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AudioCodes Ltd (AUDC) Q2 2021 Earnings Call Transcript

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AudioCodes Ltd (NASDAQ:AUDC)
Q2 2021 Earnings Call
Jul 27, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the AudioCodes Second Quarter 2021 Earnings Call. [Operator Instructions] I would now like to turn the conference over to your host Roger Chuchen, Vice President of Investor Relations. Thank you, you may begin.

Roger ChuchenVice President, Investor Relations

Thank you. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer and Niran Baruch, Vice President of Finance and Chief Financial Officer. Before we begin, I’d like to remind you that the information provided during this call may contain forward-looking statements relating to AudioCodes’ 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 US 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 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 of AudioCodes and its customers’ products and marketing, timely product and technology development, upgrades and the ability to manage changes in market conditions, as needed, possible need for additional financing, the ability just asked by covenants in the company’s loan agreements, possible disruptions from acquisitions. The ability of AudioCodes to successfully integrate the products and operations of acquired companies into AudioCodes business, possible adverse impact of the COVID 19 pandemic on our business and results of operations and other factors detailed in AudioCodes’ filings with the US 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 and income and net income per share, to its net income and net income per share according to GAAP in the press release, that is posted on its website.

Before I turn the call over to management, I would like to remind everyone that this call is being recorded and archived webcast will be made available on the Investor Relations section of the company’s website at the conclusion of the call. With all that said, I would like to turn the call over to the Shabtai. Shabtai, please go ahead.

Shabtai AdlersbergPresident & Chief Executive Officer

Thank you, Roger. Good morning and good afternoon everybody. I would like to welcome all to our Second Quarter 2021 Conference Call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance of AudioCodes. Niran will start off by presenting a financial overview of the quarter. I will then review the business highlights and summary for the quarter and discuss trends and developments in our business in the industry. We will then turn it into the Q&A session. Niran?

Niran BaruchChief Financial Officer & Vice President of Finance

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 second quarter were 60.6 million, an increase of 13.2% over the 53.5 million reported in the second quarter of last year. Services revenues for the second quarter were 22.8 million, up 32.8% over the year-ago period. Services revenues in the second quarter, accounting for 37.6% of total revenues. The amount of deferred revenues as of June 30, 2021, was 73.4 million up from 65.1 million as of June 30, 2020.

Revenues by geographical region for the quarter were split as follows: North America, 40%, EMEA 30%, Asia Pacific 17%, and Central and Latin America 6%. Our top 15 customers represented an aggregate of 62% of our revenues in the second quarter, of which 47% was attributed to our 11 largest distributors. GAAP results are as follows. Gross margin for the quarter was 69.4% compared to 66.7% in Q2 2020, operating income for the second quarter was 10.1 million or 16.7% of revenues compared to 8.8 million or 16.5% of revenues in Q2 2020. Net income for the quarter was 8.2 million or $0.24 per diluted share, compared to 6.6 million or $0.21 per diluted share for Q2 2020.

Non-GAAP results are as follows, non-GAAP gross margin 69.7% compared to 66.9% in Q2 2020. Non-GAAP operating income for the second quarter was 13.6 million or 22.4% of revenues compared to 10.7 million or 20.1% of revenues in Q2 2020, an increase of 26.3%. Non-GAAP net income for the second quarter was 12.7 million or $0.37 per diluted share compared to 10.5 million or $0.32 per diluted share in Q2 2020. As of June, at the end of June 2021, cash equivalents, bank deposits, and marketable securities totaled 191.9 million. Net cash provided by operating activities was 17.1 million for the second quarter of 2021. Days sales outstanding as of June 30, 2021 were 56 days.

During the quarter we acquired approximately 236000’s of our ordinary shares for a total consideration of approximately 7.1 million. On July 2021 we have received court approval in Israel to purchase up to an aggregate amount of $35 million of additional ordinary shares. The court approval also permits us to declare a dividend of any part of this amount. The approval is valid through January 3, 2022.

