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AudioCodes Ltd. (NASDAQ:AUDC)

Q1 2014 Earnings Conference Call

April 30, 2014 9:00 AM ET

Executives

Erik Knettel – IR

Shabtai Adlersberg – President and CEO

Guy Avidan – VP-Finance and CFO

Analysts

Rich Valera – Needham & Co

George Iwanyc – Oppenheimer

Dmitry Netis – William Blair

Les Sulewski – Sidoti & Company

Operator

Greetings, and welcome to the AudioCodes First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Mr. Erik Knettel, Investor Relations with AudioCodes. Thank you, sir. You may begin.

Erik Knettel

Thank you, Mellissa. I would like to welcome everyone to the AudioCodes first quarter 2014 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, operations of acquired companies into AudioCodes’ business and other factors detailed in 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 Mr. Shabtai Adlersberg, President and Chief Executive Officer; and Guy Avidan, Vice President, 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 first quarter 2014 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 for the quarter and then discuss trends and developments in the business and in the industry. We will then turn it into the Q&A session. Guy?

Guy Avidan

Okay Shabtai, and good morning everyone. Before presenting the financial numbers during this quarter, I would like to note that the following discussion will include GAAP number as well as non-GAAP pro-forma numbers. Our first quarter non-GAAP pro-forma results reflects adjustment for the following three non-cash items, stock-based compensation expenses which totaled $621,000, amortization expenses relating to the acquisitions of Nuera, Netrake, and Mailvision assets which totaled $339,000 and utilization of deferred tax assets in the amount of $380,000.

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

First quarter revenues were $36 million which represent a year-over-year increase of 11.4%. Looking at the sequential comparison, first quarter revenue was down 0.8% sequentially, in line with the average seasonal decline in the first quarter and in line with our expectations.

We saw continuing demand for our Core Networking Equipment business with an increase of 15% in revenues compared to the year ago quarter.

Sales of our Unified Communication, Enterprise SBC, Multi-Service Business Router, Enterprise Application and our Service offering continued to drive the increase following the growing demand for Lync Unified Communications and SIP Trunk Services.

In terms of revenue by business group, in the first quarter our networking business group accounted for 85% of revenue and our technology business group accounted for 15% of revenue, in line with the business mix for the fourth quarter of 2013.

Revenues associated with our growing managed and technical service business line grew by 21.4% year-over-year and were 21% of total revenue or $7.4 million in the first quarter of 2014, up from $6.1 million in the first quarter of 2013 or 18.9% 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 usually have recurring revenue. Our services are based on our extensive experience and know-how accumulated in the company.

As a percentage of revenues, sales in the Americas accounted for 51%, Europe, the Middle East and Africa, 35%; and Asia-Pacific 14%. Our top 15 customers accounted for 50% of our revenue compared to 57% in the sequential quarter.

In the first quarter, we had a single distributor in North America that accounted for 13% of revenue compared to 22% in the sequential quarter.

GAAP net loss for the first quarter was $278,000 or $0.01 loss on per diluted share basis, compared with net income of $71,000 or breakeven on a diluted EPS basis for the year ago quarter. Sequentially GAAP net income declined from the $2.8 million or $0.07 per diluted share, a net income for the fourth quarter of 2013.

This quarter, we recognized a non-cash utilization of our deferred tax assets of $380,000 compared to $1.8 million increase in deferred tax assets the previous quarter based on statutory tax rate.

Non-GAAP net income for the first quarter was $1.1 million or $0.03 per diluted share, an increase of $371,000 versus the year ago quarter, and a decrease of $798,000 sequentially. In the first quarter of 2014, on a GAAP basis gross margin was 58.7%, non-GAAP gross margin was 59.5%.

GAAP operating expenses were $21 million in the first quarter compared to $19.6 million in the fourth quarter of 2013. Our total non-GAAP pro-forma operating expenses were $20.3 million compared to $19 million in the fourth quarter of 2013.

The increase in GAAP and non-GAAP pro-forma operating expenses was predominantly attributed to the gross in our workforce and the strengthening of the Israeli shekel versus the U.S. dollar, partially offset by an increase in grant from the Israeli office of the Chief Scientist.

