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spk01: Good day, ladies and gentlemen, and welcome to Audio Code's fourth quarter and full year 2021 earnings conference call. At this time, all participants have been placed on a listen-only mode, and we will open up the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Roger Tuchin, VP of Investor Relations. Sir, the floor is yours.
spk03: Thank you, Operator. Hosting the call today, Shabtai Allisberg, 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 AudioCode'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 development, upgrades and 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. During the call, audio codes will refer to non-GAAP net income and net income per share. Audio codes 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 his 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 would like to turn the call over to Shabtai. Shabtai, please go ahead.
spk08: Thank you, Roger. Good morning and good afternoon, everybody. I would like to welcome all to our fourth quarter and year-end 2021 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance of Audicodes. Niran will start off by presenting a financial overview of the core. I will then review the business highlights and summary for the core and discuss trends and developments in our business and industry. We will then turn it into the Q&A session. Niran?
spk09: 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 $66.1 million, an increase of 12.7% over the $58.7 million reported in the fourth quarter of last year. Full-year 2021 revenues were $248.9 million, an increase of 12.7% over the $220.8 million reported in 2020. Services revenues for the fourth quarter were $24.4 million, up 16.2% over the year-ago period. Services revenues in the fourth quarter accounted for 37% of total revenues. On an annual basis, services revenues increased by 24.4% compared to the previous year. The amount of deferred revenues as of December 31st, 2021 was 76.5 million, up from 69.2 million as of December 31st, 2020. Revenues by geographical region for the quarter were split as follows. North America, 44%, EMEA, 40%, Asia Pacific, 12%, and Central and Latin America, 4%. Our top 15 customers represented an aggregate of 63% of our revenues in the fourth quarter, of which 51% was attributed to our 12th largest Distributors. GAAP results are as follows. Gross margin for the quarter was 67.2% compared to 71.4% in Q4 2020. Operating income for the fourth quarter was 9.3 million or 14% of revenues compared to 12.1 million or 20.7% of revenues in Q4 2020. Full year 2021 operating income was $39.5 million compared to operating income of $38.4 million in 2020. Net income for the quarter was $7.3 million or $0.22 per diluted share compared to $8.4 million or $0.24 per diluted share for Q4 2020. Full year 2021 net income was $33.8 million or $1 per diluted share compared to $27.2 million or $0.83 per diluted share in 2020. Non-GAAP results are as follows. Non-GAAP gross margin for the quarter was 67.6 percent compared to 71.5 percent in Q4 2020. Non-GAAP operating income for the fourth quarter was $13.5 million or 20.4% of revenues compared to $15.4 million or 26.2% of revenues in Q4 2020. Full year 2021 non-GAAP operating income was $53.8 million compared to operating income of $47.5 million in 2020. Non-GAAP net income for the fourth quarter was $13.4 million, or $0.39 per diluted share, compared to $15.2 million, or $0.44 per diluted share, in Q4 2020. Full year 2021 non-GAAP net income was $51.8 million, or $1.50 per diluted share, compared to $46.7 million, or $1.41 per diluted share in 2020. At the end of December 2021, cash, cash equivalents, bank deposits, and marketable securities total 174.8 million. Net cash provided by operating activities was 4.3 million for the fourth quarter of 2021 and 47.3 million for 2021. Net cash provided by operating activities in both periods were impacted by the 12.2 million payments made in December 2021, which was the third and last installment pursuant to the royalty buyout agreement. Day sales outstanding as of December 31st, 2021 were 68 days. During the quarter, we acquired 314,000 of our ordinary shares for a total consideration of approximately $10.7 million. In December 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 permits us to declare a dividend of any part of this amount. The approval is valid through June 19, 2022. Earlier this morning, we declared a cash dividend of 18 cents per share. The aggregate amount of the dividend is approximately 5.8 million. The dividend will be paid on March 1st, 2022 to all of our shareholders of record at the close of trading of February 15, 2022. Our guidance for the full year 2022 is as follows. We expect revenues in the range of $277 million to $285 million and non-GAAP diluted earnings per share of $1.40 to $1.60. I will now turn the call back over to Shabtai.