Earlier this morning we declared a cash dividend of $0.17 per share. The aggregate amount of the dividend is approximately $5.5 million, the dividend will be paid on August, 26, to all of our shareholders of record at the close of the trading of August 11. Now, to providing an update on our guidance we are raising our guidance for revenues to be in the range of 243 million to 250 million, compared to the previous range of 240 million to 250 million. We are reiterating our guidance for non-GAAP diluted net income per share for 2021, to be in the range of $1.45 to $1.65. I will now turn the call back over to Shabtai.

Shabtai AdlersbergPresident & Chief Executive Officer

Thank you Niran, we are very pleased to report strong financial results and continued progress in our business in the second quarter of 2021. This is the second quarter in a row where our revenue grew 13% plus, year-over-year. As a comparison, growth in the second quarter of 2020 last year, was about 8.2%, so quite a leap in terms of revenue growth rate. Now the majority of the growth came from the enterprise business, which has provided close to 85% of the company revenue in the second quarter. To remind us all enterprise business consists of our UCaaS and contact center market operations. Bottom line of this, is that while the company revenue grew 13.2%, enterprise-related revenue grew above 20% year-over-year, which clearly points to the potential of increasing our company annual revenue growth rate in coming years well beyond 13% a year.

During the quarter we continue to execute in all of our three strategic business areas in the enterprise space. First, Microsoft Teams, business grew well above 20%, year-over-year. I should add that in general, we saw robust demand in the US enterprise market much along the same trend we saw in the first quarter of 2021. This is a direct result of the decline in the pandemic in the US and in other markets. Contact center operations grew nicely year-over-year. We’ll touch that later on and we will talk about developments, new development that we’ve seen in certain areas, and in conversational AI we saw nice progress in several business line most important booking and revenue growth of more than 100% year-over-year.

In summary of the progress made in the UCaaS and Contact Center and in view of similar such trends in several past quarters, second quarter industry dynamics further underscores the fact that collaboration hybrid work and work from home remain key industry trends, not only in 2021 but well beyond and thus they do present for us, long-term growth potential. Also it’s important to say that our decision made at the end of last year to increase our investment in R&D, sales and marketing and services on account of trading up for lower operational margin and profitability, proves to be working well and should fuel our success in the market in coming years. And much along the same line reported in the previous quarter, we experienced strong demand and performance in North America services operation and continued as we see business strength. And so, the outlook for 2021 in the second half of the year looks positive and promising.

Going back to the various business line performance during the second quarter, here is a breakdown, UCaaS and UC, which contribute about or above 70% of revenue, grew above 20% year-over-year. Contact Center, which provides for between 10% and 15% of revenue, grew above 25% year-over-year. So all in all, if we take enterprises as a whole, which provide close to 85% of revenue, we grew above 20% year-over-year. In view of that, we should have been growing faster, however, there’s one business area, the service provider CPE business, which really suffered substantially from the pandemic, much along the same lines, that we’ve seen in previous quarters. So service provider CPE, which was top of 10 million in the quarter last year, was substantially below that in the second quarter and we have experienced decline. If you take service provider CPE, that’s about between 10% and 15% of revenues. So basically the difference between the growth of 20% plus in the enterprise and the overall company growing only about 13%.

Last I’ll mention two other business plan, which are really minor at this stage, first is the Voice AI business, which is just about 1.5% of business that grew year-over-year 100%. Technology business continue to decline, it is now about 2% to 2.5% of overall revenues and has declined about 15%, but all in all, a very strong core in terms of our enterprise performance.

Now getting to our long-term financial model that we presented in the last 2 quarters, generally, we are looking for the current three years, 21 to 23, to provide for revenue growth of 13% to 15% non-GAAP gross margin, 67% to 70% OpEx, a percentage of revenues. We said it would be capped at 47% and then non-GAAP operating margin to be in the range of 20% to 23%. If we look at second quarter performance, we seem to be well within those ranges except for OpEx. OpEx came at 47.3% and we believe that indeed going forward we will fix that range and I think we will probably target 47% to 49% or even 50%. It’s all comes to investing more in areas where we feel that there is a lot of potential and we should increase our investment in this area.

