Q2 2022 AudioCodes Ltd Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the audio Cage second quarter 2022 earnings Conference call.
At this time, all participants have been placed on a listen only mode.
Floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host Mr. Roger teach N V. P of Investor Relations Richard the floor is yours.
Thank you operator hosting the call today are shopped high Alisch, Bergh, President and Chief Executive Officer, neuron, Baruch, Vice President Finance, and Chief Financial Officer, and Dmitry that as Chief strategy Officer, and head of corporate development before we begin I'd like to remind you that the information provided during this call may contain forward looking statements.
The audio codes 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 a term is defined under U S. Federal Securities law forward looking statements are subject.
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 effects of global economic conditions in general and conditions in audio codes industry and target markets in particular shifts in supply and demand market acceptance of new products.
For existing products, the impact of competitive products and pricing on audio codes 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 audio codes to successfully integrate the products and operations of acquired companies into audio codes business possible adverse impact of the COVID-19 pandemic on our business and results of operations and other factors detailed in <unk> filings with the U S Securities and Exchange Commission audio Kids assumes no obligation to update this information in addition.
During the call audio codes will refer to non-GAAP net income and net income per share audio codes has provided a full reconciliation of the non-GAAP net income and net income per share cause 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 an archived webcast.
That 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 shop by shop.
Please go ahead.
Thank you Roger good morning, and good afternoon everybody.
I would like to welcome all to our second quarter 2022 Conference call with me. This morning is neuron Bull Chief Financial Officer, and Vice President of Finance.
Iran would start off by presenting a financial overview of the quarter, who will then review the business highlights and summary for the quarter and discuss trends and developments in our business in the industry. He will then turn it into the Q&A session.
Brian .
Thank you shop 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.
I'll be discussing on this call.
Revenues for the second quarter were $68 4 million, an increase of 12.9% over the 66 million reported in the second quarter of last year.
Services revenues for the second quarter were $27 eight.
8 million up 21.9% over the year ago period.
Services revenues in the second quarter accounting for 46% of total revenues.
The amount of deferred revenues as of June 32022 was $75 2 million up from $73 4 million as of June 32021.
Revenues by geographical region for the quarter were split as follows North America, 43%, EMEA, 32% Asia Pacific, 19% in Central and Latin America, 6%.
Our top 15 customers, representing an aggregate of 53% profile of revenues in the second quarter of which 44% was attributed to our 12 largest distributors.
GAAP results are as follows gross margin for the quarter was 65, 1% compared to 69, 4% in the second quarter of 'twenty or 'twenty one.
Operating income for the second quarter was $7 9 million or 11, 6% of revenues.
Compared to 10.1 million or 16, 7% of revenues in Q2, 2021.
Net income for the quarter was $6 9 million or 21 cents per diluted share compared to $8 2 million or <unk> 24 cents per diluted shares for Q2 2021.
non-GAAP results are as follows non-GAAP gross margin for the quarter was 65, 6% compared to 69, 7% in Q2 2021.
non-GAAP operating income for the second quarter was $11 9 million or 17, 4% of revenues compared to $13 6 million or 22, 4% preferred renews in Q2 2021.
non-GAAP net income for the second quarter was $11 3 million or 34 cents per diluted share compared to $12 7 million or 37 cents per diluted share in Q2, 2021.
At the end of June 'twenty, 'twenty, two cash cash equivalents bank deposit market both securities.
Totaled $138 5 million.
Net cash provided by operating activities was $4 8 million for the second quarter of 2022.
Days sales outstanding as of June 32022 were 75 days.
During the quarter, we acquired 300 <unk>.
74, thousands of our ordinary shares for a total consideration of approximately $8 3 million.
In June 2022 we received court approval in Israel to purchase.
To an aggregate amount of $35 million of additional ordinary chef. The court approval also permits us to declare a dividend of any part of this amount. The approval is valid through December 12 2022.
We declared a cash dividend of <unk> 18 cents per share the aggregate amount of the dividend is approximately $5 7 million.
The dividend will be paid on August 31st 2022 to all of our shareholders of record at the close of trading on August 17 2022.
Regarding head count on the heels of 112 position in 2021 and 37 position in the first quarter 'twenty 'twenty. Two we added 18 full time employees and 13 outsourced employees altogether 31 position in the second quarter of 2022.