spk08: Thank you, Niran. We're very pleased to report strong financial results for the fourth quarter and full year 2021. 2021 capped an exceptional performance for the company with revenue growth year over year accelerating to 12.7% for both the full score and full year. Definitely a nice achievement when compared to the annual revenue growth achieved in 2020, which was 10.2. More important, beyond the success on the financial front, in 2021, we have successfully executed on our strategic priorities in our markets. We have built a more dominant position in our industry as a leading unified communication collaboration voice company. We kept making progress in our key areas of focus, namely UCaaS, contact center and CCaaS and the voice AI world and continue to pivot our business towards cloud communications, and greater contribution from managed services and recurring revenues. On the net income side, we grew 10.8% compared to 67% in 2020. This is mainly due to our calculated and conscious decision to increase investments in sales and marketing and R&D in order to be able to capture the huge opportunity available for UC Voice in coming years in the UCAS and the contact center markets. Just to go and quote some data in recent two market studies targeting UCAS and contact center markets. Mentioned before, the Piper-Sandler note, which talks about a global TAM of about 440 million endpoints. UCAS next five years should show a huge increase. Basically, we're talking about only 26 million endpoints at the end of 2021, and the report projects 113 million at the end of 2026, way low from the TEM. Now, this forecast presents about 34% five-year compound aggregate growth rates. And therefore, you know, for us, this is the time to invest. This is the time to take some of our profits in our ability to generate net income and operating margin that are above 20% a year and reinvest them in the business to create higher annual growth. Another report that just came out about two weeks ago from BIRD, they've done a channel survey in the UCAS and products on the market. They've talked to 10s of different partners, some of them selling more than 10 million in the use UC revenue annually, when they've been asked about their expectation for performance over the next three months, they have said that they expect the business to grow up 30% and above 53% of them have said that we fight compared to what was quoted on it a year ago in December 2020, only 38%. So definitely huge conviction among channels and mock vendors, that this market is growing fast and represents a huge opportunity. And this is again, why we've done that decision to invest more in growing annual revenues and keep profitability at 20%. Now, as a result of that, and we've done some modeling financial models, not only for 2022, but also 23 and beyond. And we can see that just based on organic grow, and we will be talking about an organic grow immediately. But just based on organic grow, we should grow this year as we have quoted somewhere around the mid-range at about 13%. Personally, I believe that we should do even better than that. If we are good at executing on M&A strategy, we would grow further into the 15% to 20% a year. So expect growth and capturing market share in the markets. This is the strategy, and this is why we do invest in our sales and marketing R&D. Not less important, as we grow revenues, we capture more market share against competition, and I think this is really shown in the performance that we have presented in 2021. At the same time, we were able to achieve operating margin in 2021 of 21.6%, which is within the 20% to 23% range defined in our long-term financial models that we've presented to our analysts a long time ago. This is a similar level of operating margin achieved in 2020. Other key achievements for 2021, gross margin expansion from 68.1% in 2020 to 69 in 2021, and substantial expansion of our core services offering. I'll touch that when I'll talk about our services offering. In many ways, our performance in 2021 pretty much underlines the migration from our traditional gateway and SBC connectivity business, which was primarily hardware-based, towards a software and services offering carrying substantially larger gross margin and innovative approaches to AI-powered communications and collaboration. Now, at the core of this success was our Microsoft go-to-market. We're talking about growth of about 20% year-over-year in 2021. That was driven primarily by continued success for our Microsoft Teams solutions. Sales of Microsoft Teams solution extended growth of above 70% year-over-year and lapping declines from Sky for Business which now represents only about 10% of the total Microsoft UC contribution. Additionally, our contact center quarterly business grew 12% year-over-year and more than 15% for the full year. As such, Enterprise contributed nearly 85% of our revenue during the year, growing about 15% in 2021. Our Audicode's live managed services offering exceeded our internal expectation with annual recurring revenues, AOR, exiting this year well above our target