Headcount increased this quarter by 12 employees to a total of 629 employees. We continue to invest in growing our sales force and adding new engineers that will develop the AudioCodes cloud delivery network product.

Net cash providing by operating activities was $1.9 million this quarter, compared to $5.7 million in the sequential quarter and net cash provided by operating activities of $2.7 million in the year ago quarter.

Short-term and long-term cash balances at quarter end were $94 million compared to $62.3 million as of December 31, 2013.

The increase in cash balances in the first quarter was primarily attributed to the new capital raise and continuing providing cash by operating activities. During the first quarter of 2014, the company raised approximately $29.7 million in net proceed from the public offering of $4 million and 25,000 ordinary shares, including 525,000 shares sold pursuant to the underwriters exercising full after over allotment option, at a purchase price of $8 per share.

DSO came in at 69 days compared to 66 days last quarter. While we expect demand for our new product and solution to continue growth at a double-digit compound annual growth rate over the next three to five years within this larger growth strength for our new product and solution, we do anticipate some of this growth will be offset by the increasing demand in our technology and legacy product which account as 15% of our revenue in the first quarter of 2014.

We reiterate our guidance for 2014 as follows. On an annual basis, we forecast revenue for 2014 to be in the range of $147 million to $152 million, a non-GAAP earnings per diluted share are expected to be in the range of $0.18 to $0.22.

I will now transfer the call to Shabtai.

Shabtai Adlersberg

Okay, thank you Guy. We’re very pleased to report strong financial performance for the first quarter of 2014, our 7th consecutive quarter of growing revenues. We’ve been engaged in many improvement and productive activities in this quarter, most notably the markets of Lync environment that is been very active.

Same goes for One Voice initiative for the asset services and the collaboration with BroadSoft. But in view of some of the margin we achieved this quarter, its I’m confident in stating that AudioCodes is now emerging a much stronger company at the end of this quarter and better position to be an industry leader in the year end, unified communication, real-time communications, business services and mobility.

Most notably networking business line keeps growing; we’ve been talking in the past about our class to grow networking at a rate of 10% to 15% a year in each of the next three years. I’m glad to report that in the first quarter of 2014, we executed on our plan and grew 15% over the year ago quarter.

Before, I provide more details on our ongoing operations in the different business lines; I would like to touch on two most noteworthy unique and strategic milestones that we’ve achieved this quarter. First is the offering. I’m glad to say that we have completed a public offering, have raised $29.7 million as new capital for the company.

Second milestone is the launch of the cloud delivery network architecture program and the approved budget and support from the office of the Israeli Chief Scientist for about $29 million over the next three years. This would allow us to recruit a 100 more engineers in order to fuel our development in the emerging cloud in SDN and NFV areas and will allow us to become a leader in the industry.

That’s with the offering on March 5; we announced the pricing of successful completion for public offering of about $4 million ordinary shares raising net proceeds of $29.7 million. The funds raised will have strengthened our balance sheet and provide more adequate backing to our ongoing operations.

Additionally, they will provide enhanced flexibility to pursue strategic growth opportunities in the future. Just as a note, I would like to note at this time that, currently we do not have any immediate such plans.

Regarding the cloud delivery network architecture, on April 9th, we announced that the Israeli office of the Chief Scientist as approved in principal a three year plan 2014, 2016 for AudioCodes for approximately 100 million new Israeli shekels, which translates into about $29 million, in order to establish and advance an innovative research and developments here for cloud technology.

The Israeli office of the Chief Scientist approved a budget of approximately $6.4 million for the year 2014 of which nearly two-thirds will be supported by the Chief Scientist. AudioCodes cloud delivery network architecture forum includes the establishment of infrastructure for a new research and development and hiring of engineers through which in R&D stuff, a 100 engineers by the end of 2016.

Under that program, we intend to develop technologies, infrastructure, platforms and services that will design to operate in challenging cloud environment and will enable delivery of real time communication as well as value-added services. This platforms and products will utilize principles of NFV and SDN architectures.

This will allow our business partners to be able to focus on the application and rely on our abilities provide them with into networking capability in the area of Unified Communications, Connectivity to WebRTC, security, anti-fraud, quality of service monitoring and enhancement of selection of advanced cloud-based services such as mobility, recording, speech recognition, et cetera.

