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AudioCodes Ltd. (NASDAQ:AUDC)

Q3 2013 Earnings Conference Call

October 29, 2013; 09:00 a.m. ET

Executives

Shabtai Adlersberg - President & Chief Executive Officer

Guy Avidan - Vice President of Finance & Chief Financial Officer

Erik Knettel - Investor Relations

Analysts

Andrew Uerkwitz - Oppenheimer & Co.

Les Sulewski - Sidoti & Company

Dmitry Netis - William Blair

Rich Valera - Needham & Co.

Catharine Trebnick - Northland Securities

Patrick Metcalf - Halcyon

Operator

Greetings and welcome to AudioCodes, third quarter 2013 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions).

It is now my pleasure to introduce your host, Erik Knettel, Investor Relations for AudioCodes. Thank you Mr. Knettel, you may begin.

Erik Knettel

Thank you Lasania (ph). I’d like to welcome everyone to the AudioCodes, third quarter 2013 earnings conference call. Let me begin the call today with a brief safe harbor statement. Statements concerning AudioCodes’ business outlook, future economic performance, product introductions and 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 that term is defined under U.S. Federal Securities Law.

Forward-looking statements are subject to various risks, 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 current global economic conditions and conditions in general and in AudioCodes' industry and target markets in particular, shifts in supply and demand, market acceptance of new products and the demand for existing products, the impact of competitive products and pricing on AudioCodes and its customers, products and markets, timely product and technology development upgrades and the ability to manage changes in the market conditions as needed, possible need for additional financing, the ability to satisfy covenants in the company’s loan agreements, possible disruptions from acquisitions, the ability of AudioCodes to successfully integrate the products and operations of acquired companies into AudioCodes business and other factors detailed in the AudioCodes filings with the U.S. Securities and Exchange Commission. AudioCodes assumes no obligation to update that information.

In addition, during the call AudioCodes will refer to non-GAAP net income and net income per share. AudioCodes has provided a reconciliation of non-GAAP net income and net income per share to its net income and net income per share according to GAAP in its press release and on its website.

Joining us today from AudioCodes we have Shabtai Adlersberg, President and Chief Executive Officer; and Guy Avidan, Vice President of Finance and Chief Financial Officer.

I would now like to turn the call over to Shabtai Adlersberg. Mr. Adlersberg, please go ahead.

Shabtai Adlersberg

Thank you, Erik. Good morning and good afternoon everybody. I would like to welcome all to our third quarter 2013 conference call. With me this morning is Guy Avidan, Chief Financial Officer and Vice President of Finance.

Guy will start off by presenting a financial overview of the quarter. I will then review the business highlights and summary and then we will discuss trends and developments in our business and the industry. We will then turn the call into the Q&A session. Guy.

Guy Avidan

Thank you Shabtai and good morning everyone. Before beginning the financial overview of the quarter, I would like to note that the following discussion will include GAAP numbers, as well as non-GAAP pro forma numbers.

Our third quarter non-GAAP pro forma results reflect adjustment for the following two non-cash items, stock-based compensation expenses which totaled $462,000 and amortization expenses relating to the acquisition of Nuera, Netrake and CTI, and Mailvision assets which totaled $361,000.

The full reconciliation of the non-GAAP results discussed on this call to our GAAP results is currently available for review on our website and in the press release issued earlier today.

Getting to the numbers, third quarter revenues were $35 million, which represent a 4% increase from the sequential second quarter of 2013. Year-over-year revenue rose 11.7%. We saw continuing demand for our Core Networking Equipment Group business, with an increase of 13.4% in revenue compared to the year ago quarter.

Sales of our Unified Communication, Enterprise SBC and Multi-Service Business

Router offering drove the increase following the growing demand for Lync Unified Communications and SIP trunk services.

In terms of revenues by business group, in the third quarter our networking business group accounted for 82% of revenues and our technology business group accounted for 18% of revenues, compared to 86% in our networking business group and 14% in our technology business group in the second quarter of 2013. Revenues from our networking business group in the third quarter held steady compared to the second of 2013.