We adjust our guidance for 2022 follows we now expect revenues in the range of 275 million to $282 5 million down from $277 million to $285 million.
And we now guide for non-GAAP diluted net income per share in the range of one dollar and 35 cents to $1.45.
<unk> from our previous outlook of $1 40.
Two $1 60.
I will now turn the call back over to shop there.
Thank you and Iran, I would like to remind everyone that in conjunction with our earnings release, we've posted on our Investor Relations website, an earnings supplement deck I would like to start by providing an agenda for today's discussion.
First I would like to discuss our strategy and business characteristics.
Shaped us in the market.
Then I will discuss our financial highlights and outlook for second half of 2022.
Finally, I will provide a detailed discussion so for our core business segments.
On the first topic I would like to address the macroeconomic uncertainties and remind investors why the strong foundation, we have built.
So far should enable us to outperform during the uncertain environment.
Your leverage to multiyear secular growth trends in the unified communications market, notably Microsoft teams and zoom phone any of the customer experience space.
Customers deploy our software and services to drive greater productivity, which is particularly relevant in a tight labor an inflationary environment.
We have a consistent track record of strong profitability and cash flow generation.
On a trailing 12 months basis, despite short term elevated supply chain costs. Our non-GAAP operating margin was 19, 2%, which is amongst the highest in our industry.
Over the same period, we also generated $33 9 million non-GAAP free cash flow, our strong financial profile enables us to continue to make prudent investments in our business to further strengthen our competitive mode.
Appreciate us from competition, we have a rock solid balance sheet ending the second quarter was $138 5 million of net cash.
Aaron a great position to capitalize on any dislocations in.
In the market and we are actively looking for unique assets to add to our portfolio that can accelerate our long term growth and transition to recurring revenues.
Throughout our history, each time, we experience macro turbulence, we have extended.
We have exerted strong control of our expenses and manage to not only survive but to use market. This location.
Our franchise and leapfrog competition.
While it is difficult to assess in the path of the next professor Michael <unk>.
This time should not be any different for us.
I would like to remind everyone. The strategy that has served us well over the past several years.
We will continue to fine tune and agriculture.
First expand the reach of our core voice solution and services and enabling our unified communication and collaboration and customer experience with focus on Microsoft teams Zoom Genesis and the other major.
Customer experience vendors second increase customer value by Upselling abroad, and extended portfolio of voice services and application third accelerated transition to software and subscription.
Gallegly and organically.
Now to the quarter financials, we're pleased to report solid topline results growing 12, 9% year over year.
Revenue growth this quarter was mainly driven by ongoing momentum in the Microsoft teams and zoom phone in the UK space and the return of strong growth in customer experience segment, which led our enterprise activity.
Revenue from Microsoft teams zoom phone and the customer experience market grew as the group by 22, 1% year over year and accounted for 67% of our revenue.
Service revenue grew 21.
9% year over year and accounted for 46 of total company revenue.
This is the proof of execution on our strategic priority by successfully transforming our company to cloud services and recurring revenue model.
Articles live managed services, which grew roughly 100%.
Year over year.
As evidenced.
But Microsoft teams momentum ERISA Morgan Stanley CIO report cited by Federal Microsoft Executive says that over 50% of the organization is standardized on teams and that's expected to increase to about 60% in next three years, we believe.
This dynamic will further fuel our business, particularly India adoption in adopting this with large enterprises.
Quantifying this large market opportunity third party firm warehouse research forecast, Microsoft teams to grow it's roughly 35% to 40% compound aggregate.
Growth rates through 2025, which supports our confidence in multi year runway for it into the business.
There are today over 270 million monthly active users of which only low single digit percentage based on our analysis is adopted themes phone system with BSA and coding.
Where we play a market share within Microsoft ecosystem for direct routing application remains strong and is well above 50% equally.
Equally strategic is the strong momentum with zoom phone, which continues to grow and in the second quarter of 2022 grew over 50% year over year.
Shifting gears to the customer experience segment I'm pleased to report a strong snapback in our CX line up over 20% after being down eight 5% in the prior quarter.
Strong second quarter results, we're throttled by the ongoing healthy spending environment in contact center and the closing of large deals that slipped in the prior quarter.
You need to see great progress with our conversational AI business, where total contract value signed during the quarter grew over 100% year over year, we are well positioned to grow above 50% in our portfolio in 2022 compared to the previous year.
Importantly.