of $15 million and more than doubling from a year ago of about $7 million. Services grew on an annual basis 24.4%, and now they account for 37.7% of revenue. This is up from 34.2% in 2020. Additionally, Our pipeline continues to expand across core areas of our business, supported by long-term secular trends of migration of the voice infrastructure to the cloud, video-enabled collaboration, hybrid work, and enhanced customer engagement and experience solution powered by AI. Touching another focal area in the company, which is suffering from the pandemic for the second year in a row, This is the service provider CP activity. I'm glad to say that in the fourth quarter, we've seen improvement in ourselves was CP business. We saw nice recovery that contributed to growth of about 50% year over year, meaning demand is coming back, coming back at the end of 21 coming back for 2020 2022. I'm sorry. Still, In 2021, we have seen a decline of about 13% in revenue compared to 2020. We continue to suffer in this line from shortage in components, which is limiting our ability to deliver product. And this disruption in the supply chain is now also forecasted to continue well into 2022. It will cause us with limited delivery capability and higher costs that will hurt our gross margin. So all in all, small area of our business contributing about 13-14% and declining. Without that, enterprise growing more than 15%. That is where we invest in the company. This is where growth should come from. Then I want to touch voice AI and we'll talk about it later on, but While being a very small percentage of our revenues, VoiceAI bookings and revenues grew over 100% during the year. And basically they have topped our projection of $5 million for the year. We now project this business line to close to double again in 2022. Actually, I can clearly see that in about two years from today and with the acquisition we made, I'll talk about immediately of Colverso, we're looking at the line that should do between 20 and 25 million in two years from today, very strong line growing very fast. In the fourth quarter of 2021, we announced the acquisition of Colverso small Israeli private company which specializes in developing and deploying state of the art visual agent solution for the contact center market. This acquisition further Schlenk and Audicode's ability to help contact center improve their customer experience while reducing operational costs. Still on the financial performance, let me touch a few more points. OPEX. OPEX is a sore point. OPEX increased substantially, about 1.5% sequentially, but 17.6% year-over-year. mainly due to the following key factors. One is the impact of much lower new Israeli shekel exchange rate as compared to the 2020 rate, which was favorably edged. Then, increase in ad count. We'll talk immediately about the increase in ad count. All in all, I think we have added more than 110 new positions over the last year. We keep growing. We keep adding about at a rate of about 30 new positions every quarter. So increasing age count. Also, rising salaries in the R&D space in Israel, where the boom in the local high-tech industry drives shortage in skilled manpower and drives higher salaries. So taking into account more headcount, higher salaries, debt impacts or OPEX. Still, as I've mentioned before, We will plan our business such that we will keep generating operating margin that's north of 20% a year. Cash flow, we have generated $16.5 million in the core, bringing overall 2021 cash flow from progression to about $59.6. almost 60 million this year on the heels of close to 50 million previous year. Deferred revenues also grew to 76.5 million compared to 69.2 million a year ago, an increase of about 10.5%. In terms of our long-term financial model, nothing has changed. We still plan this year Revenues to grow and reach between 13% to 15%. Non-GAAP gross margin to be in the range of 67% to 70%. OPEX to be not more than 47% to 50%. Then operating margin, as I've mentioned, the range planned for is 20% to 23%. We have announced in recent weeks about struggling our corporate development efforts. We have announced the joining of Mr. Dimitri Nettis, the Chief Strategy Officer, effective immediately. Mr. Nettis joins us after a long career, 25 years in the technology sector, 15 years in Wall Street, covering companies in the unified communication and collaboration customer experience among other sectors. And most recently, Mr. Nani's work as a managing director and investment banker with QAdvisors. And has been a senior equity research analyst at Stephen. So we feel in 2022, we are creating substantially stronger theme of corporate development and planning. And I'm confident that we'll be executing this year to allow non-organic growth to the company. Now let me go into some of the key areas of activities. We've mentioned that Microsoft grew year over year about 20%. Growth is we leverage mainly our live services, which help companies transform their UC or telephony services from another solution to Microsoft Teams. a very strong activity in direct routing as a service