Revenues associated with our growing managed and technical service business line were 17% of total revenues or $6 million in the third quarter of 2013, up from $5.7 million in the third quarter of 2012 or 18% of total revenue. Managed services and professional services helped further bind AudioCodes high-value relationship with its customers.

Service revenues are also beneficial and that they are typically characterized by high gross margin and are based on our extensive experience and know-how accumulated in the company.

As a percentage of revenues, sales in the Americas accounted for 49%; Europe, the Middle East and Africa, 34%; and Asia-Pacific, 17%. Our top 15 customers accounted for 55% of our revenues compared to 54% in the previous quarter. In the third quarter we had a single distributor in North America that accounted for 14% of revenues, compared to 18% in the previous quarter.

GAAP net income for the third quarter was $935,000 or $0.02 per diluted share basis, an increase of $2 million versus the year-ago quarter and an increase of $494,000 sequentially. Non-GAAP income for the third quarter was $1.8 million or $0.04 per diluted share, an increase of $2.2 million versus the year-ago quarter and an increase of $726,000 sequentially.

In the third quarter of 2013, on a GAAP basis gross margin was 56.3%, non-GAAP gross margin was 57.1%. GAAP operating expenses were $19 million compared to $18.8 million in the second quarter of 2013. Our total pro forma operating expenses were $18.5 million compared to $18.3 million in the second quarter of 2013.

Headcount held steady this quarter with 611 employees. Of these, 22 relate to the MailVision asset purchase completed in the second quarter of 2013.

Net cash provided by operating activities was $1.6 million in the quarter compared to $4.1 million last quarter and net cash used in the operating activities of $1.2 million in the year ago quarter. Short-term and long-term cash balances at the quarter end were $58 million, compared to $67.5 million at the end of the previous quarter. DSO came in at 73 days compared to 72 days last quarter.

In May 2013 AudioCodes completed the asset purchase of its affiliate company MailVision. MailVision is an Israeli company, which developed market and license Voice over IP solution for Mobile, PC, Web and Tablet devices for the telecom operators, service providers and telco over the top.

While we expect demand for our new product and solutions to grow at a double-digits compound annual growth rate over the next three to five years within this large growth trend, for our new product and solutions we do anticipate some of this growth to be offset by a decrease in demand in our technology and legacy products.

Hence for our guidance, we would like to upgrade our annual revenue guidance for 2013 as follows. On an annual basis we forecast revenue for 2013 to be between $136 million to $138 million. We are narrowing the range of our full year 2013 guidance for non-GAAP earning per diluted share, and focus it to be at the higher end of our guidance upgraded into prior this quarter to be in the range of $0.13 to $0.15.

I will now transfer the call to Shabtai.

Shabtai Adlersberg

Thank you, Guy. We are very pleased to report another quarter or growing revenues and earnings. This quarter marks the fifth consecutive quarter of continued growth since we started the turnaround of the company in the middle of 2012. Refocusing our business modal, lining our efforts with new emerging market segments and above all, executing on our plans and partnerships have been keen in setting this new course for growth in the coming quarters.

These areas of successful quarters that illustrates the ability of AudioCodes to continue and deliver consistent growth and success for years to come.

Two major factors support this trend of growth in our business. First, the multi-year evolution in growth in the markets we service, the Unified Communication and Collaboration market and the contact centers. More recently we have diverted our attention to the new fast growing Unified Communication access service markets.

The Voice-over-IP business services market evolves quite rapidly as business access clients in the U.S. and other regions start to migrate to Voice-over-IP in hosted services and could services. According to analysts, IT based business access line on a global basis penetration is only about 13, where there is much more room for growth. Second, it’s our focus on complementing as an equal structure player and our ability to forge partnerships and executing them with the leading application players in the field.

Now, before I move to highlight our achievements in the third quarter from a financial perspective, I’d like to take this opportunity and expand on our underlying strategy. In the third quarter of 2013 we have made very important steps while enforcing our strategic initiatives, where we said the company could become the one voice company for the VoIP Business services.

In a world that is rapidly transitioning from an old enterprise telephony paradigm to a unified communication collaboration driven world, and with the migration from fewer on-prem isolated enterprise telephonic systems towards globally managed voice networks, the focus of investments shifts dramatically.

