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spk01: Ladies and gentlemen, and welcome to Audio Code's third quarter 2021 earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Roger Chuchin, VP of Investor Relations. Sir, the floor is yours.
spk02: Thank you, Operator. Hosting the call today are Shabtai Applesberg, President and Chief Executive Officer. and Naran Baruch, Vice President of Finance and Chief Financial Officer. Before we begin, I'd like to remind you that the information provided during this call may contain forward-looking statements relating to Audio Code's 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 audio codes 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 audio codes and its customers' products and markets. timely product and technology developments, upgrades and ability to match changes in market conditions as needed, possible need for additional financing, the ability to satisfy covenants in the company's loan agreements, possible disruptions from acquisitions, the ability of AudioCodes to successfully integrate the products and operations of acquired companies into AudioCodes business, possible adverse impact of the COVID-19 pandemic on our business and results of operations, and other factors detailed in AudioCodes filing with the U.S. Securities and Exchange Commission. AudioCodes assumes no obligation to update this information. In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share. AudioCodes has provided a full reconciliation of the non-GAAP net income and net income per share to its net income and net income per share according to GAAP in the press release that is posted on its website. Before I turn the call over to management, I would like to remind everyone that this call is being recorded. An archived webcast will be made available on the investor relations section of the company's website at the conclusion of the call. With all that said, I'd like to turn the call over to Shabtai. Shabtai, please go ahead.
spk05: Thank you, Roger. Good morning and good afternoon, everybody. I would like to welcome all to a third quarter 2021 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance of Audit Codes. Niran will start off by presenting a financial overview of the quarter. I will then review the business highlights and summary for the quarter and discuss trends and developments in our business and industry. I will then turn it into the Q&A session. Niran?
spk08: Thank you, Shabtai, and hello, everyone.
spk03: 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 third quarter were 63.4 million, an increase of 12.1 percent over the 56.6 million reported in the third quarter of last year. Services revenues for the third quarter were 24.8 million, up 26.7% over the year-ago period. Services revenues in the third quarter accounted for 39.1% of total revenues. The amount of deferred revenues as of September 30, 2021, was $72.1 million, up from $64 million as of September 30, 2020. Revenues by geographical region for the quarter were split as follows. North America, 41%, EMEA, 38%, Asia Pacific, 16%, and Central and Latin America, 5%. Our top 15 customers represented an aggregate of 57% of our revenues in the third quarter, of which 47% was attributed to our 10 largest distributors. GAAP results are as follows. Growth margin for the quarter was 69.6% compared to 67.1% in Q3 2020. Operating income for the third quarter was 10 million or 15.8% of revenues compared to 11.2 million or 19.8% of revenues in Q3 2020. Net income for the quarter was $8.3 million or $0.24 per diluted share compared to $7 million or $0.20 per diluted share for Q3 2020. Non-GAAP results are as follows. Non-GAAP gross margin for the quarter was 69.9% compared to 67.4% in Q3 2020. Non-GAAP operating income for the third quarter was $13.5 million or 21.4% of revenues compared to $13.4 million or 23.7% of revenues in Q3 2020, an increase of 1%. Non-GAAP net income for the third quarter was $12.9 million or $0.38 per diluted share compared to $13.3 million or 38 cents per diluted share in Q3 2020. At the end of September 2021, cash, cash equivalents, bank deposits and marketable securities total 184.9 million. Net cash provided by operating activities was 13 million for the third quarter of 2021. Day sales outstanding as of September 30, 2021 were 58 days. On July 2021, we received court approval in Israel to purchase up to an aggregate amount of 35 million of additional ordinary shares. The court approval also permit us to declare a dividend of any part of this amount. The approval is valid through January 3, 2022. During the quarter, we acquired 424,000 of our ordinary shares for a total consideration of approximately 13.8 million. On July 27, 2021, we declared a cash dividend of 17 cents per share. The dividend in aggregate amount of approximately 5.6 million was paid on August, 2021. Now to providing an update on our guidance. We are raising our guidance for revenues to be in the range of $246.5 million to $250 million compared to the previous range of $243 million to $250 million. We are updating our guidance for non-GAAP diluted net income per share for 2021 to be in the range of $1.45 to $1.55 compared to the previous range of $1.45 to $1.65. I will now turn the call back over to Shabtai.