Now touching on several more important financial data points for the quarter, OpEx increased substantially more than 5% sequentially, mainly due to two key factors, one is, increase in headcount, has dodged debt immediately and then the impact of much lower new Israeli Shekel versus the US dollar’s exchange rate. Basically, I should say that we basically were edging that conversion rate up to the end of the first quarter of 2021 and we enjoyed a very good rate of 3.7 new Israeli Shekels per dollar. However, in the second quarter, we know which was available and therefore we were at 3.3%. So there is a big gap of about 11% between the exchange rate used up to the second quarter and in the second quarter that explains a surge of more than a $1 million in our OpEx expenses.

Headcount increased 31%, I’m sorry, 31 positions to 821 full-time employees in the second quarter, 21, growing 9% year-over-year and triple 9% sequentially. Obviously, adding more than 70 positions over the year-ago quarter, clearly demonstrate our confidence in our continued expansion of our business. Cash flow from operating activities, we generated 17.1 million in the second quarter and more than 30 million in the first half of 2021. Net comparison was just 17.5 million in first half of 2020. On an annual level, we can now plan on annual cash flow from any activity of 55 to 60 million in 2021, generating a lot of cash and allowing us to allocate capital for various targets that we see. Deferred revenues continue to grow and mounted to 73.3 million versus 65.1 million a year ago, an increase of 12.6% over the second quarter last year.

Now let’s go to the key business area that present the most potential for us. Let’s talk first about Microsoft, so Microsoft business grew above 20% in the second quarter, we have seen accelerating mid-market opportunity, that we had access to. We have been leveraging AudioCodes Live services. I’ll talk more of that later on, for Microsoft Teams. Mostly around that [Indecipherable] as a service, and at this stage live contracts, total contract value pipeline equal, several 10s of millions going forward. So, we have generated for us quite a potential going forward, within the Microsoft Team space IP phone business came back from 2020 and was stable in showing plenty of room for growth. That was a very nice comeback as compared to 2020 where you know we all suffered from the pandemic. And the fact that there were no purchases of devices for premises, though the magnitude of recovery is somewhat encouraging.

We all know about the ongoing supply constraints and therefore, we believe that we could be hurt in the 3rd quarter from a shortage of chips. We continue to certify our devices for video conferencing in the team’s environment. I also invested quite a lot in the Microsoft’s teams environment. We have been investing in a new proprietary development for that ecosystem, invested substantial R&D to come up with an offering that’s new to the market. We assume that we will talk more about it as we launch it, early 2022. About our live cloud operation, where we try to provision and help our service provider, provide a live service themselves, we saw some progress in that space. We are releasing a major release in the September timeframe and that will allow us to add multi-tier and reporting, make it more powerful for the go-to-market. We have one big OEM at the sign up to live cloud and is now introducing it in their channels. Another program that is very important to us is Microsoft Operator Connect, Microsoft introduced API for teams allowing operators to integrate to the teams marketplace and offers their plans and VADS, that’s cloud testing with operator Connect API started already and we expect an introduction to the market in the first half of 2022.

In terms of growth we’ve seen definitely growth in the team space, since it’s grown 90% year-over-year, compared to the second quarter in 2020. Skype for Business continues to decline. All in all, if you compare it to the second quarter of 2020, the decline was about 45% year-over-year. All in all, we continue just as mentioned before, to grow an overall Microsoft Business 20% year-over-year. At this stage Skype for Business really is down to a level where further decline will not contribute much to decline of Skype for Business. I’m sorry, Microsoft. It was also a very successful quarter in terms of new business created. We have seen a lot of business created mainly in the teams’ space. We have seen an increase of more than 100% year-over-year and more than 20% sequentially. So definitely quite active area for us.

