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spk05: Good day, ladies and gentlemen, and welcome to Audio Code's first quarter 2022 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. Sir, the floor is yours.
spk08: Thank you, Operator. Hosting the call today are Shabtai Allisburg, President and Chief Executive Officer, Naran Baruch, Vice President of Finance and Chief Financial Officer, and Dimitri Netes, 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 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, 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 as 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 audio codes 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 his net income and net income per share, according to Gap in the press release that is posted on his website. Before I turn the call over to management, I'd like to remind everyone that this call is being recorded. An archived webcast will be made available on the investor relations section of the company's website at the conclusion of the call. With all that said, I'd like to turn the call over to Shabtai. Shabtai, please go ahead.
spk07: Thank you, Roger. Good morning, good afternoon, everybody. I would like to welcome all to our first CORE 2022 conference call. With me this morning are Niran Baruch, Chief Financial Officer and Vice President of Finance, and Dimitri Netis, Chief Strategy Officer and Head of Corporate Development. Niran will start off by presenting a financial overview of the CORE. I will then review the business highlights together with Dimitri. 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?
spk04: 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 percent over 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 total $144.1 million. Net cash provided by operating activities was 0.9 million for the first quarter of 2022. Day sales outstanding as of March 31st, 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 Shabtari.
spk07: 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 a proof of executing on our strategic priority by successfully transforming to cloud services and recurring revenue model with AudioCode's live managed services. At 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 21. Within that mix, Microsoft Teams grew over 50% year-over-year. As projected by several sources, including an industry research firm, Wainhouse Research, and an analyst note from Papa Sandler, Microsoft Teams voices are anticipated to grow at roughly 35% to 40% compound annual growth rate throughout 2025, which supports our confidence in multi-year runway for our Teams business. Wrapping up discussion of UCC business, our Zoom phone business also has an exceptional core, 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 comparison from Russia business generated in the first quarter of 2021. Ex-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 significantly. 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 are glad to report that the acquisition of Colverso at the end of 2021 started to bear fruit with substantial increase in new opportunities for intelligent virtual agent solution for the contact center application. Importantly, Articodes Live, our managed services offering for UCC, CX, and conversational AI segments, continue to see strong momentum. We exited the month of March at 20 million ARR run rate, and we expect our Articodes 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 powered by Deep. Shifting to margins, our non-gap gross margin came 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 these costs, our non-GAAP gross margin would have been at 69.3. Non-GAAP OPEX increased 20 percent year-over-year, mainly due to three factors. One, the increase in ad count of 132 positions or up 17% and 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. So higher and rising salaries in the R&D space where the boom in local high-tech industry drives shortage in skilled manpower and therefore drives higher salaries. And lastly, the impact of much lower NAS-US dollars exchange rate as compared to the first quarter 21 rate, which was favorably hedged. Non-GAAP operating margin was 18 percent versus 22.4 in the year-ago quarter. which was impacted by higher component costs, increased hiring activity, and less favorable edged new Israeli shekel US dollar rate. Excluding the higher component costs, the non-GAAP operating margin would have been at 20.1% in the core. On the heels of this development, our non-GAAP earning 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 rating our 2022 revenue guidance of $277 to $285 million and on-gap EPS of $140 to $160 million. 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 goal on the revenue growth, about 67% to 70% on a 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 Dimitri Natis, 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. Dimitri?
spk10: Thank you, Shabtai, and hello, everyone. Since I joined the team in January, we have undertaken a deep dive into fine-tuning our strategy to ensure that we have optimal plan in place to capitalize on the strong multi-year secular growth opportunities in our core market, which is mainly an enterprise market and accounts for roughly 85% of our total revenue. The remainder, 15%, is the service provider CB 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 Conference Centers, which we refer to as CX. Voice remains a top interaction channel in digital transformation and will remain as such for a very long time. is a high-impact, high-value channel, mission-critical to companies serving their customers and their employees. We're seeing the next stage of evolution of voice, not just in the traditional sense of telephony, but also in the non-telephony world, such as meeting assistants, IVAs, conversational AI, call recording, and even 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 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. Be the most interoperable communications platform as a service when it comes to voice services. We focus strictly on the enterprise segment. We're 65 of Fortune 100 multinational companies of customers of audio codes, and 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 AI connect platform, powered by our cold flow APIs and enhanced by our by our voice quality monitoring, analytics, and orchestration tools. On top of this voice platform, we offer meeting room solutions and user devices in 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 Vika from our Calverso acquisition. This is an exciting market that recently Gartner, in its piece called Contact Center Conversational AI and Virtual Assistant, estimates to grow from $332 million to $13.9 billion by 2026. That's a 72% CAGR. Conversational AI market is a future growth engine of Audiocodes, and we're developing a number of new applications here, including conversational IVR for customer service called VOCA, and our meeting intelligence solutions, Smart App and Meeting Insights. Audiocodes is a unique asset built on product-led engineering organization with a strong technology superiority in voice-related services. keep 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 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 audio codes live. For our customers, this move to manage 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 audio codes, 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 on the 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, cold 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 whole entire year of 2021. with 18.18% market share, bypassing for the first time on the annual basis competitors such as Oracle, Cisco, and Ribbon. 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. I will now hand the call back to Shabtai to discuss details of individual business lines. Shabtai?