Now to some of the financial highlights in the quarter, as Guy as mentioned, quarterly revenues increased 11.4% over the quarter -last quarter and basically that’s, I’m sorry, 11.4% over the year ago quarter. More significant and relevant is our performance on the networking where we achieved 15% growth as I mentioned before, which enabled to achieve gross margin growth and improve it nicely to 59.5% from 58.1% in the previous quarter. We believe that this is a sustainable gross margin range or better given our focus on transitioning to better mix of products including software solutions and services.

Glad to say that net cash provided by operating activities were $1.9 million at the end of the quarter we ended with $94 million in cash and cash equivalents about of which, $80 million are net. Also in terms of deferred revenues, we’ve been able to grow them just like in the previous quarter, as are now 43% higher than those of the same quarter a year ago.

New product sales continue to ramp up, we’ve grown new product sales more than 20% over the previous quarter and as compared to the quarter year ago, we grew more than 50%. That proves that our investment in new products including Session Border Controllers, IP Phones and Multi-Service Routers is proving to be beneficial for the company.

We saw strong momentum in revenues from Session Border Controller Services and Microsoft Lync-related activities and I will touch that in a few minutes.

As we go first to give you some highlights on the sales side, generally sales were in line with the original plan for the quarter, all-in-all we saw a nice contribution from across all regions, the one region that stands out for weakness was Russia and I think we all can assume that as related to the latest political events surrounding Russia and its neighbors.

In terms of some of -more notable deals in the quarter, in the Lync – Microsoft Lync market we had two nice deals one in North America was a large company in the biotech area. We have another new contribution for a completely new area for us. We start to see China looking into Microsoft Lync. We have been able sign up with a living [indiscernible] in China and I think we will see more for Microsoft Lync activity coming from that area too, which is good going forward. So that’s on the Microsoft Lync.

On the Multi-Service Router, I will mention that we, mentioned two deals one in Europe, one in Latin America, nice reception for a new multi-service routers which represents a unique capability mainly in ERF adding voice capabilities and certification with leading software vendors with their traditional data multi-service routers players. Further, I will mention ago and mentioned to at the end is, we had a nice deal signed up with a Tier-1 service provider in the mobility space, and we expect that activity and success in mobility for service provider will pick up nicely in coming quarters.

Now to some of the most important business lines in the company let me first touch Microsoft Lync. All-in-all we had great quarter, we had close to 40% growth over the year ago in the Microsoft Lync activities. Lync growth territories remain substantially United States and Western Europe, we have seen noticeable pickup in Western Europe, we have seen that long-term efforts -development efforts we have invested in Western Europe so as to stay back.

We’ve also seen some activity growing in Canada and I have mentioned before China. We kept working with some of the strategic enterprise accounts continuing adoption of Microsoft Lync and we’ve seen nice pickup in that area. We want to also to know that during the month of February, we had a very successful Lync Circle of Excellence event in Las Vegas in conjunction with Microsoft Lync conference with the private session was close 20 large enterprises, North America enterprises. And I think it was beneficial both for honors for our customers and ourselves in terms of discussion and exchanging knowledge and ideas during that event.

We have that type of event, and it’s an ongoing activity, we just said about two or three weeks ago another such meeting here in Israel where we brought in substantial number of partners from Europe.

And now a point to mention is that during the quarter, we have certified our Mediant 9000 Session Border Controller. Microsoft just to remind you that this is a high-density 16,000 concurrent SIP trunk session high capacity SBC.

Now let me go to the SBC operations. Again, a very good quarter, which were more than 10% quarter-over-quarter and again, when comparing to a quarter year ago, we grew about 40%. In the quarter, we have released a new -release for the software SBC and Mediant 9000. As I mentioned before, we now provide 16,000 concurrent SIP trunk sessions.

Our plans for first quarter of this year about six months from now, we will scale up density to about 30,000 SIP trunk sessions. We also announce our excess SBC capabilities and we will support the industry emerging with RBC technology.