In terms of some of the wins we enjoyed, I can talk about one big win in Western Europe, where we provided a Managed Services Solution to administer minutes of the solution in that space. The significance is that Managed Services Providers finding AudioCodes Live, is an easy way for them to accelerate time to service. We also enjoyed a large contract with a leading Tier 1 operator in Asia Pacific, basically it’s a large, we believe the cloud service providers continue to rollout teams to the SMB and mid-market accounts, through those type of services. Also we have seen large enterprises, which we acquired discussion in Skype for business many years ago, they keep placing purchases and expansion as they migrate to teams and we’ve got such examples, both in Japan and the US.

Now to our Live offering, which is really the key to our success, going forward. So let’s talk about teams’ voice as a service, this is where we focus teams’ voice as a service, our best offering today in the market. In 2021 we have significantly stepped up our efforts and the accelerated the introduction of AudioCodes Live Teams, voice-as-a-Service, addressing critical challenges faced by mid-and large-sized businesses, as they adopt Microsoft Teams Phone System. Teams versus a service removes complexity from the integration of Teams collaboration, unified communication, and enterprise telephony and provide a seamless, rapid and cost-effective migration to Teams. In building this service, we have brought together our SBC network and user management products and complete set of automation and are delivering them on a, per user, per month, software as a service model. This allows our customers to quickly integrate SIP trunk contracts, integrate with legacy solutions, and rollout globally, including on-premises devices such as phone video rooms in analog adapters.

Our Consulting Services team can help address planning, design, and discovery, together with the partners or to complement the capability for some office through 65 Fares[Phonetic] who have expertise in the Microsoft solution but lack telephony knowledge. Since introducing the concept, this live mid last year we experienced good reception to the offering. We talk about this in the following and growth in our annual recurring revenues from this activity. It is important to know that using this software as a service offer, we are able to extend this offer to other markets. We have already won first accounts for Siemens, such service with Zoom Phone customers, I’ll talk about Zoom in a minute. We are successful also in winning such offering in the context of the market. So AudioCodes Live is the key to our success going forward.

As we continue to grow very fast, our recurring revenues and made good progress in the second quarter, 21, we have exceeded by more than 10% or stated 10 million AOR target for June 2021. As we now expect this type of business to go above the target to 15 million AOR, by the end of the year growing 2.5 times above 2020 levels. Our booking or total contract value of this business on end is already several 10s of millions dollars, by a large number of enterprises that have already started or about to start their UCaaS deployments with us. Also there is a nice pipeline that’s growing steadily and building up. This fast-growing business is the tangible proof through our superior technology in the year as of connectivity, management, automation tools, services in adjacent application to the UC solution majority of it, for teams’ voice as a service. I’m confident that this business will keep growing and represent a significant portion of AudioCodes value in coming years.

Now let’s talk a bit about Zoom, Zoom starting to show up in our activities in 2021, we already reported in the first quarter of 2021 about the growth in the Zoom Phone area. Second quarter was also a good one. We all know that Zoom reported about two months ago that they’ve grown from one million Zoom Phone users to 1.5 million Zoom Phone, [Indecipherable] and announce it. We had one, although we made quite a big leap over 2020, the quart would have been substantially higher except for one big deal that had slipped in the 3rd quarter. So all in all, we are building our presence in the Zoom Phone area, the amount of new opportunities developed in the second quarter, was substantially above anything we saw ever, in the zone Phone area amounting to several millions just in the second quarter. Just to remind you that also in the first quarter we had above one million of business created. So all in all, we start to see some enterprise Zoom Phone deals that are rolling out over a prolonged period. We also talking about introducing more of what we do in the Microsoft voice space to be applicable to the Zoom Phone area. Basically, we try to position our surface the best voice goes to partner for successful collaboration players, such as Microsoft and now we start to see that with Zoom too.

