AudioCodes Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2024

There are 7 speakers on the call.

Operator

Good morning, everyone, and welcome to the AudioCode Second Quarter 20 24 Earnings Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Roger Chuchen, Investor Relations at AudioCodes. Roger, the floor is yours.

Speaker 1

Thank you, operator. Hosting the call today are Shabtai Atlasberg, 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 AudioCode's business outlook, future economic performance, product introductions, plans and objectives related thereto, and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters are forward looking statements as the term is defined under U. S. Federal Securities Law.

Speaker 1

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 Autocodes' 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 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, possible adverse impact of the COVID-nineteen pandemic on our business and results of operations, the effects of the current terrorist attacks by Hamas and the war and hostilities between Israel and Hamas and Israel and Hezbollah, as well as the possibility that this could delve into a broader regional conflict involving Israel with other parties may affect our operations and may limit our ability to produce and sell our solutions.

Speaker 1

Any disruption in our operations by the obligations of our personnel to perform military service as a result of current or future military actions involving Israel and other factors detailed in AudioCodes' filings with the U. S. Securities and Exchange Commission. AudioCodes assumes no obligation to update this information. In addition, during the call, AudioCodes will refer to non GAAP net income and net income per share.

Speaker 1

AudioCodes has provided a full reconciliation of the non GAAP net 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'd 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'd like to turn the call over to Chatey. Chatey, please go ahead.

Speaker 2

Thank you, Roger. Good morning and good afternoon, everybody. I would like to welcome all to our Q2 2024 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance of AudioCodes. Niraju will start off by presenting a financial overview of the quarter.

Speaker 2

I will then review the business highlights and summary for the quarter and discuss trends and developments in our business and industry. We will then turn it into the Q and A session. Yuran?

Speaker 3

Thank you, Shabtai, and hello, everyone. Before I start my formal remarks, I would like to remind everyone that in conjunction with our earnings release this morning, we will post shortly on our Investor Relations website and earnings supplemental deck. 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 Q2 were $60,300,000 an increase of 0.5% over the $60,000,000 reported in the Q2 of last year.

Speaker 3

Services revenues for the 2nd quarter were $32,000,000 up 12.3 percent over the year ago period. Services revenues in the 2nd quarter accounted for $53,000,000 of total revenues. The amount of deferred revenues as of June 30, 2024, was 80,300,000 dollars compared to $77,700,000 as of June 30, 2023. Revenues by geographical region for the quarter were split as follows: North America, 47% EMEA, 35% Asia Pacific, 13% and Central and Latin America, 5%. Our top 15 customers represented an aggregate of 56% of our revenues in the 2nd quarter, of which 38% was attributed to our 9 largest distributors.

Speaker 3

GAAP results are as follows. Gross margin for the quarter was 65.5 percent compared to 64.1% in Q2 2023. Operating income for the quarter was $4,900,000 or 8.2 percent of revenues compared to operating income of $2,300,000 or 3.8 percent of revenues in Q2 2023. EBITDA for the quarter was $6,200,000 compared to EBITDA of 2,900,000 for Q2 2023. Net income for the quarter was $3,800,000 or $0.12 per diluted share compared to net income of $1,100,000 or $0.03 per diluted share for Q2 2023.

Speaker 3

Non GAAP results are as follows. Non GAAP gross margin for the quarter was 65.8% compared to 64.5% in Q2 2023. Non GAAP operating income for the 2nd quarter was $7,200,000 or 11.9 percent of revenues compared to $5,700,000 or 9.5 percent of revenues in Q2 2023. Non GAAP EBITDA for the quarter was $8,300,000 compared to non GAAP EBITDA of $6,200,000 in Q2 2023. Non GAAP net income for the 2nd quarter was $5,500,000 or $0.18 per diluted share compared to $5,100,000 or $0.16 per diluted share in Q2 2023.

Speaker 3

At the end of June 2024, cash, cash equivalents, bank deposits, marketable securities and financial investments totaled 93,700,000 dollars Net cash used by operating activities was $2,900,000 for the Q2 of 2024. Purchase of property and equipment was $8,800,000 in the quarter, significantly higher than historical periods related to leasehold improvements of our new corporate headquarters in Israel. We expect CapEx to remain elevated in the Q3, after which we expect this line item to return to historical levels. Day sales outstanding as of June 30, 2024, were 108 days. In July 2024, we received court approval in Israel to purchase up to an aggregate amount of $20,000,000 of additional ordinary shares.