and full team voice as a service. I can say that we are signing, we've signed in 2021, total contract value, north of $50 million in the year. As I've mentioned before, ARR grew from $7 million to well above $15 million, which was the target. In terms of... breakdown of Microsoft revenues. So again, we split it between teams and Skype for Business teams kept growing, teams actually grew in the full score, about 50% year over year, Skype for Business on the other side declined about 50% year over year, all in all Skype for Business is now at a very small level, just to give you some visibility into our Microsoft sales. So In the full score, we're at around 36 million, out of which about 4 million were contributed by Skype for Business, and the rest of it, close to 32 million, were contributed by Teams. In terms of creating new opportunities in Microsoft, so here the trend is even stronger, if we look on new opportunities created in the team space, we've seen growth of more than 76% year over year. So all in all, if we compare the amount of title of potential revenues from created opportunities, there's a ratio of three to one when you compare creation versus build. So all in all, we do expect continued growth and definitely a stronger acceleration of revenues from the Microsoft space. In terms of new accounts, lately in the course of the last three or four course, we are roughly adding a few hundreds of new accounts to the Microsoft Activity. About one quarter of them came from the transition of accounts from Skype for Business to Teams. Three quarters of the new accounts are fresh new accounts. As for live, I've mentioned before that we basically done above 15 million. The plan for 2022 is to more than double that. Now let me touch on another important new activity in Microsoft, which is Operator Connect. Operator Connect targets to allow service providers in the world to offer Microsoft Teams to their business customers. To do that, there needs to be a platform, an automated solution that will allow end users and customers to onboard Microsoft Teams through a sophisticated interface. We have announced earlier in January the introduction of our solution for Microsoft Operator Connect. We've received a lot of interest, a few very large service providers approaching us. I can tell you that at this stage we're working with some tier one names in the world. All this activity, our platform is one of a very small number of platforms selected by Microsoft to help launch that activity. We expect the announcement of the platform by Microsoft in the first quarter of 2022, and we expect the business to start wrapping up in the first half of 2022. I'll mention more that we've seen pickup in our business in the IP phone area on desktop phones in 2021 and more so in the full score. This is partially as a result of the return to office. That's one activity that's picking up and growing very nicely in Microsoft. Then there's a new area that we are confident will start growing in 2022, and this is the meeting room area. We've introduced our conference devices more than a year ago, we continue to build that line. In 2021, from few hundreds of thousands of dollars made in 2020, we crossed the million between one and 2 million in 2021. And we expect that line to more than triple or more in 2022. We feel we are in a very good position, taking into account the product line itself or management capabilities or meeting insight processing solution. So we believe that meeting space is going to be very important line for us from 22 and on. All in all, we've covered substantially Microsoft operational mentioned also that we became successful in 2021 in the zoom So Zoom is focusing more and more on Zoom Phone and have stated strategic importance for that line. We have seen an announcement of more than 2 million users in the space. I can tell you that from our side, we have seen a very nice increase. If I go back to the Piper Sandler report, I'll mention that zoom is growing very fast side by side with Microsoft. And they are expected to gain market share, you know, in at the end of 2021. It was estimated they hold 11% and they are plan to grow up to 15%. Just to give you an idea about, you know, the number of seats we're talking about rising from 2.8 million seats to more than 60 million seats in 2026. Similarly, on teams, you know, we should be growing from a mere 4 million in 21 to 8 million in 2022, then to 30 million in 2026. So there's room to grow on on both teams and zoom. Getting back to one of our oldest and most important business line, which is the SBC, we've seen growth in the core. And in the year, all in all in the year, we grew revenues from 100 million last year to 121 million in 2021. We then have seen even more promising activity in credit opportunities. So We have seen a lot of new opportunities created. We've seen growth of 36%, so growing from 100 million in 2020 to 136 million in 2021. All in all, a very important line. Also, I should mention that the transition to software-based solution continues, and we are close to 40% in 2021 from just 30% in 