Talking a bit about SBC business which was great in second quarter, we grew above 20%. Actually, we at this stage, are well into our plan to reach 120 million of SBC revenues in 2021. Side by side with our ability to deliver a good quarter, we’ve seen nice growth in booking going forward. both in life and non-life environment and also we have seen similar such phenomenon in the contact center and in the Microsoft business. So all in all a very good quarter again from a geo split, I’ll mention that, it’s split almost 1/3 in North America and 1/3 in West Europe, about 17% in APAC and the rest in the Carlisle in Eastern Europe. So all in all, we are well on plan to execute on our plan to grow this year by more than 20%. Most important, our services business as we have mentioned before, we grew above 32% year-over-year, majority of the growth really comes from the professional services area and mostly from managed services. Very strong, I would say that the complexity of launching a new voice service within an enterprise, usually our ability to provide those services, provide both the products and the accompanying services so that we can basically provide the enterprise with quick turn to deployments in operation, is much appreciated by our customers, already have a very nice pipeline of opportunities in this area. So professional services and managed services is becoming key all in all, it represents about 38% of our revenues in the second quarter.

Just to touch on some of the developments in the contact center market, so we’re starting to see WebRTC as a key successful technology as we have mentioned before, when you start to place agents at arm or a lot of the communication goes from home, there is a need for good i-quality voice solution to be transported over Internet clients, WebRTC provides that. It’s being used mostly in the contact center area and we have seen a record quarter in terms of our WebRTC operations. Also we focus in the contact center market mainly on collaborating with Genesis, so we have invested quite heavily in transitioning some of our solution into the cloud environment. We have already registered for leading application in Genesis up foundry solution in the cloud, namely voice, both connectivity, WebRTC, Teams integration, and advanced [Indecipherable]. So all in all we starting to see some developments here already, so some first few projects with our WebRTC and live operation in contact center.

Last I’ll touch on the development in the Voice AI area or conversational AI. We have been able to grow revenues and booking by more than 100%, I would talk mainly about our Voice.ai Connect activities, which have shown great growth, that’s debt [Phonetic] immediately and also a lot of success for SmartTAP or Compliance Recording Solution. The transition of communication and collaboration platforms into teams’ really make it necessary to move all of the old Compliance Recording Solution to teams’ too. So we enjoyed a lot of business in that area. So SmartTAP has been growing fairly fast and basically, it is shown almost 100% year-over-year growth. Touching on VoiceAI Connect, this I’ve mentioned in the past, this is a solution that allows to connect the voice world, telephony, contact centers, SIP trunks, PBXs to cognitive services, such as speech with text, text with speech and more. We made quite a progress in the second quarter, in terms of revenue we have more than doubled first quarter revenue, booking grew 10 times more than the first, I’m sorry, the same quarter in 2020.

We have created a lot of opportunities and roughly, we are above and beyond the plan we had at the beginning of the year. So at this stage, we are in a fairly accelerated more than that. Out of all the different projects we have in that space, I’d like to touch on one very specific, which is key to our success going forward, I’ll talk about Vodafone. Vodafone has a bot called TOBi, is Vodafone at the channel digital system, that is in use in multiple Vodafone countries, many markets. It is used by Vodafone to be constantly engaged with its customers, offering persistent assistance and customer experience. Now Vodafone has selected AudioCodes VoiceAI Connect to enable its customer to talk to TOBi, their Chatbot. VoiceAI Connect not only facilitates of voice interaction with TOBi, but also integrates with Vodafone multi-vendor customer support system, including genesis, [Indecipherable] and Cisco. Initial rollout started earlier this year in South Africa, with positive feedback and plans for rapid expansion to additional countries and later also other use cases, including Agent Assist, Speaker Verification in outbound calls. The solution is provided estimated service Vodafone datacenters in subscription-based model and it should be used all over the world.

With that, I have completed my introduction to this call and we would like to take the call into the Q&A session, Operator.

Questions and Answers:

Operator

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions]

Our first question comes from the line of Samad Samana with Jefferies, please proceed with your question.

Samad SamanaJefferies — Analyst

Hi, good morning and thank you for taking my questions. Maybe first Shabtai, I appreciate all the detail that you gave in your prepared remarks, but just, it’s added notable to me that you’re seeing Zoom Phone more often, that felt like something incremental or new. Can you maybe just help us understand how you get that partnership to work and are you seeing Zoom customers decide between Zoom Phone and Microsoft Teams for telephony or just maybe, what are you seeing from those two, head to head?