Speaker 3

The court approval also permits us to declare a dividend of any part of this amount. This approval is valid through January 1, 2025. During the quarter, we acquired 116,000 of our ordinary shares for a total consideration of approximately 1,200,000 dollars Earlier this morning, we also declared a cash dividend of $0.18 per share. The aggregate amount of the dividend is approximately $5,500,000 The dividend will be paid on August 29, 2024, to all of our shareholders of record at the close of trading of August 15, 2024. Business outlook.

Speaker 3

As it relates to our 2024 financial, we are reiterating our revenue guidance range of $240,000,000 to $250,000,000 On the profitability side, we are adjusting our guidance practice for this year and going forward to non GAAP EBITDA from non GAAP net income per share. Effective Q2 2024, we have adjusted our tax expenses presentation as calculated in our non GAAP earnings per share to include only the tax impact of the non GAAP adjustment as applicable in relation to the GAAP tax expense. Prior to this quarter, our practice was to adjust non cash deferred tax expenses or income as part of our non GAAP reconciliation. Specifically, this deferred tax non GAAP adjustment derived mainly from the tax expenses recognized due to the realization of the company's net operating losses deferred tax asset. We believe this change in tax expense presentation has no notable impact on the true cash generation of the business, with approximately 20 $2,000,000 of U.

Speaker 3

S. NOLs at the end of the Q2 of 2024, we believe that our actual tax payment will continue to be lower than the GAAP tax expenses for the foreseeable future. To elevate any potential confusion from the changing tax expense presentation during 2024 and to more readily highlight cash earnings potential of the business in the future, we believe it is reasonably prudent to provide guidance based on non GAAP EBITDA in 2024 and for the foreseeable future. On that basis, our non GAAP EBITDA guidance for 2024 is $33,000,000 to $39,000,000 which is unchanged as implied in the non GAAP EPS outlook previously provided on our Q1 2024 earnings call. This 2024 non GAAP EBITDA guidance compares to $31,000,000 generated in 2023.

Speaker 3

I will now turn the call back over to Shabtai.

Speaker 2

Thank you, Niran. I'm pleased to report solid Q2 2024 results marked by the 2nd consecutive quarter of positive top line growth and ongoing momentum in our Microsoft and Conversational AI business with sequential uptick in the legacy gateway business. Within Enterprise Business, which represents about 90% of our revenue, Our UCaaS business continued to perform well, highlighted by Microsoft Teams business up 3.3% year over year for the quarter and Microsoft Teams Live managed services annual recurring revenues growing 35% year over year. In the CX business, customer experience business, we made progress as planned and our healthy pipeline continues to support a positive outlook for the second half and full year 2024. Conversational AI Business revenue was up 10.5% year over year.

Speaker 2

Bookings grew over 50% year over year. Judging by the success we enjoyed in the development of emerging conversational AI business in the second quarter and the first half of twenty twenty four provides us with strong conviction with regards to the potential of future success in this area and positions conversational AI as a second strong lag and growth engine for the company next to our Microsoft Live Teams business. Our managed services business continues to evolve to become our key go to market. Services business grew 12.7% and accounted to 53% of revenue in the 2nd quarter compared to 47% in the year ago quarter. What has fueled ongoing momentum in services is our live managed services, which grew about 35% year over year and ended the 2nd quarter at $56,000,000 annual recurring revenue, putting us on track to achieve our guidance of $64,000,000 to $70,000,000 exit 2024.

Speaker 2

Our focus and investment made in recent years are paving our growth for a strong recurring business with strong legs deeply rooted in growing markets such as UCaaS, CKS and conversational AI. The growth of 2 key business areas have contributed the most to the ongoing growing booking trends. 1st and foremost, our live business. Live Teams managed services rely substantially on our live platform, a mature voice services delivery portal and platform with unparalleled unique scale and position for TIMSS Voice, which provide us an edge in the communications and collaboration market. The strength of Live platform stems from the comprehensive large scale of services delivery supports.

Speaker 2

Among these are connectivity services, where we hold about 70% market share Contact center services, which were added last year based on our advocacy IC AI first contact center for Teams. Recording, analytics and inference services and nowadays conversational AI services. We are thus well positioned to win a large portion of the Microsoft Teams value add services. This can be seen through the rapid booking growth and adoption of live services in the market, which again, as I've mentioned, grew 35% in 2024. Just to give you one of the most important numbers, which do not show in our financials and not part of our balance sheet, AudioCode's live and managed service backlog, those are managed services that we sold but haven't yet invoiced in or delivered in full, was at the end of the second quarter $67,000,000 compared to just $29,000,000 at the end of Q2 2023.

