Also, there was an issue of inventories of IP phones, which due to high interest rates drove partners to hold less inventories. However, let me give you one perspective that we have not mentioned so far about, say the decline in gateways and MSBR, as the world moves from PSN to IP increasingly, I would tell you that in our longer-term plans, we assumed that in the next three to five years, we will see a decline in sales of other products, mainly gateways and MSBR but that was primarily based on the fact that the process would be linear. Unfortunately, due to the global crisis in 2023, — this process has accelerated. I believe that we have seen the majority of that decline occurring already in the first three quarters of 2023. Basically, I think what we should have want through the next three to five years, substantial part of it we went through in 2023.
That’s what drove our product decline. Also IP phones. I think I mentioned the high cost of inventory, but we’re seeing come back. One area that we have not touched and mentioned just briefly is the MTR in the meeting rooms. We do expect we have invested heavily in the last two years to prep it. We believe that we will start to see the benefit of it already in 2024. This is a huge market. We know there was a big push by Microsoft into the MTR space in 2022, which subsidized a bit because of the inflation, the high inflation and interest rates, which affect hardware cost. Hopefully, if we see that changing somewhere mid ’24 or towards the end of the year, I believe that already in ’25, we will see a big ramp-up in that. We will then probably go up in products.
Gregory Burns : You mentioned, I guess, the hardware mix on the noncore piece, and I guess you just discussed some of that. In the core on the enterprise side, what’s the mix of hardware versus software on that part of the business, particularly around SBCs?
Shabtai Adlersberg : Yes. The good news on that, as we see is a major line for us, the annual level of revenues for SBCs give or take about $120 million. Now we constantly move more to software. Many new SBCs solution are cloud-based. Even more than that, while in small branch offices, you need to use some hardware, we know in the process of moving from proprietary designed hardware that we engaged with in the past. We’re now moving into using software that’s embedded in service, we purchase from other parties. All in all, majority of our SBC is going to become software-based. That’s a trend. Therefore, the very high gross margin that we will enjoy.
Operator: Your next question is coming from Ryan Koontz of Needham & Company.
Ryan Koontz : I wanted to see if you could unpack the gross margin strength, the nice job you did there. You talked about product mix and software and services. Is the shift to subscription and software the key driver there on gross margins? Or is there more to understand if you could help us unpack that?
Niran Baruch : No, it’s mainly related to the improvement in our service revenues, which is now about 50% of total revenues and also relates to more software as part of the product and high gross margin product, as Shabtai mentioned, the SBC was very strong this quarter, and it’s in a better gross margin than the other products, such as the MSBR and IP phones. It mainly relates to the product mix.
Ryan Koontz : With regards to the software services revenue at 50%, is there further upside in margins in that business as you continue to scale? Or do you feel like you really achieved your goals there within that mix and that margin?
Niran Baruch : No, if you look at the supplemental deck that we published with our results on our website, you will see that our long-term target for gross margin is 65% to 68%. There is more room for improvement in gross margin.