Companies are investing more and more in mobile and cloud, de-leveraging a way from propriety in-house solutions and investing in productivity towards to support communications and other business processes search-up tools, analytics and security, of which accommodate the need of a drastically changing work force.

One Voice is our strategy indented to support this organization as they transition in their journey to an all IP network. The One Voice strategy is meant to help enterprises and service providers in achieving that goal.

Key to understanding the underlying value we bring with quite a more different look into the new evolving voice network infrastructure. Large enterprises these days are highly distributed businesses, both globally and on a nationwide basis. We also see mixed networks comprised of on-prem public cloud, private cloud, etcetera, and in addition enterprise mobility and the remote access becomes much more mainstream.

Now with that new evolving world of Unified Communication and Unified Communication as a service, that poses favorable and non-favorable challenges; let me count a few. Any CIO, any IT manager in charge of this Voice Network has to ask himself, how do I maximize network performance and quality? How do I protect prior investment and take care of integrating with existing infrastructure to achieve that total cost of ownership?

How do we deal with network complexity? What would be the most effective ways to scale? How do I enable high quality of voice? So all that is not trivial and this is exactly where One Voice is meant to serve all these issues.

AduioCodes One Voice Solution are designed from the ground up to be highly scalable for large enterprises deployments, in a world suited for emerging unified communications and services. This solution comprises of a combined package of services in a diverse set of comprehensive portfolio of products, and so we are no longer a pure product play company, but rather an end-to-end, full service, VoIP solution company.

The One Voice Strategy and go to market, the need for such a company dictates that we focus on developing and executing on partnerships and alliances strategy and we seek to align ourselves with leading Voice-over-IP application service companies such as Microsoft, BroadSoft, Interactive Intelligence, Genesis and others.

Overall, innovation remains the foundation of our growth strategy, and so with the rapid changes in technologies in our space, the transition to cloud, pure cloud, hybrid cloud, on-prem solutions, WebRTC, Session Border Controllers, Over the Top Solutions, High Definition VoIP, etcetera, are positioned as a provider of a fuller solution that helps us gain in all of the different product lines.

The first step into One Voice strategy direction was made in early 2013 when we announced the One Voice for Lync program. This is one of our most important programs, which has created a very strong like (ph) for us in the market.

We are on track to grow this year above 25% and we believe that we will enjoy similar such growth in coming years as the market accelerates. I will touch the Microsoft Lync market further in the introduction.

Today I’m glad to say that we now believe that in the third quarter 2013 and early Q4 we have created the second very strong like (ph) for the company. (Inaudible) the target for the fast emerging market for Hosted PBX Services and SIP Trunking for IT based business access.

Now let me revert to the highlights of our financial performance in the third quarter of 2013. Sales were on track with 2013 budget plan, exhibiting focus and increase over the second quarter this year. Net income came at $1.8 million. This is 70% over the past quarter, very impressive growth.

Gross margin was lower than anticipated, 0.4% decline from Q2. This is mainly due to product mix. OpEx, I think we did good control of our operating expenses. We stayed at about $18.5 million.

Cash flow was positive. We have generated $1.6 million from operations. Our net cash grew by $2.2 million. We now stand at almost $42 million net cash. Inventory stayed flat at $13.4 million, the same for headcount.

Now in terms of our focus going forward, we put a lot of emphasis of developing relationship and alliances with leaders with large ecosystems in our world. We are working with Microsoft; we are working with companies like BroadSoft; Genesis. We do have a plan to growth that company of partners and be able to sign more One Voice firms for more players. This is the emphasis in the company. We believe that our portfolio of product and services complement their offering as a key switching in the application server.

We do transition to focus much more on solution and managed services, rather than products in the past. We do intend to go also for our cloud implementations and I think that this quarter we will introduce the first new data for our could-based application in a few weeks from today.

Now to the product line behavior in the quarter; networking was 82% of revenues. That is flat in terms of our quarter-over-quarter with the second one this year. In terms of programs, Lync, contact centers and services were on tract for continued long term growth.

In terms of our business services, session border controls, we had a mild quarter. We did not grow in the third quarter of 2013. We do expect to introduce and access as we speak, that is sourcing cloud and hosted application. We are already affecting to beta customers in that space.