Speaker 2

This represents 133 percent year over year growth, and that speaks for the strength of the Microsoft Teams Live business. 2nd, and emerging in a big way in 2024 is the area of conversational AI services. We have already won several projects this year, starting from a low base in previous years. We saw above 50% growth in bookings in 2024, and we aim to end up above $10,000,000 this year. As we all know, Geni Technology is fueling much modernization and innovation in the modern workplace applications in the enterprise space, due to its unique ability to support creation and new advanced services, while cutting substantial costs and time to market.

Speaker 2

At Home Decodes, we enjoy a very unique position due to the fact that we own one of the most comprehensive set of technologies, including telephony, networking, network and device management, security, cloud infrastructure, cognitive services, services practice and more. At the same time, we invest in expanding our capabilities in the area of applying advanced gen AI and large language models technologies for conversational AI technologies. As such, we have become a prime contractor for these Gen AI related projects, which are fairly complex and difficult to implement. That is our unique advantage. Let me take step back now to provide a broader perspective on our business history and evolution in recent years and provide you with a basis for the outlook for 2025 and beyond.

Speaker 2

Decline in our legacy business relating to the service provider business during 2023 and the first half of twenty twenty four, coupled with our revenue model shift from CapEx sales into recurring business were the main factors that drove a halt in our growth story during the years 2020 to 2022. However, these were also the years where we have worked hard to build our large platform and business in UCaaS, CCaaS and invested in building core conversational AI business. As legacy business decline starts to moderate in 2024 and beyond, laying less impact on our overall results and live and conversational AI service businesses keep growing double digits every year. We believe we will see growth reemerging as of 2025 beyond. With growth in recurring business in UCaaS, CX and CAI and our favorable competitive position in our markets, we are confident in our ability to return to growth in both revenue and profits starting in 2025 and beyond.

Speaker 2

Before turning to the TLB's discussions, let's quickly shift to 2nd quarter profitability metrics. Our non GAAP gross margin in the quarter came at 65.8% within our 65% to 68% long term range and compares to 65.2 percent in the Q1 of 2024 and Q2 2023 levels of 64.5 percent. This year over year margin improvement is primarily attributable to a more favorable product mix, namely software and services. 2nd non GAAP OpEx 2nd quarter non GAAP OpEx was $32,500,000 in line with our expectations, representing a small sequential decrease relating to our latest headcount rationalization initiatives. As a reminder, we expect the bulk of $1,500,000 quarterly expense initial reduction, of which about $1,200,000 is still to be realized in the Q3 2024 and thus to contribute to further reduction in the OpEx in Q3 2024 and beyond.

Speaker 2

Reference headcount, we ended the 2nd quarter with headcount of 9.40 down from 959 in the Q1 and as compared to 946 people in the employees in the second quarter Q2 of 2023. The year over year improvement in non GAAP gross margin OpEx led to non GAAP operating income of $7,200,000 or 11.9 percent margin versus year ago of 2.9 percent and or 4.9 percent margin. On a guidance front, with steady performance in the 2nd quarter and pipeline opportunities for strategic area of business remaining healthy, we are reiterating our 2024 revenue guidance of $2,040,000,000 to $2,050,000,000 As explained earlier by Niran, we are introducing full year non GAAP EBITDA guidance of $33,000,000 to $39,000,000 which is unchanged as implied from the non GAAP EPS guidance provided during last quarter earnings call. In 2023, non GAAP EBITDA was €31,000,000 Now let's move to some of the business lines. Let's talk about Microsoft.

Speaker 2

In terms of our strategic business lines, Microsoft Teams business grew 3.3% in 2nd quarter year over year, with steady increase in the live managed services, which grew 35%. 2nd quarter live business growth puts us on track to land within our full year 2024 annual recurring revenue target range of $64,000,000 to $70,000,000 representing an average approximately annual growth of 35% to 40% compared to 2023. Revenue was led again by steady growth in the North American region. From a recurring versus CapEx perspective, our 2nd quarter recurring live bookings mix accounted for 43% compared to 39% in the year ago quarter, more than 10% year over year improvement. The one time or CapEx portion of TIMSS revenue was accordingly 57% compared to 61 percent in the year ago quarter.