In terms of environments in which we sell our session border controllers, we focus substantially in the ecosystems of our partners namely Microsoft, Genesis, BroadSoft and Avaya. With a big focus on collaborating with BroadSoft and I will touch that in a second.

We have basically announced One Voice for Hosted Services at the end of 2013, during February we had an event in Europe where we met with BroadSoft personnel, myself and the CEO of BroadSoft. We’ve also been there, and we’ve been working with our teams and selected partners and customers on providing a comprehensive outlook for combined offering.

AudioCodes is now being added into the Broad cloud offering. In terms of products, BroadSoft is now pushing more and divesting more uniform products to their clients among those products are Session Border Controllers, IP Phones, voice quality props and telephony adopters.

We started to work with BroadSoft on collaborating with some of their largest partners, we cannot name specific names at this time, but I can tell you that we’re dealing with some of the largest Tier-1 service providers in the world.

Now to our services, again, we enjoyed very good quarter; revenues associated with our growing managed and technical services, business line improved by 21% year-over-year and were above 20% of total revenues. That translates to $7.4 million in the first quarter, again compared to $6.1 million in the first quarter of 2013.

I would like to mention also that service revenues are also beneficial in that they are typically characterized by very high gross margin and usually have recurring revenue. Our services are based on very extensive experience and we believe that that will make a difference for us and grow in coming quarters.

Just to mention that we have been able to exceed in terms of invoicing -services invoicing. We were able to exceed our plan this quarter by more than 5%, again comparing to the quarter a year ago, we saw invoicing growing 8.5% and the technical support and maintenance and more than 40% in the professional services year-over-year.

And before I conclude my part, let me talk a bit about Mobility. We believe mobility will emerge to be a very important growing area for AudioCodes in coming quarters and years. As you know right now, our activity is comprised of mobility for service providers supporting consumer products. We just released a business addition that targets enterprises. And then we have the voice dialing solution that is named VocaNOM.

In February, on February 20th, AudioCodes has introduced new cloud-based enterprise mobility services delivered from the Amazon Web services cloud. We have announced both the mobility cloud business addition for enterprises into VocaNOM application which enables mobile and office voice dialing.

Those solutions are pretty complicated technologically or basically where we provide mobile clients actually coupled with the delivery platform for secured connectivity management and monitoring and that enable service provider to offer their business customers, anywhere, anytime, any device type of mobile communication service with data networks while reducing further cost of ownership.

The new application for enterprise leverages AudioCodes existing Tier-1 service provider customers for the over the top solution, we are providing that technology for more than four or five years now with some of leading names that we have mentioned such as Telefónica in South America, Liberty Global, GVT, Vonage, Bezeq and others. We believe that our solution for mobility and for dialing will basically be superior to other solution in the market.

It will leverage the successes for various technologies including voice compression, SIP technology, SBC technology and few more. And we believe that we will see substantial growth in our users in coming quarters and we believe that in coming quarters we will start quantifying that product.

With that, I have concluded my part and we’ll now turn it to the Q&A session.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question it’s from the line of Rich Valera with Needham & Company. Please proceed with your question.

Rich Valera – Needham & Co

Thank you, good morning gentlemen. It sounds like you’re seeing good strength in both your Lync and the new products areas in terms of growth. Can you give us a sense of what those two product areas represented 80% of revenue for the quarter? Hello, can you guys hear me?

Guy Avidan

Yes, yes, yes.

Rich Valera – Needham & Co

That’s great.

Guy Avidan

Can you hear me? Rich can you hear me?

Rich Valera – Needham & Co

Yes, all right. You guys can’t hear me?

Guy Avidan

Can you please repeat.

Rich Valera – Needham & Co

Sorry, yes the question was related to your two, the Lync product area which you called out as showing strong growth and the new product category both sound like their seeing very strong year-over-year growth trends, and I was wondering if you could share with us roughly what percentage of revenue each of those categories represented in the quarter?

Guy Avidan

Well actually we are not -we are not giving the exact number, what I can say is that we saw some increase in Lync quarter-over-quarter and very good increase in new product Q1 over Q4.

Rich Valera – Needham & Co

You mean as a percent of revenue or just in absolute dollars?

Guy Avidan

Absolute dollars.