One very nice achievement in the quarter is that we have announced few months ago our so far as we see product and we announced a target to reach 10,000 concurrent sessions in January 2014. I’m glad to say that according to our current development plans, we will be able to present much larger density in early 2014. We should for 16,000 concurrent channels in early 2014; practically that’s almost unlimited scalability in terms of what (inaudible) we are tacking today.

Two very successful product lines for us in the past quarter are (a) the line of the market service routers. This segment of products which target the branch office segment has shown very nice growth, and based on final and new design wins in this space, we do expect that we will more than double ourselves in 2014. This is a relatively very new product line for us. We just initiated sales this year. We’ll get close to 5 million.

The number of customers we’re getting both in Europe, Latin America and the U.S. is very impressive and we believe that being a very complex product, integrating both routers, SBC, Gateways functionality and more than that the company is capable of generating it and that will defiantly create a differentiating factor for us in both service provider application and in cloud services application.

Second item that has been very successful for us in the third quarter was the IP phone line. We have seen strong growth over our second quarter and I’m glad to say that we achieved certification with Microsoft on one of our models. That will definitely contribute the growth of sales in the Microsoft Lync environment.

Now one very important category that allows us to judge the progress we’re making with our development activity is we have defined a category that’s called New Products. In that category of New Products we have the combination of Session Border Controls, Multi-Service Routers and IP Phones.

I’m glad to say that we have seen very steady growth for the past five quarters. We grew 150% year-over-year in the third quarter of 2013 and in terms of contribution to the overall revenues of the company, we grew from 7% contribution a year ago to 16% in the third quarter. That shows that our ability to benefit from the investments we are making in the new product lines pays us very nicely.

Now lets get to Lync. Before I get to our activity, I just line to quote some interesting data points we inferred recently. A Microsoft blog claims that at this stage Microsoft is now shipping more enterprise voice lines than any other technology company in the world. That is a very impressive achievement. More specifically they clam that this year almost 60% of enterprises are counting more than 500 SIP’s surveyed or are deploying or planning to deploy Lync and that is up from only 45% a year ago.

Also in the past, the proportion of enterprises, which had no plans to deploy Lync was 21%. This year it dropped down from 21% to 7%, so all-in-all very impressive growth for Lync.

Another quote we have seen is that Microsoft is now growing above and beyond their competitors. In Enterprise Voice Revenues they are growing close to 60% on an annual basis and if they continue to grow as they trending, it feels very likely that they will surpass Cisco for total collaboration revenues very soon.

Now to IP Phones in that space. We are very successful in the Microsoft Lync environment. We are probably number one in the voice category there. We grew 10% in the third quarter over the second quarter and we are at 15% growth from Q1, Q2 run rate. Lync growth territories remained the U.S. and Western Europe, but we do expect pickup in Asia Pacific. We’ve seen already signs for 2014.

As I mentioned before, we completed certification for IP phone, the first model, the 400 series. So One Voice for Lync is proving worthy to customers and we have few customers that basically where we have deployed a combination for the products and services.

And that basically concludes my introductory presentation for today and I’d like to move the call to the operator for the Q&A session. Operator.

Question-and-Answer Session

Operator

Thank you (Operator Instructions). Our first question comes from Andrew Uerkwitz with Oppenheimer & Co.. Please proceed with your question.

Andrew Uerkwitz - Oppenheimer & Co.

Hey, thanks guys for taking my question. One of the biggest positives for you guys this year, I think it was increased visibility as you got longer deals. So its a two part question; is there any update on some of these larger deals you guys just signed and then secondly, kind of how much visibility or how comfortable do you feel about 2014 so far?

Shabtai Adlersberg

Okay. Regarding the first one, actually it’s a good question, because when we talk about Lync activity, one needs to know that when large companies deploy that solution, it takes years for the complete solution to be deployed. Usually it starts with a proof of concept, then with gradual incremental deployment.

Lets think about companies who have more than 100 different branches all around the world. So what we are seeing is continuing and somewhat accelerated deployment in those branch offices and those deals that we have signed are going well and now its basically building the base, the customers, the branch offices base on a yearly bases.