Speaker 2

As a reminder, and with Microsoft recent disclosure of over 20 1,000,000 PSTN users, representing just a fraction of the over 320,000,000 Teams monthly active users, we believe the low Teams phone voice penetration is less than 10% and thus provide us with ample multiyear runway to drive ongoing penetration gains. As such, U. K. S. And Microsoft Teams remain with high potential.

Speaker 2

Microsoft now estimates that Teams phone adoption growth is predicted to be about 30% year over year. Microsoft last reported lastly reported in previous quarter was that they are at about 3,000,000 Teams phone ads in the previous three quarters. We believe that the key driver to further or accelerated growth of Teams Phone is the nowadays Microsoft push on use of Copilot for meetings and calls analytics, so expect good market lying ahead. On a new area for us, meeting rooms for Teams, we saw good momentum and growth in revenue from our MTR business, while we are at the end of the second quarter, already at the same level of the entire revenue for the MTR business throughout 2023. Just to remind or talk about one key win in the quarter.

Speaker 2

We signed a 36 month contract with a multi national consumer goods firm providing live essential services to initial 20,000 Teams users, voice hits, with plans to rise to over the next 2 years to reach nearly 100,000 users. As the customer continues to migrate to Teams from its legacy PBX vendor. Winning marquee enterprise accounts with complex requirements takes time. Also initial contract win may not be meaningful. So long term building trust with customers and executing on our land and expand strategy by leveraging broad portfolio of products and services have proven to be effective recipe to generating material revenue contribution with these accounts over time.

Speaker 2

Now let's move to the customer experience business. In the CX business, our healthy pipeline continues to support a positive outlook. For the second half and full year 2024, Revenue declined about 10% year over year in the quarter, impacted by push out of a large deal owing to customer specific circumstances and that's related to material changes in the macro environment. We do expect a portion of this deal to close in the 3rd quarter with the balance in the 4th quarter. Pipeline generation of opportunities remains healthy and we have good visibility in this segment for the rest of the year.

Speaker 2

We see growing number of large contact center migration to cloud projects, choosing our services and products to refresh their voice infrastructure. This quarter, we closed several large deals with banking, financial services and insurance organization in North America, Asia Pacific and EMEA. Live CX is our voice services suite for contact center and now is delivered using our Live platform, which generalizes the way the services are delivered and allow us to offer additional services to complete our value proposition to partners and large customers. Just to mention some of the customer experience life services, I'll mention just 4. The first one is our Bring Your Carrier solution or SIP connection.

Speaker 2

This is our core competency, which is tied up to our SBC business and where we deliver superior voice quality for large global contact centers. We know that at this stage, only about 20% of the contact center global contact center have migrated, so very long runway ahead. We forecast that in each of the next 3 years, our revenues from this application will grow about 25% a year. 2nd service is our omni channel omni voice channel solution or as we call it click to curl. In this area, we expect high growth.

Speaker 2

We are sharpening our go to market and shaping it. But we believe that within the next 3 years, this will help to add more than $20,000,000 of revenues going forward. Then we can talk about a call regarding call security, and then we can talk about enhanced voice service and analytics. I'll not provide more details. We can definitely provide those details in calls after the call.

Speaker 2

In terms of revenues, just to tell you give you some idea about the way Live CX revenue has evolved. We started with about €2,000,000 in 2022. In 2023, revenue grew to €6,800,000 with more than 30 projects compared to just $15,000,000 the year before. In 2024, we had about $3,100,000 in booking in the first half. And then we have a very interesting win with a large financial institution in the U.

Speaker 2

S. We see increasing number of projects with financial institutions migrating to the cloud. Naturally, these large projects require longer decision cycles that may be that may delay signature. In 3rd quarter, we won a project with U. S.

Speaker 2

Bank that ordered our new call security service, adding additional 30% on top of the voice connectivity revenue. Now let me move to the Conversational AI business. Shifting to that business, revenue was, as I've mentioned, 10.5% year over year. Booking grew above 50% for the quarter. We expect it quarter.

Speaker 2

We expect it to become

Speaker 1

a 2nd most important growth engine for the company

Speaker 2

going forward with total contract value expected to close to €10,000,000 this year. We expect total contract value to grow for this line at least 30% to 50% year over year in each of the coming years. So definitely key activity. To provide more color on our investment in Conversational AI, I'll point out the following. First, again, as I've mentioned before, we believe that the majority of business to be done in CAI relates to AI project implementation, where Gen AI plays a critical role.