Articles live our managed services offering for UCC in CX and for the conversation on the AG segments continued to see strong momentum.
The month of June a $24 million, our run rate, putting us on track to achieve our 2022 target of doubling.
The annual recurring revenues to over $30 million from over $15 million in 2021.
Our pipeline.
Is to expand across core areas of our business supported by long term secular trends of migration of voice infrastructure to cloud hybrid work and enhanced customer engagement and experience solution powered by AI.
Shifting to margins discussion in Opex.
Our non-GAAP gross margin came in at 65, 6% versus 69, 7% in the year ago quarter. This was influenced by several factors.
A product mix hardware accounted for a greater percentage of our sales this score versus the year ago quarter and they typically.
Carry lower than corporate average margins.
Our supply chain costs accounted for the balance of the gross margin difference specifically, we incurred $1 2 million of higher component costs in second quarter versus the year ago quarter, which was lower than the $1 4 million, we mentioned in the proof of the school year.
We estimate the highest.
The higher supply chain cost impact on our non-GAAP gross margin by about 170 <unk>.
This points, excluding this impact, which we believe is temporary while margin should have been six or seven 3%. We now believe substantially lower impact in the third quarter.
While we continue to invest in our strategic areas in our business, we have slowed down its investment in the second quarter in view of the global macroeconomic slowdown the non-GAAP opex growth slowed to 15% year over year sales growth.
Comparing to 20% in the previous quarter. The Opex growth was primarily driven by adding position. We've added 119 position year over year non.
non-GAAP operating margin was 17, 4% versus 22, 4% in the year ago period, which wasn't factored by increased investment in new product and technology developments product mix, our supply chain costs and includes hiring activity.
On the heels of this development and our non-GAAP earnings per share came in at 34 cents in line with our internal budget. This compares to 37 cents in the second quarter of 2021.
With regard to headcount as neuron mentioned, we have added 18 full time employees and 13 outsourced employees altogether 31 position in the second quarter of 'twenty two.
That speaks for itself in terms of wire <unk>.
Deaths, nor our ability to continue to grow and prosper.
On the heels of 112 positions added in 2021 and 37 positions added in the first quarter of 'twenty two as we continue to invest in strategic areas of our business, while prudently managing opex in light of uncertain macro environment. We expect continued growth in net count in the third quarter.
2022.
Now to our guidance, while we continue to see strong business momentum in fundamentals. We believe it is prudent to update our guidance in view of the macroeconomic headwinds in the short term elevated supply chain costs in 2022.
S neuron already stated we adjust our guidance as follows on the revenue side, we know Lora revenue range by $2 5 million about 1% annual plan.
For the year could be in the range of 275 to $282 five down from the original one.
Original guidance provided in January .
As to earnings we now guide to.
non-GAAP EPS to be in the range of 135 to $1 45 down from the original guidance of 140 216 feet.
There is no change to our long term financial targets, which remain.
In growing.
Income by 13% to 15% year over year and by working to get back to the range of 20 to 23.
non-GAAP operating margin.
Touching on our sales in the quarter.
This has been a very good quarter, we have.
Heath on our targets in.
Sales in North America.
We have a strong channel that keeps developing and outperform our plans by 20%.
We have few rich.
<unk>.
Is that a.
Past the original plan all in all I would say that we performed well in North America.
In EMEA.
EMEA and some areas.
Now, let's dive into our core business engines are first and foremost Microsoft.
As mentioned previously Microsoft business grew over 20% year over year.
The activity in teams up 45% year over year.
Skype for business declines continued to decline above 50% this quarter.
Sure and now its down to only about 4% of our overall company quarterly business.
No question that in coming quarters, the impact of the declining Skype for business will be.
Net negligible and we will see the full par of the growth in teams, which has said it would be 45% year over year.
We had another record quarter for Microsoft teams accounts additions, we added 317 accounts versus 209 in the year ago period and versus 260 in the prior quarter, which speaks for the accelerating adoption of teams now growing pipeline.
Also since nuc greater discipline be here, if we look on the new business, that's being created every quarter.
He has grown 25% year over year, which provides again a strong basis for further growth in coming quarters.
Another point to note is that while our overall Microsoft business in 2021 with about 120.
When we combine our revenue year to date with the above 80% probability opportunity that we have on and we are now at the similar level already at the end of July 2022, which again speaks and shows the strength of our growth and thus we have a high confidence.