The second question related to 2014. So my answer to that would be very simple. We’ve done and executed on our planning of 2013, mainly growing the Lync; one was for Lync program and completing the developments we needed to have on the new alliance, which are the SBC, the Multi-Service Routers and the IP Phones.

Entering 2014 we’ll be in much better shape. The Lync will accelerate for us. We believe we have a new program targeted, Hosted PBX Services, which will bring another strong Lync, more sales for service providers and the importance far New Product portfolio, namely the SBC, the routers and the IP phones, that plays to the tune of cloud emerging as the key area for services. So we believe that we will enjoy a very strong 2014 based on what we have already completed in 2013.

Andrew Uerkwitz - Oppenheimer & Co.

Great, thanks. I appreciate it guys. Congratulations on a good quarter.

Shabtai Adlersberg

Thank you.

Operator

Our next question comes from Les Sulewski with Sidoti & Company. Please proceed with your question.

Les Sulewski - Sidoti & Company

Hi guys, thanks for taking my questions. Just two quick ones. Can you tell me a little bit more about the feedback you’ve been receiving on the Voice One for Hosted

Services?

Shabtai Adlersberg

Yes. Actually that announcement was not made in The Voice. We had discussion with professional partners around the time of the announcement. We do see feedback with participating some partners, end user events. It was good feedback and we believe its catching up. Its definitely a need; I’ll tell you why.

Hosted Services companies tend to be primarily software companies. Strong product, very strong product, but stills its a software solutions. Now that solutions is being deployed in the cloud. Those companies usually tend to have less ability to either service the products to install this provision and maintain it, upgrade it, deal with existing infrastructure.

So, our ability to come up with complementary product portfolio and provide services through our very large network of partners, that is a key value and we’ve seen that playing for our self and for that target.

Les Sulewski - Sidoti & Company

And with Verizon talking share of the wireless package, which should have rolled out to LTE quicker and accelerated opportunity for mobile. How will this affect your mobile platform?

Shabtai Adlersberg

I do believe the sales team will be a major driver in the evolution of Hosted Services and with our product line, I mean the routers, we believe that we will definitely be clear. We’ve already been approached by a few companies who provide wireless service. Looking into our product, is a possible solution.

Usually you need a link to a wide area network. Usually its either a DSL. When you are talking wire line, you are talking DSL or a fiber or either means, but in the age of LTE there will also wireless link for very wideband, so that is why that is in the interest of the wireless companies.

Les Sulewski - Sidoti & Company

And you know, one last one, you mentioned two programs coming into effect this quarter for could. Can you shed a little more color on that?

Shabtai Adlersberg

Yes, I’ll just mention briefly. We will make announcements in due time. We’ve been working substantially in OR mobility, enterprise mobility programs. We do expect to deploy a beta version of it. Its already in use in Israel. We will deploy it later this year and there is another application that helps travelers with being bobbled to voice dial, the PBX and not having to key in the numbers again. That’s a very successful service that we have already sold in Israel; it’s a pilot. We do intend to go cloud by the end of this year.

Les Sulewski - Sidoti & Company

Excellent. Thank you.

Shabtai Adlersberg

Sure.

Operator

Our next question comes from Dmitry Netis with William Blair. Please proceed with your question.

Dmitry Netis - William Blair

Hello guys, thanks. So just wanted to get to the bottom of sort of your long term operating metrics and certainly showing how five consecutive quarters of solid performance, a lot of it is probably we have expected in the stock price.

So the question is what should drive interest going forward? So perhaps you can refresh your long term operating metrics and kind of give us a sense of where you are today and how close are you to those metrics. That will be kind of one question for now. Thanks.

Guy Avidan

Hi Dmitry. So looking at the long term model, obviously as Shabtai mentioned before, we are looking to grow revenue, especially on the networking segment and gross margin wise, we believe at least in the next coming few quarters gross margin will not change dramatically from what we’ve reported in the last two quarters, meaning 57%, 57.5%. Obviously by growing revenue the bottom line will grow and we did not announce yet our guidance for 2013, but it’s going to be definitely more profitable than this year.

Dmitry Netis - William Blair

Got it. So right now I think your operating somewhere in the single digits operating margin. I mean where those margins can possible go over time? I don’t know, what’s your target, three, five years. I mean if you’d give us a sense of what you got, what you’re operating this business to?