Speaker 2

However, most of the value lies in the integrated solution. While GenAI and conventional AI are key to deliver a solution, the ability to compete and be successful in providing full working surface solution to the enterprise base is highly dependent on system and cloud services, where we have an edge over the competition. This is where our OD codes shine. We own extensive experience in multitude of technology areas, including telephony, networking, networking device management, security, cloud infra, cognitive services, services practice and more. At the same time, we invest in fine tuning Gen AI applied research for this project.

Speaker 2

I'll mention that out of an R and D force, headcount of about 350 engineering software developers, we currently employ more than 100% in the voice AI activities, which is close to 1 third of it. Growth of UCaaS and CCaaS is heavily dependent these days on the application of CAI, GenAI, Microsoft CoPilot growth clearly depicts this dependency. And thus, we believe we have an edge and are building a strong baseline for future business expansion. Key activity increasing in mainly in the verticals of finance, healthcare and government. Talking about solutions, we have now in production 3 SaaS applications, which provide multi tenant operation over Azure.

Speaker 2

Leading is Voca CIC, our AI first Azure native contact center for Microsoft Teams. Then we have an interaction recording application called Smart App 360, which provides compliance recording and enterprise recording. And then we have Meeting Insights, an enterprise grade meeting collaboration tool. We do intend to expand the activity in CAI by providing going forward an on prem solution for meeting insight and interaction analytics for contact centers add more automation on top of the meeting insights and more custom projects. Turning a bit to Voca CIC.

Speaker 2

Voca CIC is our, as I've mentioned, our first contact center solution for Teams. It plays well into the company overall live business and strategy, where we enjoy the benefit of upsell to existing customer base. Bookings are already at 70% at the end of second quarter, already at 75% compared to last year. We expect them to close to double this year. Revenues are already 130% above the entire 2023.

Speaker 2

We expect to almost triple them in 2024. To mention a few more data points, OCA CIC pipeline increased 35% quarter over quarter sequential quarter. We won additional education account in North America, now serving 5 educational customers in the U. S. In total.

Speaker 2

We have continued momentum with channel partners in education. We signed 5 additional channel partners this quarter. We onboarded our first ever omnichannel contact center with a leading Fortune 500 manufacturer with a contact center with more than 300 agents. We run a large migration project of more than 200 IVRs. Again, this is in EMEA, moving a customer from Zoom to Teams.

Speaker 2

And then we have Voca CSC largest deployment to date now handling 2,500,000 calls a month. Turning into Meeting Insights, Meeting Insights is a SaaS application and an organizational enterprise solution that captures, analyzes and organizes every Microsoft Teams meeting in organization, allowing company wide information sharing and enabling substantial better decision making for managers and company managements using information delivered in meetings across the organization. At Articos, we use Meeting eSight for more than 2 years now and processing nowadays more than 150 meetings a day. Needless to say, we experienced high very high productivity pickup based on this using the application. AdiCosmetic Insight is part of a growing portfolio of SaaS application and services in the conversational AI domain, which unleashed the power of AI by transforming Teams meeting into business insights, delivering efficient use of information and data exchange throughout the meeting and accelerates business productivity and organizational decision making intelligence.

Speaker 2

Glad to inform that as of the end of last week, an online publication leading online publication UC Today has selected AudioCode's Meeting Insight as the winner of its best use of AI category in its UC Awards 2024. The awards judges recognize Reading Insights' ability to leverage conversational AI to enhance user productivity and overall communication experience. Just to mention some data points, we've seen we have delivered a completed the deployment of a SaaS solution throughout the Q1. We've seen tremendous growth in Q2, more than 30%. We now expect to grow very fast.

Speaker 2

The use of AI in meeting A side will probably double month over month. We see many organizations starting to use LLM technology and insights and prompts from meeting insights. Going forward, we expand we plan to expand the Teams solution into providing a solution for the Zoom, Google Meet and Cisco Webex environments. And we intend also to provide a solution for storage to be on prem rather than just cloud. We're doing that on top of the Hebrew and U.

Speaker 2

S. And UK English to provide a few more European languages already next month, August, providing German, French, Dutch, Italian, Spanish and more. So we expand rapid growth. We expanded that business that is just few of 1,000 of dollars in 2024 to deliver 1,000,000 few millions in 2025. Just to again mention that we're working to expand the solution in many areas, as I mentioned.