Our ability to grow Microsoft business in 2022 by 20% to 25% compared to 2021.
To mention some of the key developments in the Microsoft <unk>.
Space we've.
We have seen.
Substantial growth and drive in our devices activity.
We've seen our IP phone business growing nicely, we've seen demand substantially grew up growing and continuing after the return to work with the decline of the government into endemic with so contingent including IP phone business across several course note. This is the third quarter of growth.
And we plan for about 20% annual growth.
I should mention though that.
You know if we would been able to deliver all of the purchase order that we received we would probably end up with the answer for the business is growing substantially faster.
So touch and that is a really limited our ability to deliver.
Also great focus by Microsoft on increasing.
Airports equipment and.
Deliver in.
Install installation of meeting rooms that becomes a major topic with Microsoft who you are.
We're acting to build a new product to offer of new services and we expect those two to deliver and launch this product and service in this meeting space in the second half of 'twenty two.
Also we have seen increased activity in the life cloud platform, we have and Microsoft operative connect those solutions are meant to enable a service provider in the market to quickly get on board with Microsoft teams without going through a tedious separations and so.
We have been working.
Closely with Microsoft and some other partners to accelerate live cloud operations.
Just to mention two tree counts that we have in that space. So working with tier one service provider. We have signed a 36 month contract with a large international investment firm.
Selling verticals live services for one 5 million total contract value. This deal covers the migration from Avaya to inflows for 7000 employees in APAC and EMEA.
The scope for expansion.
Another win we had in Europe , working with another tier one service provider, we signed a 48 months' contract with multinational European Energy company selling.
Selling articles lie surfaces for close to a million of total contract value.
The live services.
Cover my question of 15000 employees from Alcatel, So it seems to us by the end of 2022.
Full of potential expansion projects and Upselling additional solutions in our portfolio.
So that's working alongside the system integrator, we signed a 42 month contract with an international Energy company selling article drive premium services for about one point.
$5 million total contract value the deal provides minutes SBC services plus.
Various operations such as addition, changing the leading with as part of the migration from this time from Cisco to teams voice for 7000 employees in the U S and APAC.
Now, let's dive to the most important business line, we have a 30 codes, which is logical drive articles live for a minute services portfolio in the Microsoft space, Microsoft in space, We had excellent execution in our lives and services portfolio. We ended the second quarter.
24 million run rate up from 20 million last quarter, and keeping us on track to achieve over.
Our 2022 target of over 30 million importantly, we benefit from multi year visibility from this revenue stream is life customers often sign 30, sometimes 48, and sometimes 60 month contract. We ended the June quarter with over 60 million.
Of total contract value up over 100% year over year.
Actually in each of the last three quarters, we've added more than 10 million in total contract value.
In Microsoft teams.
I think it was the last success stems from the fact that it removes complexity from the process of integration with legacy enterprise telephony and provides a seamless rapid and cost effective migration to Microsoft teams for enterprises.
Regarding live games.
Total contract value as I've mentioned before just to repeat the information in each of the last three quarters.
A signed contract for a total value of more than 10 million each quarter and at the end of the second quarter our total.
The amount of.
Contributed total contract value is now above 60 million.
Let's move to our success in the <unk> space.
In the second quarter revenues from activity in the zoom phone air space grew above 50%.
We will.
Grow this year close to a 100% compared to previous.
Previous year still will be in the range of $5 million to $10 million.
2000, <unk> second quarter 2000.
22 was also a record quarter in which.
New opportunities work related new opportunity creation really grew by north of 200% in the quarter, which tells you about the big professional developing or a solution in the zoom phone.
Right now we know that a zoom is focusing more and more on the zoom phone and has stated it.
Strategic importance publicly and we know that for.
A piper Sandler reports out of.
It's over 21 zoom mix is expected to gain market share.
From about 11% this year in the UK market to 50% in 2026.
Just to remind everybody we're talking about a 400 million seats ucas market.
We are cooperating with zoom.
Projects are targeted to increase the number of product and solution and the zoom phone environment, we invest in.
Coming up with a solution for local resiliency.
Several phones.
Connectivity devices.
And Ms beer and gateways some conference devices and more so all in all we believe that we are making nice progress also with them in the U S market.
The next strategic business segment is the customer experience. We are pleased to see the return of strong growth up over 20% in second quarter after being down eight 5% in the prior quarter.