Guy Avidan

Obviously on three to five years, we are aiming to double digit, higher than 10%.

Dmitry Netis - William Blair

Okay, that’s helpful, thank you. And then a lot of other metrics were provided and we appreciate that, but one thing I wanted to kind of clarify is, I think you mentioned 25% growth from your new products. I just want to make sure I’m getting this correctly and that contributed around 16% this quarter. So if I did the math, that’s roughly what, $5.6 million, so is that correct?

And then also another metric was thrown out. I think it was with regard to Lync, that she grew about 150% and then there was another metric for 10%. So I apologize for putting all those out, but if you could just sort of give a sense of what all these different metrics are and what are you tracking specifically besides the product categories. Thank you.

Guy Avidan

Sure. We were talking about the new product category. We are counting that the routers, the session border controllers and the IP phones were our new growth engines. The combination of all these products contributed as you have mentioned, $5.6 million this quarter, which represents 16%.

Now comparing to a year ago where the combined level was about $2.1 million, $2.2 million, which was only 7%. So that is the measure in metrics that relate to the content of the new products in the mix of revenues, that’s one number.

The second one related to our Lync activity, our service Lync Environment, we have been growing 10% in the third quarter compared to the second quarter and on a unit basis, we do plan to grow more than 25% in 2013 over 2012.

Dmitry Netis - William Blair

Okay. So just to get it right, so the new products will grow 25%, is that what you are basically saying, or is that the Lync category that we’re…

Guy Avidan

No, no, no, no. Those are really two different things. In the new products we refer to the combined revenue that came out from three product lines, that’s one thing. In the Lync category we basically count all of them self into one voice over link, meaning both product and services. Now products may contain also gateways and service recession implementation and remote monitoring and others. So the Lync number really gives you a flavor for the combined overall sales into the markets of Lync environment projects. That is not a product sales measure.

Dmitry Netis - William Blair

I understood, okay. That’s helpful, thank you very much. And that category is growing – what’s the expectations for that Lync category. So you grew 10%, what’s your expectations sort of going forward? That category will continue to be in that low single, low teens, high teens, mid teens. I mean what are you guys projecting? This one Lync for voice can possibly grow.

Shabtai Adlersberg

So this year we expect that category to grow 25% over last year. We do believe that going forward we’ll be able to sustain similar such growth trends, simply because markets of Lync deployment grows and accelerate essentially and that would be the pace we would look to achieve in the coming years.

Dmitry Netis - William Blair

Okay, great. Thank you so much and keep up the good work gentlemen.

Shabtai Adlersberg

Sure. Thank you.

Operator

Our next question comes from Rich Valera with Needham and Company. Please proceed with your question.

Rich Valera - Needham & Co.

Thank you, good morning. Just to follow-up on that, could you give us an estimate of what Lync will be as a percentage of your total sales in 2013?

Shabtai Adlersberg

Roughly we think it should be about 15%, yes.

Rich Valera - Needham & Co.

Now correct me if I’m wrong. I thought Lync was more than 20% at one point. I guess I was mistaken on that. Is this …

Shabtai Adlersberg

We were talking more from a target of $20 million, about $20 million, so maybe this is where the confusion comes from.

Rich Valera - Needham & Co.

Okay, so 15% of sales for all of ’13 is a rough number there. Is that right? Okay, thank you. And then just wondering how to think about the margin profiles of these different products, I guess particularly as you look at your new products, do these all have similar gross margin profiles.

I mean I would just think intuitively that IP Phones would not have the same kind of gross margins as an SPC or even a Multi Service Router. So, just wondering how to think about the gross margins, either in aggregate of that group versus the corporate average or any color on individual gross margins for those products.

Shabtai Adlersberg

Right. You must be right, Rich. Those would be different gross margins. Since we do not have those numbers with us right now, I prefer that we do some work and build that gross margin model and then discuss it. I don’t think we are ready to give you a complete breakdown of the gross margin going forward at this stage. We simply do not have the full matrix.

Rich Valera - Needham & Co.

No, that’s fair. But it sounds like over the next few quarters you expect gross margins roughly stable with where you were in 3Q. Is that a fair statement?