Speaker 2

We led automation on top of it, very unique features that will allow to improve productivity, just such as prepare me for my next meeting, you'll get a message on your mobile and you'll be ready to meet to deal with anyone that you had meeting with and action item with. We'll add more integration into CRMs and meeting notification. And with that, I'll wrap up. So we have delivered on our business priorities in the core, fostering growth in strategic areas of our business, while successfully executing on cost reduction initiatives. We believe this lays the foundation to support healthy top line growth long term, while driving significant margin expansion 2024 and beyond.

Speaker 2

And with that, I have concluded my presentation and we'll move the session to Q and A. Thank you, operator.

Operator

Thank you very much. We will now be conducting our question and answer session. Thank you. Your first question is coming from Ryan McWilliams of Barclays. Ryan, your line is live.

Speaker 4

Hey, guys. This is Damon Coggan on for Ryan McWilliams. Thanks for taking my question. Great to see improved service business growth year over year in the quarter. Can you help us understand what the key drivers of growth were in the quarter and how we should think about growth in the product versus service business lines in the back half of the year?

Speaker 2

Yes. Actually, again, anyone who wants to understand the prospects of our business should pay attention to 2 key lines business lines. 1 is the live and Microsoft live Teams, which is the managed services business, which services now about 53%, growing nicely year over year. This is where we put most of our energy and resources. We have built I think the strength comes from the fact that we have developed throughout several years a platform.

Speaker 2

The platform is called Live platform. And it's based on connectivity services for which we are known, right, both gateway and SBC. But then throughout the years, we have added more services. 1st and foremost, management services, so we can manage addition, deletion of user sites. We then added on top of that the contact center Teams application, which provides for contact center applications.

Speaker 2

We've added recording solutions. Nowadays recording and transcription and inference become key in the evolution of both UCaaS and CCaaS solutions. So, adding those services further strengthened. So our strategy here is land and expand. So we usually land with our connectivity services, where we consider to be the dominant leader in the market.

Speaker 2

And then we simply tunnel and sell do an upsell of voice related business application to each such account. So using and customer, we had the last win, very important win with UCF, University of Central Florida, right, one of the top 3 universities in the U. S, they have been using our SBCs for a long time. And because they recognize us as a trusted reliable supplier, when we offer them to evaluate our contact center solution, they took on it. And last year, we signed the contract.

Speaker 2

So it's again, it's land and expand and the addition of more services. And you can expect, right? I was talking about meeting Insight, I was talking about new coming solution. Let's talk about interaction analytics for contact center, etcetera. So we see a long runway for voice related business application in the live Teams environment.

Speaker 2

This is why we believe that having this integrated platform is very high integration to it. I believe that, that puts us substantially above any favorable competition. So it's we've kind of built a moat, if you will, for the Microsoft Teams phone business. And with the long runway, we're fairly confident that, that growth will continue. So that's one leg.

Speaker 2

The other one, which is just a new substantially smaller leg, which is the CAI, conversational AI. Here, again, we bring our many years, 20, 25 years experience in multitude of technologies as I've mentioned. We believe not too many organizations may have this type of comprehensive sets of technologies, resources from telephony, networking, management, you name it. And now since we are and we have a group that is specializing in evaluating and optimizing large language models in GenAI. So we are basically marrying the old system and software and cloud services abilities with the new GenAI activity that the internal group is handling, right?

Speaker 2

We're working with OpenAI, LLM and with Cloud and evaluating several more. So we definitely expect that our ability to deliver end to end full solution based on these capabilities will become a very strong driver for success in the future. So those are the 2 key elements that upon which we base our business going forward.

Speaker 4

Got it. Thank you, Sabtai. Great to see the continued improvement in the conversational AI product. Can you just help us understand what kind of customers are adopting that product? And is customer appetite for adopting AI use cases better than your expectations?

Speaker 2

Yes. So we have well, my strategy was always to set up here in Israel next to Edcore where we have got great access to a lot of businesses. So we have few projects running already and completely delivered, both in the financial sector, in the government sector and in the health care sector. So for example, we completed a project with Israeli Red Cross ambulance service back in 2021. That's working for 3 years now.

Speaker 2

We have delivered 2 projects for the government space. We are delivered already the Israeli largest medical service organization is called Clalit. It has 4,500,000 subscribers. We have a solution for cost steering and now we have for setting calls, it's running like 100,000 calls a day. So at this stage, I would say that we have close to 10 different application, which are not based on the standard products, right?