spk05: Thank you, Niran. We're very pleased to report strong financial results and continued progress in our business in the third quarter of 2021. As in previous quarters, our enterprise business, now 85%, of the quarterly revenue kept growing and demonstrated growth of above 20% year-over-year. At the core of this success were the UCAS business, which grew about 18% year-over-year, and our contact center business, which grew more than 20% year-over-year. The growth of these two key business lines for several quarters now in a row clearly points to the potential of continued annual growth rate of four revenue in coming years. Just to remind us all of stated objective announced earlier in the year, we plan to achieve annual growth rate of 15% by the end of 2023. During the quarter, we continue to execute in all of our three strategic business areas in the enterprise space. The first one, Microsoft Teams, Business grew nicely above 20% year-over-year with live services or Teams voice as a service leading charge. Contact center and customer experience operations grew nicely year-over-year. We have signed a new vendor partnership agreement and were able to drive new advanced technological solutions with end users, mainly for call automation. And in the conversational AI space, We saw nice progress in this in several business lines growing year over year, about 50% in revenue and above 100% in bookings. Now, progress made in both the UCAS and the contact center markets in several past quarters further emphasizes the fact that team collaboration, hybrid work, and work from home remain key industry trends, not only in 2021, but also for coming years. As such, Both markets offer a long-term growth potential for us for several years going forward. Contributing to this fast pace of growth and success is our decision made end of last year to increase our investment in R&D, business dev, sales and marketing, and services for those markets. We intend to grow our investment in these areas in order to fuel further business growth in coming years. Growth in UCAT and more specifically in the Microsoft Teams market is primarily related to our audio codes live services in the area of Teams Voice. All in all, service business revenue grew in the quarter above 25% year over year. Consisting now close to 40% of our revenues in the third quarter of 21, it is becoming key to our future business success and expansion. The progress in Teams Voice as a service is primarily related to the industry evolution towards cloud communication and the growing demand in the enterprise space to consume technology as a service versus buying and deploying products and technological solutions by the enterprise IT staff. Delivering successfully Teams voice as a service relies primarily on continued steadily investment in our professional and managed services operations One favorable result of this is the shift towards technology as a service is the continued progress in pivoting towards recurring revenues with strong execution in ORD Code's live operation. While enjoying success in the enterprise space, we saw substantially less success in the service provider market. In this area, revenue suffered from diminished demand for connectivity gear from service provider assets as a result of the COVID-19 crisis. As a result, we have witnessed a decline of over 30% year-over-year in this area. Just to put things in perspective, I should mention that revenue in the service provider area provide less than 15% of the company overall revenue. Another less favorable phenomenon in the third quarter was the shortage in components, which has limited our ability to deliver products targeting connectivity and IP phones. Consequently, this shortage in components has hurt our ability to deliver a more successful core by roughly about $2 million in revenue. Before we move on, just to summarize the various business line performance during the third quarter. So company overall revenue grew 12.1% year over year. UCaaS and Microsoft Teams revenue grew 18%, contact center revenue grew above 20%, voice AI, which is now roughly about 1.5% of business kept growing 50% in revenues and 100% in bookings year over year. And lastly, the service provider CPE business line declined about 30% year over year. Touching on several more important financial data points for the core. As you could probably see from the press release we issued, OPEX increased dramatically, around 7.5% sequentially and close to 25% year-over-year. This phenomenon is due to the following three key factors. One, first, increase in ad count. We grew 100 positions year-over-year. Ad count increased 34 positions year-over-year. this quarter to 855 full-time employees and growing 13% year-over-year. Obviously, adding 100 new positions over the year-ago quarter clearly demonstrates our confidence in continued expansion of our business. The second factor, rising salaries in the R&D space in Israel, where the boom in the local high-tech industry drives substantial shortage in skilled manpower and higher salaries for R&D employees. Third component, the impact of much lower U.S. dollar versus the new Israeli shekel exchange rate as compared to the year ago quarter. Well, we enjoy good hedge. We are talking about 10% change in this ratio compared to last year. So all in all, three factors affecting substantial growth in Aurapex. That probably explains how from growing revenues 12% year over year, the earning line really remained flat. Most of the