Shabtai AdlersbergPresident & Chief Executive Officer

So Zoom as far as we know, right, much of what I’ll tell you really comes from the market, Zoom was very and will be successful, mostly in the lower end of the market. They’re working their way up to the mid-market and the large enterprise. Obviously, we have more value to offer when you come to enterprise. So if Zoom steps into more and more deals with large enterprise and mid-market Company’s, collaboration with Zoom will pick up, and that’s really the so far, better performance in the first half of 2021.

Samad SamanaJefferies — Analyst

Great and then maybe just a follow-up question on the guidance, we saw the bump up in the revenue outlook but EPS was held in the same range. I’m curious, how much of that is due to the FX weakness versus the ramping of actual growth investments? Just can you help us bifurcate that end and if it hadn’t been for FX, would you have raised that EPS guidance?

Shabtai AdlersbergPresident & Chief Executive Officer

Yeah. So we had a step function in terms of the FXo all the impact of the US dollar exchange rate are going down from 0.7 to is now fully embedded. And therefore, we do not expect any further change in coming quarters. On the other end. I can tell you that we have pressure from both partners and some big customers to perform certain developments, some of our partners come to us with request to invest and develop new capabilities and are serving them says, yes, we will be evaluated and we will invest in it. So basically this is really what drives our investments that considered in most of the investment really well made in 3 different areas. Its R&D developing those solutions it sales and marketing to attract and achieve more sales in the market and then service because once we focus more on in services, we need to increase personnel that helps customers deploy those Managed Services. Beyond that, I think that we need to take again into consideration two phenomena, one is the shortage in components, which may hurt sales going forward 3rd quarter. We already know that some deals were pushed from the 3rd quarter because of shortage of components. And then there’s also the pandemic, which you know, we all thought we were out of it and now we have the 4th wave. So trying to be a bit more conservative, I can tell you that we will keep pushing on all cylinders and growing revenues, but as far as, on our profitability, we need to be more conservative. That’s where it is.

Samad SamanaJefferies — Analyst

Okay, great and then just one housekeeping question, I didn’t hear if you said Teams growth specifically for the quarter, can you just tell us what Teams related growth, was please?

Shabtai AdlersbergPresident & Chief Executive Officer

I’m sorry can you repeat the question please?

Samad SamanaJefferies — Analyst

Yeah. Microsoft Teams-related growth, I think you said overall, Microsoft. [Speech Overlap]

Shabtai AdlersbergPresident & Chief Executive Officer

Yeah, yeah. We’ve. Yes. Yeah. I’ve mentioned the Teams revenue grew 90% year-over-year. 9 zero.

Samad SamanaJefferies — Analyst

Okay, great. Great, thank you. I’ll turn it over to the next Analyst, appreciate the questions this morning and congrats on the quarter.

Shabtai AdlersbergPresident & Chief Executive Officer

Thank you so much. Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Greg Burns with Sidoti and Company, please proceed with your question.

Gregory BurnsSidoti & Company — Analyst

Good morning. Is there any potential benefit for you from Zoom’s Act pushing of Five9?

Shabtai AdlersbergPresident & Chief Executive Officer

Good question, Greg. So on the first glance, not sure. However, should Zoom be successful in integrating with Five9, in terms of their customer base with Five9, Zoom is the strong mid-market player. That may help may help Zoom to win those mid-market players. Now if that happens, the answer is yes. Meaning that, if Zoom is successful in acquiring more mid-market customers of Five9, that would be good for us.

Gregory BurnsSidoti & Company — Analyst

Okay and then just getting back to the OpEx and the increased investments you’re making, I didn’t quite catch it, did you raise your target for OpEx that cap from 47, above 47, how should we think about that going forward?