Speaker 2

It's not Voca CAC and it's not meeting insight. It's projects where you need to connect to a contact center, you need to connect to a cell phone environment, need to do management of elements, you need to transcribe to extract to interfere, record, deliver reports, analytics. So a lot of areas where we can shine.

Speaker 4

Thank you, Shabdai. I'll hop back in the queue. Appreciate it.

Speaker 2

Sure. Thank you, Ryan.

Operator

Thank you very much. Your next question is coming from Ryan Koonce of Needham and Company. Ryan, your line is live.

Speaker 5

Thanks. I want to take a different cut at the last question about the transition from license over subscription. And if we think about this over a multiyear view, at what point do you expect growth to re inflect as you see this transition from product over to service? Do you have an idea? Can you set me kind of goalposts out there when you think you might see this return to revenue recognition growth again, approaching high single digit or maybe double digit?

Speaker 2

Yes. I believe that the decline of legacy is moderating. And at the same time, we see managed services picking up and CAI services at the same time. Based on our visibility, we should talk about 2 to 3 cores going forward. So I expect that actually, either Q1 or Q2 2025, we are definitely going into growth.

Speaker 2

And I believe that now that our business will be primarily based on recurring business and not one time sale business, chances for decline such as happened to us back in 2020 this year will not repeat themselves. So we expect growth to come back, a second quarter of 20 25 and beyond.

Speaker 5

That's really helpful. Thank you for that. On the recovery in the legacy gateways, anything going on there? I mean, it just doesn't seem like the operators are particularly investing a lot these days. So wondering what's behind your recovery in legacy gateway shipments?

Speaker 2

Yes. When we looked into the history of gateway sales, we saw that back in 2023 Q1 and this quarter this Q1 of 2024, there was a sharp decline between 4th quarter to the last quarter in a year to the Q1 in the year, and then it stabilized for the rest of the year. So we do expect that gateway business will not continue to decline or it will definitely moderate its decline throughout 2024. All in all, I believe that we already just give you a quick think. All in all, if I'll sum up the total, back in the end of 2022, our combined gateway business was roughly about $90,000,000 At the end of this quarter, I think we got somewhere to like 60,000,000 dollars I don't believe we will see a decline of more than another $10,000,000 or $15,000,000 throughout the coming quarter.

Speaker 2

So all in all, I think we already experienced the largest drop. And so it will moderate and will vanish.

Speaker 5

Helpful. And just a quick housekeeping one here. On the higher cash use in the quarter, You mentioned the headquarters modernization investments there and that will continue in Q3. Any other puts and takes on the cash use in the quarter? I did see the accounts receivable was up and things like this, but anything else you'd call out on the cash flow that drove you guys to have a higher use in the quarter?

Speaker 3

Hi, Raul. This is Niran. So we had a very nice cash flow operating cash flow in the Q1. It was $50,000,000 So no dramatic change during this quarter, although we saw a slight increase in our accounts receivables, but there is no issues with the collection or a doubtful allowance with regards to the accounts receivables. We managed to lower the inventory level.

Speaker 3

So all in all, we believe we will back to positive operating cash flow at the Q3 and then after. With regards to the capital expenditures, yes, it relates to our new headquarter. We will have few more 1,000,000 invested at the Q3 and then we will back to the regular level that we used to have before.

Speaker 5

Miranda. That's all I've got. Appreciate it.

Operator

Thank you very much. Your next question is coming from Samad Samana of Jefferies. Samad, your line is live.

Speaker 6

Hey, guys. This is Billy Fitzsimmons on for Samad. Maybe first question. There are a lot of conflicting narratives right now on the macro front and what this means for the UCaaS and CCaaS vendors. I'd be curious if you guys have seen any material changes in either UCaaS or CCaaS spending from a macro backdrop perspective quarter over quarter or as you look out to the Q3?

Speaker 6

Thank you.

Speaker 2

Okay. All in all, I believe and we also review information provided by analysts in the space. Contact center activity doesn't seem to stop. Actually, it continues. If you'll take Enterprise Connect back in March of this year, it was fully active and intensive even on all contact center application.

Speaker 2

That's growing. No impact from the global economy. UCaaS is growing less. However, it's still very strong. We've not seen well, there's definitely an impact of economic situation on enterprises investing in modernizing their networks.