2020. At the same time, we are investing in our SaaS infrastructure and managed services. In 2022, we plan to expand our investment in SaaS solution for key target markets, Microsoft Teams, Zoom Phone, Contact Center, bring your own carrier, work from home, click to call, and multiple use cases of conversational AI, such as virtual agents, agent assist, intelligent IVR solution, et cetera. So we plan to aggressively migrate more function of our successful sales growing with current revenue management services to the SaaS platform. Just to touch again, services, services grew in 21, 16.2%. However, more important, we've seen decline in support and maintenance services as a result of the move from capex sales into recurring sales. But at the same time, we've seen huge, huge increase in sales of professional managed services. So in managed services and professional, we grew 44.9%, almost 50% in 21, which means a lot of growth in managed services. Actually, that kind of sets a direction for us to excel in managed services going forward. Touching on some background on the voice AI stuff. So, as I mentioned, booking grew more than 100%, actually topped our focus for 5 million. In the full score, we actually seen, you know, booking growing to 3 million versus 1 million the year before. Some of the key components of voice AI are its photos, smart app, which is a compliance recorder. So in 2021, revenues grew nicely, about 70%. And booking actually grew another 60%. So all in all, the transition to teams, you know, obligates companies who have compliance obligations to move their solution to a team-based solution. And this is where we come shining. We keep investing in the line. We do intend to come up with a multi-tenant SaaS solution towards the second half of the year. So all in all, very successful line of recording business. If I touch our VOCA operations, VOCA is a rich IVR application. that is substantially more advanced than the previous product. We started to develop a very advanced product that allows conversational IVR. We have launched that solution second half of last year. We do see huge growth, and I can tell you that if we compare the number of opportunities created, we are starting to compare about 50 new opportunities versus just 14 in the year before. All in all, we do expect that line to generate more than double revenues in 2022. Then coming to a very lucrative solution, we're talking about Voice AI Connect. Voice AI Connect enables chatbots to use voice input and output for the conversational AI platform. We have very intensive activities with many partners in the market, most notably with Google and Microsoft both. We just had a webinar with Microsoft about two weeks ago where we hosted more than 1,000 participants from all over the world That webinar was run together by Microsoft and Audiocodes. We then have seen a new Magic Quadrant Gartner report coming out a few weeks ago. I can tell you that out of the leading pack in the upper right quadrant, we've seen two partners that use us extensively. One is integrating the Voice AI Connect into their platform, now serving many large enterprise solutions for bots capable of handling both text and voice. And then the other partner is very strong, relying on us on many different technologies relating to voice. And actually, they are building an AI-first contact center around the world. contact center and voice AI connect. So all in all, more than 50 customers, more than 30 productions, we expect this line to almost triple in 2022. So now you can understand the basis for being so optimistic that line that is cross booking. So 5 million this year will get to 25 in the next two, three years. This is just organic growth at this stage. talking about customer coming from, you know, talking about solution being deployed in the insurance, banking, automotive, energy service provider space. Now, two words about our acquisition made last November, we have acquired submission before a private company developing virtual agents in Israel. This is now part of our business line in the contact center in the company. We already started integration. It goes very nice. We added resources. We are starting to employ product management and a few more operational procedures just to make their operation very efficient. Very active in the last pandemic with the Omicron wave that basically triggered huge amount to volume of calls into contact center of, you know, medical service provider. Call verso virtual agents were very efficient in tackling just mentioned that, you know, the daily basis normal day, usually you have like 100,000 calls during the last few weeks, the volume got to almost more than double. And virtual agents were very efficient in tackling that. So we do intend, obviously, to extend their operation, but also take the technology and deploy it worldwide. With that, I believe I've exhausted my presentation for the session, and we'll be turning the call into the Q&A. 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 Ryan McWilliams. Please announce your affiliation, then pose your question.