spk07: Thank you, Dimitri. 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 pick-up in growth Microsoft created the opportunity to discuss on the last quarter translated 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 a UCC platform in our market leadership in the segment. Importantly, Microsoft created the opportunity to continue to grow at a healthy rate. In the first quarter of 22, new Teams opportunities created grew 51% year-over-year compared to 2021. Now let's talk through a couple of Microsoft important wins in the core. The first one, we're working with a 2.1 service provider. We have signed a 78-month contract with a global freight transport company selling Audicode's live services for $5 million total contract value. The deal calls for migration of 30,000 users to Microsoft Teams Voice. We want 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 healthcare medical device company, enabling migration to Microsoft Teams from Cisco and Avaya by providing Audicode's live managed services 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 million in total contract value. Now, after reviewing these two deals, let's dive into the Audicode's live, or as we call it, Tim's voice as a service. Just to remind everybody, since inception in mid-2019, live teams ended 2020 at about 7 million ARR, has more than doubled in 2021 to reach above 15 million ARR, and in 2022, as discussed earlier, we plan to double it again to above 30 million. The background for this growth is obvious. Based on growth demonstrated in the U.K. market in the past 12 months, It is obvious that Microsoft Teams is the leading solution for large enterprises in North America and worldwide. According to a recent Piper Sandler analyst report from October 2021, introducing a UK market model for the next five years, TeamSuite's compound aggregate growth rate in coming years is about 34%, quite steep growth that should support continued growth for Teams live services. This report estimates about 4.2 million team seats for 2021, 8.1 million seats for 2022, and 31.5 million for 2026. IDECA's live success stems from the fact that it removes complexity from the process of integration with legacy enterprise telephony and provides a seamless, rapid, and cost-effective migration to teams communication and collaboration for enterprises. IDCodes Live provides, among other things, a solution for direct route SBC, devices, network and user management products, and a complete set of automations, a lot 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 Articodes Live team, DarkRoute managed service nearly three years ago. DarkRoute is Microsoft terminology for bring your own carrier service. Our strategic priority is to provide partners and end customers with flexibility in choosing the team's voice deployment options that best suit their needs. To that end, we recently announced Articodes Live Express, which is a self-service service SaaS offering asset on Audicode Azure Cloud for resellers, VARs, and managed service providers looking to seamlessly and efficiently provision Microsoft Teams 1 services. The beauty of this service is quick onboarding and provisioning, which can occur in minutes and is handled entirely in Audicode's cloud. We also recently extended capabilities of live cloud managed service, which simplify onboarding Teams business customers of service providers, also in the service provider cloud. This service is also known as Microsoft Operator Connect. Microsoft Word Connect provides end users an alternative to procure Teams voice from select carrier partners directly through the Teams admin portal. Colt is the first publicly disclosed carrier using GoD codes to offer this service. on Microsoft Operator Connect. To date, there are roughly 25 carrier partners on Microsoft Operator Connect, and Audicode is working with many of them. Just last week, we announced that Audicode has been named by Microsoft an Operator Connect accelerator partner. This is a new direction for Microsoft to enable tens of additional carriers or managed service providers to expeditiously offer voice service or operator connect with no infrastructure investments required and without the need to maintain ongoing API integration directly with Microsoft. So with a vast array of different live services offering, let me distill the primary differences between the different offering. So a flagship is live teams, which targets enterprises and which enables teams via DICRAD. This solution is sold to resellers and system integrators that target our historical medium to large customer. Usually we're talking about seat count of between 3,000 and 30,000 that often have a very complex telephony system environment and require customization. Second offering is LiveCloud, which is a white-label SaaS platform. It is sold to service providers. to enable them to provide small to medium-sized customers. And then lastly, Live Express, which again is an AudioCodes-branded SaaS platform that enables resellers with no telephoning experience to quickly onboard customers. As discussed so far, Live basically targets the enterprise, and this is where we derive all four managed services today. Live Cloud and Live Express represent new greenfield opportunities for us targeting small to medium customers with likely fewer office locations and less network complexity. Now let me shift gears to Zoom Phone. I would like to discuss an emerging, fast-growing