increase in profitability went to cover those differences in spending. Cash flow, again, very successful core. We generated $13 million in the third core and more than about $43 million in the first nine months of the year. which is fantastic. That would compare with about $28.4 million in the same period last year. Lastly, deferred revenues were $72.1 million compared to $64 million a year ago, an increase of 12.6% over the third quarter of 2020. Now let's relate to our financial performance in terms of our financial model. As we have targeted earlier in the year, we target revenue growth to achieve 13% to 15% on an annual basis. Last year, we delivered 10.2%. This quarter, we delivered 12.1%. We believe we should be able to close the year at around 12.6%, 12.5% in terms of revenue growth. In terms of gross margin, we targeted to achieve between 67% and 70%. Glad to know that in the core, we have delivered 69.9%. In terms of OPEX's percentage of revenues, we targeted a range of 47% to 50%. In the third quarter of 21, we delivered 48.5%. And lastly, operating margin. we target the range of 20 to 23%. We ended third core 21 at 21.4%. All in all, very nice performance. Now let me touch one key area which I believe everybody is interested in, and that is Microsoft Space. So in the third core of 21, we grew more than 20% year over year. We have leveraged Audicode's live services for Microsoft Teams. We saw continued momentum in the market. Live services have focused on DAC routing as a service and additional Teams voice services. As a result, we have increased the total contract value of live contracts by several millions in the core, reaching now few tens of millions of total contract value from past 12 months activity. Now, I would like to reference now, until lately there was no published report that gave visibility as to the potential or the total available market for Microsoft Teams for us, Teams Voice. So I would like to reference one recently published seminal research from Papa Sandler, highlighting the large total addressable market and the strong growth potential in the UCA segment. According to that report, UCAS should expand rather fast. Before I begin with that, I'll mention that the global TAM for endpoints is today about $440 million. So we're now looking at a market that's looking to replace the current TDM and other endpoints with UCAS. and for us more specifically, with Microsoft Teams and Zoom phone endpoints. So the report mentions that this year the overall endpoint market, UCAS market, is about 26 million. They forecast that that number should grow to 113 million endpoints in 2026. All in all, this represents about 34% CAGR for the next five years. According to this note, Microsoft Teams market share is estimated to be 17% this year out of the total UK market and is forecast to grow to lead the market and own 29% by 2026. So I just translated that into actual numbers. So Microsoft Teams UK sets are expected to increase from 4.2 million this year to 31.5 million in 2020 seats. That represents about 50% CAGR for Microsoft Teams seats. The note states also that Zoom and RingCentral are main competitors in that space. As I'll mention later on, we're growing out our share of revenue in the Zoom phone area as well. We had a very successful core in that space too. Getting back to Microsoft, the IP phone business is growing fast this year and showing plenty of room for growth. This is mainly due to the trend of return to work. So all in all, we grew. Actually, we could deliver a substantially better core unless we were facing a component shortage thing. Also, now let's talk about enhancements, what we see ahead for us in 2022. Microsoft announced lately in the Enterprise Connect industry trade show two very important programs. They've announced Microsoft Operator Connect. They've introduced APIs for Teams, which allows operators to integrate Teams data marketplace and into their plans to deliver UCAS. We see high traction by the carriers and service provider SMB vehicle from Microsoft perspective. Early release should be provided by the end of the year and the final release will be provided mid-2022. And Audicode is one of four partners that are helping that effort to develop and sell the platform. So that should be a big driver for Microsoft Teams service provider push next year. Also, Microsoft announced SIP Gateway program at Enterprise Connect allowing third party phones to connect to Microsoft Teams using advanced session border control technologies and device management. All in all, we look forward to see how that from develops and what all part in it will be there. Just to get to some more visibility into the Microsoft ecosystem sales. So we've continued to see the share of Skyfall business declining versus sales of about 10 million a year ago. We saw just 5 million this quarter. On the other end, Microsoft Teams grew significantly. more than 70%. So things carry carrying the charge going forward. In terms of new business created, again, we saw an increase in new opportunities created in the core. And it's growing at least 25% year over year. Now let me touch on the key program we have in the Microsoft space that is the codes live, where we provide basically teams voice as a service. In 2021, we have significantly stepped up our efforts and accelerated the introduction of Agico's live Teams Voices of Service. Teams Voices of Service removes complexity from the integration of team collaboration, unified communication, and