Rich Valera – Needham & Co

Got you. Fair enough. And then just with respect to the pipeline for your One Voice, I guess it’s clearly Lync and BroadSoft, I mean can you just kind of characterize how that pipeline works, it sounds like you’re talking more about BroadSoft than you have maybe in some recent call, so it sounds like that is that strengthen, so can you give us some color on sort of the pipeline activity for both Lync and for BroadSoft that how it might compare to, a couple of quarters ago?

Shabtai Adlersberg

Right, this is Shabtai. So yes, there is definitely pickup in activity with BroadSoft, we started closer working about eight to nine months ago, since then we’ve been working with them. It looks like our ability to provide a combined offering that will lower the total cost of ownership of the customers is the driver for those relationships. And we’ve been working with BroadSoft closely to make that happen or be active in the sales. So, you should see, we -at this stage also BroadSoft has been a great partner for us for many years none of the new activities reflected regarding revenues which means that we believe that the fruits of that renewed corporation will start to be seen only in about a quarter to going forward, but that’s mainly that you will see much increased shares in that environment.

Rich Valera – Needham & Co

Great, thank you. And then Guy with respect to gross margin, you saw quite strong gross margin in this quarter, pretty well above your recent couple of quarters. Can you give us a sense of where we should think about gross margin going forward was there anything unusually favorable in that first quarter gross margin?

Guy Avidan

The highest gross margin this quarter was pretty much based on high gross margin from product mix that Shabtai mentioned before. We saw very good business in services support professional services that will bear higher gross margin than average and we expect this trend to continue along the year. As I mentioned, before we are not changing top-line and bottom-line guidance, but we expect gross margin to be a bit higher and OpEx will be a bit higher as well.

Rich Valera – Needham & Co

Great. And then just want to touch on your new OCS grant; I know you gave a very broad outline of the types of products you planned to develop under that grant and sort of the cloud architecture sort of topic. Is there anything details that probably you can share with us in terms of specific products or when these products might start hitting the market, it is something that which we really be thinking of more products hitting the market and, 2015, 2016 from that initiative or is there something that might happen any sooner? And then a follow-up just is it, it is possible that this could have sort of an incremental impact and you guys don’t guide for beyond the 2014 year, but could have sort of positive incremental impact on your bottom-line as we look to 2015 and beyond? Thanks.

Shabtai Adlersberg

Right, as a matter of fact to think you are right on that, we’re growing as you -listening to what we just described, we see growth all over the place. We’re growing in Lync, we’re growing in Session Border Controllers, we’re growing in IP Phones, we’re growing in Multi-Service Routers, we’ll have to invest in Mobility. We’ve been somewhat limited in our ability to invest in the current P&L, I would say scenario we are in, the fact that we have been granted that forum will allow to pour much more resources into various areas, I can name the Multi-Service Routers that’s an area that we will invest substantially more. We’re talking about our operation center which gives huge value for customers in any voice networking solution, we claimed, be BroadSoft, be Genesis, contact centers comprises of an element management system, a voice quality monitoring, business routing, shift analysis.

So our ability to invest was somewhat limited previously now with the infusion of grant from the Chief Scientist, it seems that we will be able to make those investments. Mobility will be another area for us to invest, so basically I just give you an idea originally for the year, we claimed on ending the year was about 630 employees. We’re now targeting about 665 employees, 35 more employees. Again since this is an R&D grant, all of the infusion goes into R&D, so you can imagine that accelerating our developments in R&D and products in all those area will definitely contribute to incremental revenues in 2015 and going forward.

Rich Valera – Needham & Co

Okay that’s helpful. Thank you.

Shabtai Adlersberg

Sure.

Operator

Thank you. Our next question comes from the line of George Iwanyc with Oppenheimer. Please proceed with your question.

George Iwanyc – Oppenheimer

Thank you for taking my questions. So following up on the headcount additions, can you give us the sense of -the pace of additions and, how we should look at modeling as the year goes through?

Guy Avidan

We expect and again this is obviously based on the grant that we are -we’re about to receive from the government so we expect to grow additional 10 to 20 engineers this year. And this is based on the program most of them are actually more than 60% fine is by grant. So it will not impact the, the P&L. And then as mentioned, we’re not much changing the guidance; we’re going to be very straight in keeping expenses and not changing the OpEx dramatically.