operational momentum at Zoom Phone. While it's still a small percentage of overall business, Zoom phone activity in the core 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 core, Zoom added around 550,000 Zoom phone sets up from zero 3.5 years ago. Zoom Phone launched in U.S. Canada in January 2019. As the foremost voice expert with the most comprehensive voice solution in the market, Audicode is uniquely positioned to benefit from this long-term upsell tailwind. We are stepping up our investment in marketing activities around the Zoom platform and look forward to announcing new product launches on Zoom ecosystem in the coming months. Following the revenue growth in the first quarter of 2022, we also know that we have seen 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 conversation AI segment, which grew 40% year-over-year and is a expected to grow about 50% in 2022. This segment consists of five applications, Smart App or compliance recording solution, Meeting Insights or Meeting Productivity Service, VOCA or conversational IVR solution, Voice AI Connect platform that transforms chatbots into voicebots, and VICA or intelligent virtual agent solution. Let me highlight our intelligent virtual agent solution, the one we acquired from Culverso, which has been a driver of strong momentum in the first quarter. As proof of strength and scalability for our 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 and 1,600 of its clinics. Let me provide some data points that indicate how strong and successful is the IVA service at Clalit. We're talking here about the following metrics. Vika, the IVA, annuls daily more than 80,000 calls a day. and up to 120,000 calls a day on peak call volume. That has resulted in roughly replacing 200 fewer human agents. And then all that saving was translated into a cost saving of about 100 million new Israeli shekel, or about 30 million U.S. dollars. Following our success in the Israeli market with Vika Virtual Agent, we have plans to start addressing the global market in the second half of 2022. Another area of strength within the Conversation AI portfolio is the Voice AI Connect product, which powers voice interactions for the growing market of chatbots. We continue to win more chatbot applications with leading worldwide partners. We believe we are on track to more than triple ARR in 2022 compared to 21. 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 as leading voice partner to the leading vendors, and investment done and continue to be done to keep our momentum in the space. We are confident and optimistic as ever about the strategic vision, our strategic vision, and strong competitive foundation that we have built to capitalize on the multi-year secular growth opportunities in our core enterprise market and subscription services. I'll stop here, and now we will turn the floor back to the operator for the Q&A session. Operator?
spk05: 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.
spk11: It's Greg Burns from Sedodian 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?
spk07: Yeah, we refer to existing business, mainly in the CX market, where a large deal, you know, was deleted. So revenues compared to the first quarter of 21 were roughly very low. We do not anticipate any new opportunities for developing the Russian market in the coming future. Okay.
spk11: Okay. And Dimitri was talking about cross-selling opportunities. Can you just talk about what the attach rates currently are, maybe with some of your... into the Microsoft ecosystem and how you see that developing over time. Thank you.
spk07: Yeah, I'll tell you. Well, Dimitri defined our strategy as land and expand. So as we see, Diacrout is the most 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, the best 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 sales of phones, meeting room services, call recording services, solutions, and others. So all in all, we take advantage of the fact that we have broad access to the team's customer base. That allows us to win with one area application in our service and then add on top of it more services.
spk11: But maybe just to understand where you're currently at versus what the goal is here, what is the typical like attach rate for applications on top of the core, um, Microsoft direct route offering.
spk07: Right. So right now we have, um, I have no statistics here with me to answer that. I'll mention just that, uh, there's definitely an interest. Give you one, one, one or actually two, two areas. Okay. Um, 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, Notel, Lucent, and others. And all that gear is going to migrate now and in the future to Teams. Now, every PBX has got auxiliary services, right? Take IVR services. Take 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. And in the past six, nine months, we've seen a rising number of Teams users who now, on top of the DAI crowd, now want to use the IVR and or the compliance recording. Hopefully that answers your question.
spk03: It does. Thank you.
spk05: Your next question is coming from Ryan McWilliams. Please announce your affiliation, then pose your question.
spk09: Hey, it's Jack McGuire on for Ryan with Barclays. Thanks for taking the question. So on the two large live deals in the quarter, any color around how Audiocos is brought into these deals? And is there any specifics around the pipeline for these kinds of deals just going forward? Thanks.