enterprise telephony, and provides a seamless, rapid, and cost-effective migration to Teams. In building this service, we have brought together our SPC, network and user management products, and a complete set of automations and are delivering them on a per user per month software as a service model. In recent course, we have already expanded the service offering by adding new compliance recording services and more. Also, we have since extended our offering of live to other markets, including solution for Zoom phone and contact center activities. Since introducing the live offering mid last year, we experienced good reception to this offering. We continue to grow the recurring revenue fairly fast, as I've mentioned before, with the target to reach 10 million ARR middle of the year. We passed it. We believe that this time we will cross the target to 15 million by the end of the year. Our bookings or total contract value of this middle on end is already several tens of millions by a large number of enterprises that have already started or are about to start the UK's deployments with us. Also, there's a nice pipeline that's growing steadily. This fast-growing business is tangible proof to our superior technology in the areas of connectivity, management, and automation services, and adjacent application to the UC solution majority of it in Teams OS. I'm confident that this business will keep growing and represent a significant portion for Decode's value in coming years. Touching on the Zoom, This has been most successful, the best query we had ever in the Zoom phone area. We have reached about a million dollars in revenue, a bit less than that. We believe that full-score will keep growing. All in all, we see a lot of focus in this area. We believe that Zoom will be focusing more and more on Zoom phone, and they've basically stated that. application to be a strategic focus for them. So we want some large operation. I can mention two large deals, one in Europe, one in the U.S. So all in all, also if you go back to the Piper Center report, I can quote that Zoom is expected to achieve a market share of 15% in 2026 from its current position of 11%. current market share of 11% in 2021. Again, I remind you all, we're talking about a time of 440 million seats altogether. Now, one key operation I've mentioned before is our services. As I've mentioned, services is growing to become about 40% of our business. That basically is a combination of maintenance contracts, but more importantly, professional and managed services, which is growing very fast. I mentioned that services invoicing, well, I was talking about recognition. Talking about invoicing, title company services grew close to 25% of the core, while professional and managed services exhibited substantially large growth, topping 40%. both for the core and for the first nine months in the year. So all in all, services really do serve for us a lot of room for expansion going forward. Lastly, I'll touch on Voice AI. Voice AI seems to be growing the way we want it to grow. This year, as I've mentioned in the press release, we target overall booking to grow above 100% and reach a level of close to $5 million. We expect that rate of growth to come and happen next year. Key in that operation were a compliance recording for teams, where booking are substantially over the initial plan for the year. Second is a technology we call Voice AI Connect, which is used to enable chatbots to connect through voice. And here we've enjoyed a very good core. This year we should end up somewhere in the one million ARR in that business, but next year we expect to move and triple that number. And all in all, you know, we definitely get a feedback from the market that as it comes to voice and voice becomes more Very important in the chatbot world. In the voice space, our solution is regarded as fairly advanced and superior to competition. And we do have a working relationship with some of the leading chatbot developers in that market. One such known one is a company called Cognigy out of Germany and Europe. And there are a few more partners in the UK, I'm sorry, in the US, and in India and other places, which allow us to deploy that technology. Last, I should mention that we've made very nice progress with our meeting insights product. The first release was done in October, actually, earlier this month, we've seen um great interest um in over than 70 or 80 percent of introduction um right now we have tens of um proof of concept scheduled and running uh in israel uh already begun with business development in the us for that product we've got first few very uh nice reaction to the product and um already got the first po from the us uh so We do expect to grow fast on that product next year. All in all, with that, I've been able to cover most of our activity in the third quarter, and I'd like to get the call back to the Q&A session. Operator?
spk01: Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question for today is coming from Greg Burns. Please announce your affiliation, then pose your question.
spk06: Good morning. I'm with Sidoti and Company. So I just wanted to touch on... the increase in OPEX and what your view is on that, the ranges you kind of set in terms of operating expenses as a percent of revenue and your operating margin targets. At what point do you expect to kind of slow down the investments and start to gain a little bit of leverage on some of the revenue growth that you're projecting? Thank you.