Shabtai AdlersbergPresident & Chief Executive Officer

Yeah, good question. Okay. Good question. Originally when we have established a range for OpEx to be capped at 47% that was made end of the last year. We have not anticipated that US dollars will depreciate against the new Israeli shekel that much. I’ll tell you that the guiding line for us is really increasing investments where it needed, be it in services, be it in R&D, in other areas or adding sales positions. So in view of that we’d rather change what we have said that OpEx will be kept by 47% and basically we want to extend it to be kept by 50%, OK, and increase of 3%. That would mean that, if that happens, then operating margin will go down toward the 20%, rather than stay as they are today, above 22%. So that’s the [Indecipherable] we give priority to increasing investments over profitability.

Gregory BurnsSidoti & Company — Analyst

Okay and then in terms of the decline you are seeing in the service provider, the CP area, it’s pretty, I guess significant decline this quarter. What’s the outlook for that, the term of the year. And do you expect to stabilize or to continue on the same downward trajectory?

Shabtai AdlersbergPresident & Chief Executive Officer

Second quarter, represented bottom[Phonetic] into the stats, we have received some signs of a better market in 3rd quarter already, some of the customers, some of the service provider really did not place with us purchase order for a long time. We started to see toward the end of the quarter, some new PO’s, however with the rise of the 4th wave, hard for me to say. I will tell you that in our plans because enterprise market goes well, sulfur and services goes well. Most of the Company priority and strategy lies in that area and therefore at this stage, service provider is still a 10% to 15% revenue service for the company, but we place less importance to that. We’ll have to live with what the market provides us.

Gregory BurnsSidoti & Company — Analyst

Okay. Thank you.

Operator

Thank you, ladies and gentlemen. [Operator Instructions] Thank you.

Our next question comes from the line of Ethan Etzioni with Etzioni Portfolio Management, please proceed with your question.

Ethan EtzioniEtzioni Project Management — Analyst

Yes. I wanted to ask about the interest expense, why would you have an interest expense when you have so much cash and no debt?

Shabtai AdlersbergPresident & Chief Executive Officer

You know, first, we are investing in market versus securities are mostly at the yield of 1% because we don’t want to take any risk about our cash investments and there were some exchange rate differences, it come close to zero for this quarter and previous quarter. Of course, if the interest rate, at the marketable securities or bonds will raise, we should expect more.

Ethan EtzioniEtzioni Project Management — Analyst

But the negative, do you have IFRS 16, are you impacted by that or you’re not subject to, is GAAP subject to IFRS 16?

Shabtai AdlersbergPresident & Chief Executive Officer

No, we are subject to US GAAP, not to IFRS.

Ethan EtzioniEtzioni Project Management — Analyst

Okay. So this is nothing to do with leasing or something like that?

Shabtai AdlersbergPresident & Chief Executive Officer

No leasing and we don’t GAAP, we take it out as a reconciliation. You can look at the reconciliation between the GAAP and the non-GAAP. So no impact from the leasing.

Ethan EtzioniEtzioni Project Management — Analyst

So we should expect a positive, the finance income over the long term?

Shabtai AdlersbergPresident & Chief Executive Officer

Yes.

Ethan EtzioniEtzioni Project Management — Analyst

Yes. Okay, thank you very much.

Shabtai AdlersbergPresident & Chief Executive Officer

Okay.

Operator

Thank you, ladies and gentlemen, that concludes our question-and-answer session. I’ll turn the floor back to management for any final comments. Thank you.

Shabtai AdlersbergPresident & Chief Executive Officer

Thank you, operator, I would like to thank everyone for attending our conference call today. With continued good business momentum and execution in the first half of 2021, we believe we are on track to achieve another strong year of growth and expansion in 2021. We look forward to your participation in our next quarterly conference call. Thank you very much. Have a nice day.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Roger ChuchenVice President, Investor Relations

Shabtai AdlersbergPresident & Chief Executive Officer

Niran BaruchChief Financial Officer & Vice President of Finance

Samad SamanaJefferies — Analyst

Gregory BurnsSidoti & Company — Analyst

Ethan EtzioniEtzioni Project Management — Analyst

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