canada in January 2019. As the foremost voice expert with the most comprehensive voice solution in the market, AudioCodes is uniquely positioned to benefit from this long-term upsell tailwinds. We are stepping up our investments in marketing activities around the Zoom platform and look forward to announcing new product launches on the Zoom ecosystem in the coming months. Following the revenue growth in the first quarter of 2022, we also noted that we saw a record in new opportunities created, so in the first quarter of 2022, Zoom Phone new opportunities grew more than 50% year-over-year. Now let me wrap up my discussion with the Conversational AI segment which grew 40% year-over-year and is expected to grow above 50% in 2022. This segment consists of five applications: SmartTAP, our compliance-recording solution; Meeting Insights, a meeting productivity service; Voca, our conversational IVR; Solution Voice AI Connect platform that transforms chatbots into voice bots; and VICA, our intelligent virtual agent solution. Let me highlight our intelligent virtual agent solution, the one we acquired from Callverso, which has been a driver of strong momentum in the first quarter. As proof of strength and scalability for the IVA solution, I would like to discuss a large customer in the medical space, Clalit, which is Israel's largest medical services provider serving over 4.7 million people with our IVA deployed at the company's contact center in 1,600 of its clinics. Let me provide some data points that indicate a strong and successful IVA service at Clalit. We’re talking here about the following metrics: VICA, the IVA handles daily more than 80,000 calls a day and up to 120,000 calls a day on peak call volume, which has resulted in roughly replacing 200 fewer human agents. All that saving was translated into cost savings of about 100 million new Israeli shekels or about $30 million. Following our success in the Israeli market with the VIC virtual agent, we plan to start addressing the global market in the second half of 2022. Another area of strength within the conversational AI portfolio is the Voice AI Connect product, which parses voice interactions for the growing market of chatbots, and it continues to win more chatbot applications with the leading worldwide partners. We believe we are on track to more than triple ARR in 2022 compared to 2021. As such, we strongly believe that Conversational AI can develop into a new meaningful growth engine to fuel our growth going forward. This pretty much concludes my prepared remarks. I'd like to point out that in view of the strong growth anticipated for the UCC markets we serve, our top leading position is attracting voice partners to the leading vendors and investments done and continued to be done to keep our momentum in the space. We are confident and optimistic as ever about our strategic vision and the strong competitive foundation that we've built to capitalize on the multi-year secular growth opportunities in our core enterprise market, and subscription services.

Now we will turn the floor back to the operator for the Q&A session.

It's Greg Burns from Sidoti and Company. First, you had mentioned some impact from Russia. I didn't catch if you put an exact number behind it. But what was the exact impact from Russia on the business in the quarter?

Yes, we refer to existing business mainly in the CX market, where a large deal was deleted. So revenues compared to the first quarter of 2021 were roughly very low. We do not anticipate any new opportunities for developing the Russian market in the coming future.

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

Yes, well, Dmitry defined our strategy of land and expand. So as we see that cloud is the must-needed solution in the Microsoft Teams if you want to connect and use voice with the outside world. Now, we do have today probably the leading solution in the enterprise space. Once we are able to penetrate an account with that service, we are offering within our managed services more services attached to it. Those could be cell phones, meeting room services, call recording solutions and others. So all in all we take advantage of the fact that we have great access to the Teams customer base that allows us to win with one area application and our service and then add on top of it more services.

But maybe just to understand where you're currently at versus what the goal is here. What is the typical attach rate for applications on top of the core Microsoft direct route offering?

Right. So right now we have no statistics here with me to answer that. I'll mention just that there's definitely an interest. I'll give you one or actually two areas, okay. I think we need to realize Teams is the new PBX to win the world, right? We're coming from a world where there's been a lot of other PBX manufacturers such as Cisco, Avaya, Nortel, Lucent and others. All that gear is going to migrate now and in the future to Teams. Now, every PBX has auxiliary services, right? For instance, take IVR services, take recording compliance recording services. So if you add a PBX, let's say an Avaya PBX, and you needed to provide IVR solutions to your customers. Once you move to Teams, you need to establish a new IVR solution or a new compliance recording solution. So that's exactly what we do. We have developed a very advanced IVR conversational, IVR solution. We have a very advanced compliance recording solution called SmartTAP. In the past six to nine months, we've seen a rising number of Teams users who now want to use the IVR and/or the compliance recording. Hopefully that answers your question.

It does. Thank you.

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

Sure. So usually with our live services, we typically work directly in the mid-market through a set of local partners, Microsoft partners. When you go to large deals such as those that I've mentioned here, one that has to do with healthcare or the one with the freight transport services, those are huge companies. The go-to-market is usually through global system integrators. So in both cases, we have worked our way into those accounts through those partners.

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

We have seen significant growth in the number of new opportunities for our virtual agent solutions. Currently, we are operating in a strong market, particularly in the healthcare, financial, and large utility sectors. In 2022, we are focused on developing this technology into a multi-tenant cloud-based solution that can be deployed globally. It is still a work in progress, and I expect we will likely launch it within the next six to nine months.

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

Okay. Yes. So actually, the decline is tied up to a few failures. So I'll name three of them. One is, as I've mentioned before, the Russian market. The second one has to do with a delayed big above $1 million opportunity delay in the finance sector. Then we do see some players in the CX market. I think there are some of them losing market share. So we had some decline. Lastly, obviously, we had some business with some large contact center players who are moving their business to the cloud, which has also caused some loss. But all in all, the space is fairly vibrant, and we do expect to recover from those declines moving forward.

Right. Great. Thanks for that color. And on the gross margin headwind, does that arise primarily from IP phones or your cloud appliances?

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

Hey, guys, this is an analyst from Jefferies. I work with Samad Samana. Another quick one on margins, actually; how should we think about the shape of margin throughout the rest of the year? Do you have any visibility into how these costs are looking into Q2?

Yes, with regard to the gross margin, procurement cost of components in the open market continue to accelerate in the first quarter. The component purchases in the open market at higher than expected cost in the first quarter of 2022 are expected to have a residual impact on the second quarter as well, though at magnitudes less than the first quarter. While we expect supply chain costs to remain temporarily elevated for the rest of 2022, relative to 2021, we believe our supply chain situation should stabilize by the end of the year.

Got it. Thanks. And one more for me. Can you share any details on how Teams is performing across different regions? Is it still mainly driven by the Americas?

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

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

Sure.

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

Hi, it's Madeline Brooks on for Tal Liani at Bank of America. Just want to dive a little bit more into the supply chain issues around the components. Last quarter I know this had been a concern as well. However, it appears to be overemphasized this quarter, especially when I look at the supplementary slides. I'm just wondering if this quarter with the magnitude of the component shortage greater than expected?

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

When you mention stabilization, will it worsen in the second half, or can you clarify how this will impact gross margins and margins overall?

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

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

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

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

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

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