spk04: Ryan McWilliams from Barclays. So next, you're taking the question guys. It looks like the midpoint of your initial revenue guidance implies similar growth of this year and the guidance going into next year, stronger than the guidance you gave when headed into fiscal 2021. So Shabtai, given that there are investor concerns around a pull forward in cloud communications growth due to COVID, but then in light of this stronger guidance, can you just talk about some of the indications you were seeing of an improved market opportunity as we head into this year? Thanks.
spk08: Right. Yeah, you know, unfortunately, with the COVID, you know, we all move to be kind of hybrid workers. In a hybrid mode, you need to be able to work from anywhere, not only from home, but from office, you know, and home, you need to travel between the two. Huge demand for UK solution. It's growing, we have seen with quoted numbers, those those trends both in UPS and contact center, we keep see them coming up. And I can tell you that actually, you know, if one of the questions later on would be regarding get count and the great resignation or ability to deliver, I'll tell you that our issues going forward, and I think everybody's in the world will be much more uh, concentrated about the ability to deliver, um, having enough people on board. It's not a demand. The demand is there, uh, very strong. And we, you know, constantly adding people, you know, I've mentioned we had that 110 last year, 30, every new quarter, it's all in the race to be able to deliver the demand that we are seeing.
spk04: Excellent. And then one for Neuron, Neuron, it looks like fourth quarter service revenues were slightly lower than the prior quarter. Just any puts and takes to call out there would be helpful. Thanks.
spk09: Yeah, I wouldn't read too much into quarterly fluctuation in the service revenue growth line. As you know, we have professional services training in the service line. There can be fluctuation and can screw the quarterly growth rate. Our 2021 service revenues grew 24%. which is an improved growth rate from 16% in 2020. So there are fluctuations between, but I suggest not to look on a quarterly basis.
spk04: Excellent. And last one for me, Shabtai. Congrats on bringing on Dimitri. I may be a little biased here, but you mentioned the potential future for more inorganic acquisitions going forward. Any specific areas of the market that seem interesting, or are there any software capabilities or things that your customers are asking you for? Thanks.
spk08: Thank you. Well, we are focusing on our strategic market direction, and I think we've defined that to be the Microsoft Teams space. As such, and since we deliver managed services, I think our highest priority would be in that area to understand supplement and augment our ability to deliver more services in that specific space, Microsoft Teams Voice. Obviously, working also on the Voice AI, working also on Contact Center, we will be looking more for market-rich rather than technology. We will be adding a few smaller technology pieces, but that's not... The focus is really getting more market share.
spk04: Appreciate the comment. Thanks, guys.
spk08: Thank you.
spk01: Your next question for today is coming from Greg Burns. Please announce your affiliation, then pose your question.
spk05: Good morning. Greg Burns with Sidoti & Company. Just wanted to follow up on the service line, just in terms of the gross margins this might a similar answer in terms of quarterly fluctuations, but what was driving the gross margin down on the service line this quarter? Is that kind of how we should expect, what we should be looking for in 22?
spk09: Yeah, it's a result of increasing our manpower at the customer service department. That's the main reason. With regards to gross margin at all, you know, we are facing like all over the world an ongoing supply chain disruption. And this quarter we had made one-time purchases of components cost in the open market at higher cost to fulfill demand. So we estimate the gross margin impact from products sold carrying this higher component cost to be roughly 100 basis points in Q4. So that's what we had in terms of gross margin, both in service and as a total.
spk05: Okay. And Shep, you mentioned... some shift in the revenue mix given you're moving away from hardware to more like recurring service sales. So the recurring revenue, like say if you sell a live solution, does that go into the service revenue line item or is that product line revenue? Where is that falling out on the income statement?
spk08: Yeah, it's definitely going into services. It's part of our managed services. And as you have said, you know, it's growing. It's growing fairly fast. I can tell you that just gives you a rough idea that at this stage, you know, I've mentioned that, you know, teams grew this year almost 70% compared to last year. And live is now in the full score, rising to more than 20, 20, between 20 and 25% of total Teams revenue. So as Teams grows, live will grow, managed services will grow.