Speaker 2

I believe that, that will come back when that situation ends hopefully next year. I'll just say that, again, as I've mentioned that the appearance of GenAI Technology, Copilot and likes will definitely give a push to the UCaaS use case simply because now there's ample actually excellent technology that allows to provide substantially more value from analyzing meetings and calls in the enterprise. So while we have been using data, messages, e mail messages in our files, digital files to derive our intel from. Nowadays, there's the information exchange in meetings, which is we sit on meetings all day. So there's huge amount of new information that has not been captured so far, has not been used to generate good intelligence.

Speaker 2

So we do expect that GenAI CoPilot and few more chatbots technology will definitely help to increase the use of UCaaS. So all in all, we are optimistic that in 2025 we'll see better behavior.

Speaker 6

Got it. And then conversational AI grew 50% year over year. And Jon, now you provided some customer examples of conversational AI adopters. Maybe digging a little deeper there, can you just relay some anecdotes from customers on kind of the sales motion and what initial feedback on the product has been like? How are customers justifying the cost increase?

Speaker 6

What are getting those deals over the finish line? Any color there would be helpful.

Speaker 2

Yes, very simply, I mean, let's talk about a corporation that needs to be highly operational and effective in running its operation and diverse location and sites. One organization that we work with was usually recording its meetings, but however, he had a turnaround time of about 3 weeks before they got back the transcription, and then were able to distribute it. Nowadays, if you have some time pressure to solve issues, at the end of the meeting, you're getting a full transcribed summary action items that can be distributed and sent over immediately over the communication line. So it takes an operation that was really non efficient, very slow to an operation that's fully real time operated. And that's a big, big plus.

Speaker 2

Think also about a contact center that was working. However, management and analysts had no idea about what was going on in all those calls. Now we have tools such as summarization and insights extraction that allows analysts and data scientists to inform managers where the focus is, what application and operation is hot and which is not and where management should invest its resources. So many such I can tell you that we have plenty of use cases all around. I'll give you an example, employee leaving your organization, knowledge retention.

Speaker 2

If you have a talent that has left your organization, you're at loss. It will take you 4 months to recruit a replacement. All the experience and knowledge that the previous employees were gone usually, and it's a blow. We many years ago, we lost several design engineers. We made a calculation that the departure of each cost us about $70,000 in total.

Speaker 2

Nowadays, if you use a meeting summary and insights tool for each meeting. All you need to do is you tell your employees to include that capability in each of their meetings. Now when somebody leaves, the new employee that comes and replaces him, all of a sudden he has got tens and hundreds of recordings and summarization and insight in text from this person experience. So all of a sudden, it can become fairly productive and effective within a matter of a week or 2. So that's definitely three different examples, tells you why organization will spend a lot of money to take advantage of the use of AI.

Speaker 6

Super helpful. Thank you very much.

Operator

Thank you very much. Okay. We appear to have reached the end of our question and answer session. I will now hand back over to Shabtai for any closing remarks.

Speaker 2

Thank you, operator. I would like to thank everyone who attended our conference call today. With continued good business momentum in our enterprise operation and good underlining market growth trends in the UK, profitability in coming years. We look forward to your participation in our next quarterly conference call. Thank you all.

Speaker 2

Have a nice day.

Operator

Thank you very much. This does conclude today's conference. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

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Key Takeaways

  • AudioCodes reported Q2 revenues of $60.3 million, up 0.5% year-over-year, with services revenues growing 12.3% to $32 million and non-GAAP EBITDA rising to $8.3 million.
  • Enterprise momentum continued with Microsoft Teams business up 3.3% year-over-year and Live managed services ARR growing 35% to $56 million, driving a Live backlog of $67 million (+133% YoY).
  • Conversational AI is emerging as a second major growth engine, with revenues up 10.5% and bookings up over 50% year-over-year, and total contract value expected to exceed $10 million in 2024.
  • Recurring services now account for 53% of revenues versus 47% a year ago as AudioCodes shifts from CapEx sales to a services-led model and reiterates full-year non-GAAP EBITDA guidance of $33 million–$39 million.
  • The company reaffirmed its 2024 revenue guidance of $240 million–$250 million, declared a $0.18 per share dividend, and expects growth to re-emerge in 2025 on further UCaaS, CX and AI services adoption.
A.I. generated. May contain errors.
Earnings Conference Call
AudioCodes Q2 2024
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