George Iwanyc – Oppenheimer

Okay. Thank you. And then when you look at the FX impact, do you see very big swings you hedged as much as you can when you’re looking at the expenses over the next quarter?

Guy Avidan

Again, we do not know what’s going to be the FX next quarter, but as we see right now it will not change dramatically Q2 will not be dramatically changed from Q1 FX basis.

George Iwanyc – Oppenheimer

Okay. And then can give us just an overall update on the competitive environment?

Shabtai Adlersberg

Yeah I think we’re not -we are not seeing much difference in the competitive environment. Luckily enough we don’t see much competition obviously we see more in the year to see market -we see some competition in the Lync market, but again our ability to grow offering and basically offer a more complete solution make us better in that space. We will be stepping into mobility and we believe that we’re coming up with some innovative solutions. So, again I think we will be quite competitive in that area.

So, I don’t see any worsening in that area, actually I think that growing our ability to invest will basically improve our competitiveness.

George Iwanyc – Oppenheimer

Thank you.

Shabtai Adlersberg

Sure.

Operator

Thank you. Our next question is from Dmitry Netis with William Blair. Please proceed with your question.

Dmitry Netis – William Blair

Yes, thanks a lot. I wanted to touch again on OpEx, what was the rough impact from the shekel appreciation versus the dollar as you went through the year. Can you kind of square that out for us and maybe pick that out of the total OpEx line that would be great?

Guy Avidan

So if you compare Q1 2014 with Q1 2013, so year ago the U.S. dollar versus the Israeli shekel was in the rate of roughly one to four in Q1 this year it was close to 1 to 3.5. If you take all the Israeli shekel expenses multiple with that gap you will get something like a million dollar a quarter which is $0.02 to $0.03 and that’s the impact assuming this quarter we had a year ago FX rate.

Dmitry Netis – William Blair

Okay. And then so that partially explain the difference between the $20 million this quarter and I guess $18 million in last, right so that’s about a half of that was related to foreign translation?

Guy Avidan

So there are three point, one was the FX, the same direction was new personnel and there was some offset by increased grants from our Chief Scientist office.

Dmitry Netis – William Blair

All right, okay. And then just if you can touch on last point then, could you give us any more color as far as the investments you guys will have to make, I understand the headcount, but can you quantify that in terms of what’s the spend will look like, incremental spend will look like versus what you had projecting starting the year before you had the grant in hand? And how was that applied to kind of the grant money that you are getting?

Guy Avidan

Most of the investment and most of the grant are actually attached to personnel facility in lease. So it’s not really materially, new product improvement will just pick in next year and we’ll be depreciated over the period of the lease. It will not be material as well. So it is predominantly, high-end engineering and the large majority of the expense is granted by the government.

Dmitry Netis – William Blair

I understand. Guy. But I guess, what I was getting at is it you could talk about the net benefit from that grant is this year and if you walk us through the next two years as well since this is a three year plan. What should we be expecting here? Thank you. And I asked this question, because I think you kept your non-GAAP EPS basically flat, but well sustained with prior guidance for the year. So trying to see what -what the impact from that line would be and we do understand the currency stuff that’s happening as well so, kind of put that all respectively for us that would be great? Thank you.

Guy Avidan

Okay. I got it. So if you look at three years plan with $30 million expense budgeted over three years, well let’s assume grant is going to be two-third 66% out of it. So its $4 million first year, $6 million in the second year and $9 million to $10 million at the third year in terms of grants. The first year is 2014.

Dmitry Netis – William Blair

Okay, so – but that’s the grant money right. But, you see, so what would be the net benefit there and what were you’re projecting?

Guy Avidan

So again for 2014 we already made the budget, so it’s pretty much awash, because we are going to have some recruiting expenses, et cetera. Next two years we’re going to see net profit, but we are not guiding for that yet.