spk05: Okay. And then lastly, you talked about Operator Connect, but Microsoft also launched Teams Essentials, kind of going more for the SMB space. How might that impact your business? Is that something that could further accelerate growth for you in the Microsoft ecosystem?
spk08: Yeah, as a matter of fact, Microsoft essentially is really a plan targeting to lower prices of Microsoft Teams for small organizations. In that regard, it's definitely a boost to the Operator Connect. Operator Connect will allow those businesses to connect to Teams, but to make it even more attractive, they've lowered subscription rates for the small businesses.
spk05: Okay, great. Thank you. Sure.
spk01: Your next question is coming from Samad Samana. Please announce your affiliation, then pose your question.
spk06: Hi, great. With Jefferies, thanks for taking my question. So I kind of want to unpack one of the comments you made, Shabtai, about the growth expectations. I know the formal guidance, but, but your view was that you guys should, um, should do better than that. And I bring it up because I just, you know, if I think about last year, the initial guidance for, for 2021 was, I think like two 42 to 50 million. And you guys are kind of squarely at the high end of that initial range. So maybe what gives you the confidence that you guys can outperform kind of the initial guidance set today? versus when you think about your guidance last year, historically, when you've guided. Is there a change in the guidance framework? Maybe just help us understand what underpins it.
spk08: Actually, yeah, thank you so much. Yeah, actually, I think I gave you a hint, and let me go and get into the details, okay? So we were kind of accustomed last year to see Microsoft's revenues growing 20% a year, right? However, we didn't always, we mentioned always that Teams is growing and Skype for Business is coming down, but we have never talked about the interrelation between the two when you compute growth. But now, you know, Microsoft called it, let's talk about the full score. So in the full score, Skype for Business got to some very low level of about 4 million. And Tim's got to about 32 million. Now, remember that Skype for Business, let's say, declines, let's say, quarter over quarter by 10%. 10% decline in 4 million is $400,000. On the other end, if Microsoft is growing, I'm sorry, if Tim's is growing, say, north of 20% quarter over quarter, you take now 32%. you add 20% of that, you get another 6.4%. So all of a sudden, you'll find that while we have suffered from the kind of skyfall business in previous years, in 2022, even more going forward, it's not going to overlay or overank or impact growth at Microsoft. So actually, I can tell you that if you do the math, and assuming that growth will continue in teams as we continue to invest in it, we will see growth in Microsoft that snows of 30%. So that gives you some flavor as to why we are more optimistic about the ability to reach those revenue levels and beyond.
spk06: Gotcha. And then just maybe, maybe one last question for me, when you think about the growth versus investment philosophy, you know, I think you definitely touched on it on the call, but, Um, how should we think about, um, how should we think about it? Kind of like what's the, what is the, I know you gave, again, you gave guidance, but what is the end goal growth level that you're trying to drive for? Is it, is it to sustain in this low teens? Is it with the, with, you know, are the OpEx investments meant to get you to a range that's closer to 20%? I guess I'm just trying to understand how we think about the, the reinvestment philosophy. especially given the EPS guidance for 2022 to the growth level that you're actually trying to get to that's a durable growth level.
spk08: Right. Thanks, Ahmad. Yeah, if you take a step backward, right, and you'll take a higher level perspective over several years, right, starting from, let's say, 2020 and looking into 2025, you know, up to 2020, you know, we have been very cautious with growing our OPEX. So just to give you an idea, in 2020, our OPEX grew only about 3.5% over the previous year. Our S plant, you know, in 2021, we have invested heavily. And actually, we grew OPEX in 21, 14.6%. And in our plant, you know... we are planning not less of an effort in 2022. So just think about a huge investment that we will be applying. We've applied half of it already in 21. We'll be doing that as well in 22. But you will see, according to our internal business model, we predict that we'll keep revenues growing at least 50% and above organic. We should be growing even 16 and 17, but we need to be well into the year to be more confident about that. But even more, you'll see the net income line all of a sudden leaping from 23 and beyond because at some point there will be no more need to invest that much. So it's major investment done in 21-22. Now, the result of it would be you know, revenue growth 15%, 70% annual, organic and beyond, and then obviously improved net income line.