spk05: Okay. Well, most of the investment in growing ad counts really is related more to the sales and marketing side of the business. To grow our team services as the market grows and we need to be able to attract more customers and grow the business, we need to add personnel to provide good service. So our investment is less is less intense in the R&D space, still going on and adding more automation and a few more solutions to it. But the majority of the expense goes to the deployment in the market. So I think we've seen the most of the worst, I would say, part of the increase, simply because from that point on, I think the behavior of The U.S. in new Israeli shekel will moderate substantially. We will not face any time soon another decline of 10% in that ratio. And then, you know, again, coming back to the, you know, average salary issue in R&D, I think this is a phenomenon that you will hear of. Many companies in Israel were due to the very, you know, attractive, I would say, attractiveness of Israeli R&D. You know, just to give you an example, a month ago we've heard Microsoft is planning to add 2,500 new positions in Israel in five new development areas. And as you can imagine, you know, there are tens of such companies, including yesterday we heard about AT&T opening a design center in Israel. So I would tell you that there's a... kind of I would say not call it a fight, but there's a big, big effort to be able to recruit the right talent to be able to grow the business. Luckily for us, again, most of the additions would be abroad in marketing and sales. So we do expect continued investment, but not as big a jump as we have faced at current core.
spk06: Okay, and then in terms of the service provider space, Do you just give us a little bit more color on what is driving the declines there? Do you expect that business to kind of remain at these levels, like level off here? Or is there a reason to believe maybe that that business might potentially rebound from these current levels? Thank you.
spk05: Sure. Now, I'm a bit more optimistic than I was about three months ago because we definitely have seen in the third quarter, you know, some new demand. And I would expect some, you know, level off. However, you know, due to the shortage of components, we are kind of stuck here for, I would say, for this quarter, the fourth quarter, and maybe the first one, too. So I expect, you know... I do not think that we will see any further decline. Actually, I think we've reached the bottom and could see some up growth from here. But more growth should be expected second half of 2022. So all in all, it's an area that's not helping to drive revenues upward these days, but we believe it will make a comeback around mid-next year. Okay, thank you.
spk08: Sure.
spk01: Your next question is coming from Ryan McWilliams. Please announce your affiliation, then pose your question.
spk07: Sure. From Barclays Bank, PLC. Shabtai continues strong growth with enterprise customers. So as these larger customers are looking to adopt cloud solutions, are you seeing your average deal size increase? And are the companies by number of employees getting larger in your pipelines? Thanks.
spk05: Thank you, Ryan. Yes, well, a focus, as I've mentioned, is really what, you know, when we develop our solution for Microsoft, first Skype for Business and later on Teams, we're targeting, you know, usually the large enterprise companies with a number of employees ranging from, I would say, 3,000, 5,000 and upward. Lately with... teams versus a service. We also target smaller companies. We could go as low as 500 employees. We're working with a large global system integrator on the large enterprises. We're acting much more independently in the mid-market. This is where the focus is going to be. The typical business for us would be a few thousands of employees where they will start trialing and do proof of concept with first with 100 or a few hundreds of employees, and then after a period of three to nine months, we'll probably add more. So that's the trend you'll see in that space.
spk07: Perfect. And then you mentioned Operator Connect last quarter along with this quarter. Would you mind just digging a little deeper on what you think that could mean for audio codes? And how do you think Operator Connect impacts the direct routing landscape? Thanks.
spk05: Sure. Okay. So, great question. As I mentioned a moment ago, Microsoft's focus was entirely in the beginning in the large enterprise space. There's no focused target effort in the mid-market. However, it's obvious that going to the SMB market and going to small businesses Usually that's not where Microsoft is having direct full efforts. In that space, you know, obviously RingCentral is the leading player, and as we could have seen, Zoom has entered the space. And actually now, according to that report from Piper Sander, you can see RingCentral and Zoom, you know, in a fight for this segment. Now, Operator Connect, which will connect between Microsoft and a service provider, will allow Microsoft for the first time to target that smaller-sized business market. Because traditionally, businesses of that size are being served by service providers. Take AT&T and Verizon and operators anywhere in the world. So that will definitely open for us completely new segment that has not been served by us before. Once that program goes into full motion, the cooperation between Microsoft and service provider will allow us to tunnel or voice teams as a service into that small businesses market. So it's a very important addition towards our future.