spk07: Sure. So usually, you know, With our live services, we usually work directly in the mid-market through usually a set of local partners, Microsoft partners. When you go to large deals, such as those that I've mentioned here, the one that has to do with the healthcare or the one with the freight transport services, those are huge companies. The go-to market is usually through global system integrator. So in both cases, you know, we have worked our way into the accounts through those partners.
spk09: Great, thanks. And then one more quick one. Any more specifics around how Calversa has been performing and any key plans for the acquisition as you take it global in the second half?
spk07: Thanks. So again, you know, we have... I haven't mentioned the number, but we've seen huge growth in the number of new opportunities for virtual agent solutions. We're working right now in the Israeli market, very strong on the medical, vertical on the financial one, large utilities. We are working in 2022 to port that technology into a multi-tenant cloud-based solution that we can deploy on a global basis. So it's a work in progress. I assume we'll probably launch it within the next six to nine months.
spk03: Thanks so much. Sure.
spk05: Your next question for today is coming from Ryan Kunz. Please announce your affiliation, then pose your question.
spk02: Sure, it's Ryan Coons with Needham. Congrats on the nice Microsoft numbers. It's great to hear that. I wonder if you could expand a little bit on the decline in contact center customer experience. Was that primarily attributable to Russia, or was something else going on there with your different partners you work with in the contact center? Thanks.
spk07: Okay. Yes. So actually, the decline is tied up to a few failures. I'll name a few of them. One is, as I've mentioned before, the Russian market. The second one has to do with the delayed big, you know, above $1 million opportunity delay in the finance sector. Then we do see, you know, some of the players in the CX market. I think you know their names. Some of them are losing market share. So we had some decline. And lastly, obviously, you know, we had some business with some large contact center player who is moving, you know, his business to the cloud. That has caused also some loss. But all in all, you know, the space is fairly vivid, and we do expect to recover from that decline in the first quarter.
spk02: All right, great. Thanks for that, Collar. And on the gross margin headwind, is that primarily on IP phones there or your cloud appliances?
spk07: No, not really. IP phone is fairly okay. Actually, it's other components which are hard to outsource in the open market. Therefore, we're trying to get them to you know, other returns, but that's not the phones. It's more the CP gear, the service provider CP. Got it.
spk02: Got it. Okay. That's all I have. Thanks so much. Sure.
spk05: Your next question is coming from Jeremy Soller. Please announce your affiliation, then pose your question.
spk12: Hey, guys. This is Jeremy Soller. I work with Samad Samana. Another quick one on margins, actually. How should we think about the shape of margins throughout the rest of the year? Do you have any visibility into how these costs are looking into Q2?
spk04: Yeah, with regard to the gross margin, you know, procurement cost of components in the open market continue to accelerate in the first quarter. purchases in the open market at higher than expected cost in the first quarter of 2022 is expected to have residual impact on the second quarter as well, though at a magnitude that's less than first quarter. While we expect supply chain costs to remain temporarily elevated for the rest of 2022 relative to 2021, we believe a supply chain situation should stabilize by the end of the year.
spk12: Got it. Thanks. And, uh, one more for me. Um, how should we, do you have any color on kind of teams, uh, across geos and how it's performing? Um, it is still primarily driven by the Americas or if you can provide it, provide any color there.
spk03: Sorry. Okay.
spk07: All in all, we definitely see teams continue to grow. Actually, it's a long-term basis of, you know, the numbers quoted were like $4 million last year, $8 million this year. So, yeah, it's not going to stop. We do see more opportunities created, and I think we have a winning position in the market.
spk12: Got it. Thanks, guys.
spk03: Congrats on the quarter.
spk07: Sure.
spk05: Your next question for today is coming from Tal Liani. Please announce your affiliation, then pose your question.
spk01: Hi, here's Madeline for Tal Liani at Bank of America. Just wanted to dive a little bit more into the supply chain issues around the components. Last quarter, I know this has been a concern as well. However, it seems 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?
spk04: Yeah, actually we see the trend continue also in the second quarter. So we believe it should be stabilized by the end of the year.
spk01: Okay, great. Thank you. That's it for me.
spk06: Sorry, this is Tal. I'm going to jump in. When you say stabilize, is it going to worsen in the second half? I'm just asking about the impact on gross margins and margins in general.
spk04: Yeah, you know, we believe that the second half will be better in terms of gross margin if we compare it to the first quarter of 2022, which was the lower side of our range.
spk06: And is the improvement because of supply chain or the improvement is because of other things like currency or anything else?
spk04: You know, 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, less components.
spk06: Thanks.
spk05: There are no further questions in queue. I would like to turn the floor back over to Shabtai for any closing comments.
spk07: 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.
spk05: 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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