spk06: Great. Thank you so much. I'll pass it on to the next analyst. Appreciate it.
spk08: Thank you.
spk01: Your next question is coming from Ryan Coons. Please announce your affiliation, then pose your question.
spk07: Sure, I'm with Needham & Company. Obviously, the Teams ecosystem really gaining momentum here globally. I wonder if you could share any color you have on different segments where you're seeing they're having success. Is it primarily in U.S., where the core of their business is coming from, and how are they doing outside the U.S. and moving down market? I know you mentioned the new SMB offering, but any color you can offer on kind of how Teams is faring across different market segments would be really helpful. Thank you.
spk08: Right. Thank you, Ray. Again, Ryan, I don't think, you know, there's any specific vertical that shines out, but definitely, you know, as you have mentioned, you know, U.S. is substantially leading in deployment of TIMSS. More, you know, Western, West world countries such as the U.K., Germany, and a few more countries, Canada, France, etc., Scandinavian. So it's still in infancy. Again, if I relate to the Piper Sandler report, a very small portion has been deployed so far. So a lot of things to come, but then again, the Western world is leading by far.
spk07: Okay, super helpful and I get one quick follow-up I could. Any color you have on deal size in terms of seats? Are you seeing very, very large enterprises start to opt more into UCAS offerings now? Are we still kind of in the smaller enterprise and mid-market that's the fast adopters today?
spk08: No. Teams is by far deploying in the S&P in a major way. I think we are deploying in close to, I think, We have heard teams deployed in over 90% of the SMP, you know, 100. So the focus is really on large enterprises and lately on mid-market. It's only now that they're starting to try to attract to the smaller businesses, but that's where the focus is.
spk07: Super helpful. Thanks a lot.
spk08: Sure.
spk01: Your next question is coming from Tal Liani. Please announce your affiliation, then pose your question.
spk02: Hi. This is Tal from Bank of America. I have two questions. First one, it's on the margins. Your R&D and G&A went up 15% and 20%. So your EPS is going down while your revenues are going up. What's the outlook Can you explain what are you investing in, what are the projects, and then what's the outlook for expenses? And the second thing is I wanted to also ask you about margins. Any impact of, I think you touched on it when you spoke about gross margin, but any impact of supply constraints, any impact on your ability to deliver, at least on the legacy side, and what's the status of you getting enough components? Thanks.
spk09: Yeah, hi, Tom. So, indeed, OPEX on an annual basis increased 14% year over year. If we split it between R&D, sales and marketing, and G&A, so R&D was 13%, sales and marketing 17%, and G&A 6.8%. So all in all, we are planning to, as Shabta mentioned, we are planning to invest more in OPEX to support our revenue growth, mainly at the area of sales and marketing and customer service. So that's with regards to the OPEX. With regards to the growth margin, as I mentioned, we are... As you know, everybody is suffering from the supply chain disruptions. Specifically for this quarter, we had an impact of about 100 basis points since we had to buy some components at the open market at higher cost. While we expect a similar gross margin impact at the first quarter of 2022, we do believe this is a temporary issue.
spk02: Got it. So going back to your first answer about expenses, is it the one-time phenomenon that your expenses are going up and it's going to stabilize after, or do you envision that operating margins keep coming down next year?
spk09: No, you know, for 2022, we are planning to increase OPEX. And that's why our guidance for the EPS, the midpoint of that was flat. And by that, if we jump to 2023, we will definitely need to invest less in terms of growth year over year than we had this year and in 2022.
spk02: Got it. Great. Thank you.
spk09: You're welcome.
spk01: There are no further questions in queue.
spk08: Thank you, operator. I would like to thank everyone who attended our conference call today. This continued good business momentum and accelerated growth in 2021 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. Bye-bye.
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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