spk07: Thanks for taking the questions.
spk08: Nice print. Thanks, guys.
spk01: Your next question is coming from Samad Samana. Please announce your affiliation, then pose your question.
spk10: Hi, good morning. Samad Samana from Jefferies. So maybe Shabtai first. I wanted to ask about the component side. I wanted to make sure, one, that I think you said it was a $2 million headwind in the quarter. One, I want to confirm if that's the case. And then how does that factor into the guidance that you've given for the fourth quarter or the implied guidance for the fourth quarter? And maybe how should we think about the impact of that into 2022? Okay.
spk05: So, yeah, you understood correctly. We could have delivered more IP form products and more service provider gear, we believe that all in all, we kind of missed delivery of about $2 million in the core. So, you know, we have targeted a larger growth of revenue in the core. That phenomena will probably continue, I would say, this core in the first half of 2022, but We took that into account when we gave the overall guidance, meaning that taking that shortage into account, we still target to grow in the full score. If you make quick calculation, we definitely plan on growing in the full score, although less than we could have expected earlier in the year. So all in all, that's for the guidance. Again, next year, I believe that as we approach second half of the year, all that will go away. So we should get a boost from increased phone sales and service providers out here.
spk10: Great. And then maybe a follow-up. I know we've touched on OpEx, but if I look back at sales and marketing dollars from 2017 to 2018, it was roughly flat. It shows up very modestly in 2019. So Even pre-COVID, it was fairly limited expansion in sales and marketing dollars, and now this year we're tracking up pretty healthily. How should we think about just the increases there going forward, and what's the right level of sales and marketing investments that we should think about, maybe both short-term and intermediate-term?
spk03: All right, Samad, this is Niran. So again, as Shabtai mentioned, we are planning to invest more in OPEX, mainly at the sales and marketing area. I can refer to the near term, to Q4. We are planning to invest more, and the level that you see in the third quarter, which was 14.4 million, we are planning to increase it by, let's say, 1% to 3% in terms of sales and marketing. With regards to other OPEX, such as R&D and G&A, we are not planning to invest much more than the level that you saw in the third quarter.
spk10: Great. And then just last question for me. Shabtai, you spent a lot of time today talking about the seats available in the market and the opportunity. I was wondering if you... could share with us just maybe how many Microsoft Teams voice seats you're actually enabling today, just so we can get an idea of how AudioCodes' progress looks against this large market.
spk05: Right. We do not, you know, discuss in public the number of seats we have, but I'll give you some numbers, if you will. And if you go back to the Piper Center report, you can see that Microsoft Teams seem to be deploying about 4.1 million subscribers this year. This should grow, as I've mentioned, to 31 million in 2026. Now, we are by far the dominant player in that market. You know, you can use, you know, market share of 60 or 70% these days. So that probably can give you some idea about the number of seats we are enabling, but at the same time, give you an idea about, you know, the future or ability to, you know, double that number next year and grow to be 60 or 70% out of the total of 30 million in 2026.
spk10: Great. Thank you for taking my questions this morning.
spk08: Thank you. Sure.
spk01: Your next question is coming from Tal Liani. Please announce your affiliation, then pose your question.
spk04: Thank you. My affiliation is Bank of America. Good morning. I have a question on Zoom and also on Microsoft. Can you share with us what's the outlook for Zoom? What are they doing there that involves you? What's the potential for other types of businesses with them? Just kind of because it's such an important company, I just want to understand the outlook, even not with numbers, just the potential opportunities there. And then on Microsoft, can you share with us your view of how they evolve from here? Is there a risk? of slowdown because of COVID year-over-year comparisons, and just in general, same question on Microsoft. Thanks.