Dmitry Netis – William Blair

Okay. Great. Fair enough. And then, I guess I wanted to touch on kind of the top-line as well, you guys guide on the annual, you provide annual guidance, I wanted to see as you progress through the year how should we be thinking about your quarterly fluctuation there on the top-line, is it more of a back-end loaded year is it kind of loaded or rated fully throughout the year, give us a sense so we can model that potentially properly throughout the year?

Guy Avidan

So let’s take the meet off to guidance in terms of top-line to the area of $150 million annually. So Q1 is usually flat over the previous Q4 and that’s what we saw this quarter. And we expect about $1 million increase quarter-over-quarter, so it’s 36, 37, 38, 39, but very roughly and as mentioned we’re not guiding for the quarter.

Dmitry Netis – William Blair

Okay. Thank you. I appreciate that. And here is my last question would be, I think Rich mentioned, the Broad cloud -BroadSoft brought initiative on One Voice you’re starting to see some traction there, is it something you’re going to be able to quantify for us going forward, just like you did with Lync?

Guy Avidan

Not sure, again, I think the only way for us to provide information with the maybe to identify extra revenues coming from new service provider that have not been on Board before we launched that initiative. So, I assume that, at some point in time, we will be able to differentiate between our revenues from new accounts as related to the one versus BroadSoft forum, yes.

Dmitry Netis – William Blair

Okay. Thanks Guy. And I guess, the last one would be on the mobility side, just want to touch on that’s your one deal you guys mentioned, is that the VMAS product or is that the new business addition that you launched in February, can you provide some color there and where the most stress will come from in that category going forward that could be on the enterprise side or start to getting something similar traction there as well?

Guy Avidan

It’s VMAS. It’s on the service provider side, right now we enjoyed much success in that area, we have more than 10 large customers that win was in that space. We actually looking to upgrade our offering and allude that we will be able to have repeated and increased sales just to tell you that at this stage penetration rate is very low. We did some internal analysis turns out to be very few percent much less than 5% which means good news, because, service providers are priced today by over the top players providing calls and messaging solutions. And there is probably no choice for the service provider including the Tier 1s other than to offer, if you can give them agenda, so they will need to offer much more comprehensive over the top solution. That creates for us the full momentum. As to the business addition which targets enterprise, we are adjusting the beta stage now, so still no revenues to report.

Dmitry Netis – William Blair

Okay. Thank you very much gentlemen.

Guy Avidan

Sure.

Operator

Thank you. Our next question comes from the line of Les Sulewski with Sidoti & Company. Please proceed with your question.

Les Sulewski – Sidoti & Company

Good morning, guys. Thank you for taking my questions.

Guy Avidan

Sure.

Les Sulewski – Sidoti & Company

First, you do not have a much larger cash base to work with and then any possibilities of potential acquisition we can see in the near-term?

Guy Avidan

Again, we’ve done that step to become capable, but there is no any such plan in the industry we have so much on our play from the existing activities. So we will be fairly through I assume that we will not see anything in 2014 unless, I’d be surprised. But at this stage there is no plan.

Les Sulewski – Sidoti & Company

Okay. And then regarding your full-year expectation on the non-cash deferred tax expense. I know it was $380,000 this quarter. I mean what will be the impact for full year?

Guy Avidan

Well, actually what’s going to happen is we’re going to utilize the asset during the quarter and then most probably increase it again in at the end of Q4. So on an annual basis we’ll almost have lower impact, so this is why we’re taking out of the pro-forma not to confuse you guys.

Les Sulewski – Sidoti & Company

Okay. And then last one, any updates on the development with Dell Services?

Shabtai Adlersberg

No specific update its an ongoing effort on joint sales in the markets and its going grown, but there is nothing specific to note at this time.

Les Sulewski – Sidoti & Company

Okay, thank you.

Guy Avidan

Sure, you’re most welcome.

Operator

Thank you. I would now like to turn the call back over to management for closing remarks.

Shabtai Adlersberg

Okay. Thank you, operator. I’d like to thank everyone who attended our conference call today. Based on current business momentum, our execution in the first quarter for this year, we believe we are on track to achieve growth and success this year and in coming years. And we are in position to continue to build a very sustainable profitable operation for coming years.

We look forward to meet you and we look forward to have you on our next quarterly conference call. Thank you very much. Bye-bye.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.

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