Shabtai Adlersberg

Yes.

Rich Valera - Needham & Co.

Okay. Thanks very much gentlemen.

Shabtai Adlersberg

Sure.

Operator

Our next question comes from Catharine Trebnick with Northland Securities. Please proceed with your question.

Catharine Trebnick - Northland Securities

Hello, hi Shabtai, Catherine. A quick question on the products that Microsoft Lync focuses on. Is that basically your small end products and then who do you see competitively in the Microsoft Lync’s relationship when you fell into that channel. Thanks.

Shabtai Adlersberg

Sure. Okay, so basically it’s a combination of products. Its entails gateways that combines or analog gateways. Some of which are 24 lines used in large institutions. Visual gateways, session border controllers. Not always low density, some of which are higher densities, IP phones and services, yes. So it’s a combination. Its not only just the low end stuff.

Catharine Trebnick - Northland Securities

Well, then but in a relationship with Microsoft Lync, is it mostly, where would you say that which vertical market or is it the SMB, the mid sized SMB or the large size that you get the most traction with them, with your combined group of products.

Shabtai Adlersberg

Oh okay, so basically Microsoft is targeting the lower gen prices. I mean this is where they fight to achieve the largest market share. So we sell through, we talked about our wins through AT&T and Ernst & Young and few other accounts and we’re selling into those larger enterprises. At the same time we have a more independent go-to-market for the mid market and the sweet spot there would be companies that’s larger than SMB's. SMB’s we believe will be served mostly from the cloud implementation of Lync.

Catharine Trebnick - Northland Securities

Okay. And then competitively who would you say you’d run cross. You see Genban, Sonus, do you see any Acme packet anymore in this channel or how do you think the competition stacks up?

Shabtai Adlersberg

So we’ve seen the Sonus, in most of the Lync accounts. We do not see Genban, we do not sell into that space. Acme we see rarely. Acme at this stage at least focusing more on the higher density session border control applications.

Catharine Trebnick - Northland Securities

Okay, and then the last question is, is there any change in the ASPs in the sell through or is it pretty stabilized?

Shabtai Adlersberg

Its pretty stabilized. The gross margin, the small decline before is attributed to a mix of products, where we had a low margin product from the residential line effecting the results.

Catharine Trebnick - Northland Securities

Alright, thanks a lot.

Shabtai Adlersberg

Sure. Thank you Catherine.

Operator

Our next question comes from Patrick Metcalf with Halcyon. Please proceed with your question.

Patrick Metcalf – Halcyon

Hey Shabtai, hey Guy. Congratulations on a good quarter. I just wanted to ask you a question. In May you talked about hockey stick growth potentially out about 12 months from the May conference call, and since then in the third quarter you said you are approaching larger deals with the Microsoft Lync. When do you see the potential for a hockey stick growth to hit the quarterly results?

Shabtai Adlersberg

Yes, hi Patrick. I’m not sure we said hockey stick, because that is not our nature. We definitely believe in growth and its mentioned if you take the Microsoft Lync environment, sales tend to be incremental but very steady. So we will see growth in the batches of our sales, but I don’t think we will see hockey stick phenomenon.

Patrick Metcalf – Halcyon

Okay, and then secondly the BroadSoft announcement. Who was BroadSoft doing business with prior to you guys signing this relationship and how do you see this relationship developing into revenue. Do we see it in the fourth quarter Q1, Q2, etcetera.

Shabtai Adlersberg

Okay, so we have not announced BroadSoft. We announced lots of services. BroadSoft is one good partner for us in that space. We do believe this will work in the after services market. It will start to translate into sales in 2014, more in the year-end and then the second half. We definitely see its potential there, but it always takes time to develop.

Patrick Metcalf – Halcyon

Okay, thank you.

Shabtai Adlersberg

Sure.

Operator

There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

Shabtai Adlersberg

Thank you operator. I would like to thank everyone for attending this conference call today. Based on our current business outlook in early Q4, we believe we are on track to continue a trail of growth and success and continue to be able to be sustain across the board operations for coming years.

We look forward to have you in our next quarterly conference call. Thank you very much. Bye-bye.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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