spk05: Okay, thank you, Tal. Okay, referring first to Zoom, it's obvious that Zoom Phone is a strategic program for Zoom. And we have been working with Zoom for more than two years now, on writing and integrating our solution into their offering. Now, we have done very little business in 2020. That business is growing substantially in 2021. The amount of new business created for us in the past two course is really overwhelming. Now, the way we are designing to the Zoom phone solution is in two key areas. One is devices, phones, that is integrated already today. Now, I'll tell you, and I think this is known, that Zoom success really comes from the small businesses and SMB. Zoom has an effort to grow up the market and go into larger organizations. Whenever they go into larger organization, the need for SBC, good SBC solution grows. So whenever they go to sell to a larger company, our potential offering grows in importance. Also, we do intend to come in next six to nine months with our new offering for meeting rooms. And that offering would combine of conference devices, or meeting room devices management and meeting insights. And we will provide a comprehensive bundle. We believe it will be very successful. We believe that Zoom should be a very important partner for us. So that's on Zoom. Regarding Microsoft, Teams is perceived to be a key driver in Microsoft projects. you know, effort to increase licensing fees from E5. I think security and Teams are the two leading drivers for the increase in E5 licensing as such. We could see pretty focused effort at Microsoft to support Teams and Teams Voice more specifically. And I've just mentioned these two programs, Operator Connect and SIP Gateway, to be fairly important to them. Also, I think it's known that Teams should be part of Windows 365, basically integrating Teams into practically not only the business world, but also for the consumer world. So I don't think we face a trend, a potential, you know, trend of lowered focus in this area. I think we will see Microsoft keep investing because this is part of a substantially larger and overall more important target for Microsoft.
spk04: Great. Thanks, Shabtai, for the color. Just last question on supply chain. Can you discuss how supply chain impacts you how it impacts your clients and your ability to sell, even if you have the right components in place, just in general, the environment for supply chain?
spk05: Yeah, actually, it's really more the shortage of components. Obviously, there is increased lead times. So, you know, customers really suffer from inability to get the products they want. But other than that shortage, you know, we are capable of working out, you know, around those issues in the production and delivery. So that's something that's contained within our operations. All in all, I think, you know, we are starting to see some signs that, you know, there are ways in which the world is starting to – crank out more devices, more components. I'm optimistic that in six to nine months, we will see substantially leveling off of this issue.
spk10: Got it.
spk08: Thank you.
spk00: Sure.
spk01: Your next question is coming from Ali Yakov. Please announce your affiliation, then pose your question.
spk09: Hi, Shabtai. I'm from VAR Capital. Great job on another good quarter. So my question is, can you elaborate and give us more color about the time that you mentioned in the Microsoft Teams area, specifically for the Audio Codes Live? To my understanding, your total addressable market from the 440 million seats is 4.2 million. And that's, you can assume, 50% CAGR year over year. And from that, you can take 70% microchip. Is that correct?
spk05: Yeah, that is about the rough, you know, of my ad calculation, yes.
spk09: And how should we look at it in the next couple of years in terms of your market share or maybe you can charge more from a user per month?
spk05: Right, so A1 needs to make a differentiation You know, we haven't done that yet, but we'll probably need to do it starting from next year. Everything we discussed so far on Microsoft Teams is really in the enterprise space. Now, let's not forget that that 440 million TAM relates to both enterprise and service providers. Now, service provider will start to play next year. We'll see their competition. We expect competition from companies like Ribbon and MetaSwitch, which is now part of Microsoft. So how market share will develop in the service provider, that is still yet to be seen. However, we're very confident that in the enterprise space where we are today, we will keep being the dominant player. Obviously, the only competition, real competition we face there. It's just one company, and we really don't see them close to us. Also, we do intend, and I have not mentioned it, but we do intend to add more services, contact center services, meeting room services, recording services, management services. So I think we should be able to defend fairly nicely or dominance in the enterprise team space.
spk09: So, to my understanding, that expands your time. If it's 4.2 million only for the enterprises, then you can take another market share from the service providers in the upcoming years, right?
spk05: Yes, that is correct. Although, you know... 2022 will be just the launch year. So you should expect rather mild beginning but I would I would tend to think that 2023 will be a year where that market will start growing fairly fast with large service provider, you know, no names pushing it to the market.
spk08: Okay, thank you so much. Sure.
spk01: There are no more questions in queue. I would now like to turn the floor back over to Shabtai.
spk05: Thank you, operator. I would like to thank everyone for attending our conference call today. With continued good business momentum and execution in the first nine months of the year, we believe we are well on track to end 2021 with a strong note of confidence in growth and expansion in coming years. Look forward to your participation in our next quarterly conference call. Thank you very much. Enjoy the day.
spk01: Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
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