Growth was fueled by continued healthy adoption of connectivity services and the closing of a large deal in EMEA this quarter that slipped in the prior quarter.
That particular large deal we are working with a global system integrator to provide SBC infrastructure for a large European financial institution, which has embarked on a digital transformation initiative. This is a 48 month deal was of roughly 1 million total contract value.
As you can clearly hear during the past two years, who are increasingly drawing the number of long term.
Hi contract value.
Two three and sometimes even five years would tell you that we are building a saving for ourself the future.
Going forward.
Also we see growing adoption of new products and services launched during the past 12 months that we expect.
To boost revenue growth among them.
Web RCC solution, and then voice AI related product and solution, including conversational AI VR solution, a voice that connect which enables voice connectivity to chat bots and intelligent voice agents and assistance.
I'll just mention regional success.
Success in the customer experience. So in addition to North America, where we have traditionally at strong activity that is related to a long term relationship with Genesis, we've seen nice pickup in activity both in EMEA and APAC.
And this time, we are <unk>.
Cecity that involves directly to end users.
Lastly, let me talk about our global services Global services as we've mentioned is really growing.
<unk>.
Pillar for our business.
In the second quarter of 'twenty two.
<unk> grew to become 40% of our revenues.
Specifically, we have grown 12% in the second quarter year over year, and if we combine first score altogether. We grew 13% in first half growth in support and maintenance contract was mild four 3% in second quarter, and then about eight 1% and this.
As you know.
Results from moving from a <unk>.
Selling and a capex mode to selling in a week.
Recurring mode.
Because then our support services really build more to past transactions.
On a professional services, we grew substantially we grew over 35% in the second quarter with our professional services year over year coming mainly from North America and EMEA.
In fact professional services at the highest invoicing quarter.
On record globally and in North America.
North America professional services as a first half year over year growth of about 35% and then just mentioned we knew one in North America 45, new articles live minutes services Gossamer So all in all.
Bringing the total contracted the mirror America's managed services customer count to above 200.
And with that I've concluded my introduction and I will now turn the session to Q&A operator.
Thank you very much.
Ladies and gentlemen, the floor is now open for questions and comments. If you have any questions. Please press star one on your phone at this time, we all sat while paying your question you. Please pickup your handset listening on a speaker phone to provide alternative sand quality. Please wait while we poll for questions.
Okay. Your first question is coming from Greg Burns of Sidoti and company Greg. Please ask your question.
Good morning, So just first on.
The revised guidance.
In terms of the.
EPS.
The decrease in EPS guidance, what are your assumptions in terms of margins for the back half of the year are you expecting any improvement from the second quarter or should we expect the gross margins to remain under pressure.
Yes, generally I think.
Generally I believe that we will see.
Additional costs for our components going down and we've seen it going down a bit in second quarter, we expect a higher.
Decline in the third quarter. So all in all I think you know, we we hope turn into and as Ive mentioned too.
A gross margin that's about 67%.
Okay.
I think better operational margin yeah.
Alright.
Okay.
And Microsoft.
I mentioned, they had 12 million PSTN users on teams so is that way.
Are those the users that are.
Where you are.
Your services are touching by Glenn if they're reporting to that number or is that a good number to kind of gauge the the voice adoption in teams and what are you seeing in terms of their their efforts to to increase that rate of adoption.
Okay. Good point so yeah.
Teens.
Quote some of Microsoft and no statement, so AZ announced $217 million since users right infuses does not include.
Phone. So if you want to understand how many phone users are they state 18 million now out of those 80 million people who use.
Phone not to or are communicated with the outside world So as ever announced and this is indeed.
An important announcement they have mentioned in the last call a week ago now have 12 million of PS.
PSTN users compared with just $6 million a year ago, so growth on what's being.
We point here too the SBC <unk> functionality. Okay. Every organization that has embarked on using teams.
Can work internally without any specific voice solution. However.
Communicate with the PSC in either to receive a call.
Oh in or to dial outside you need to add the SBC functionality.
We are at right now.
K 12 million and such.
Fifth using that I can tell you that we.
And we see it in the field that we control north of 50% of these sites.
And we see it.
Growth in debt. So yeah that is an important.
Data point, a good ways of our future.
As a nation as to the potential that we see ahead of us.
Okay, great. Thank you.
Sure.
Thank you. Your next question is coming from Samad Samana of Jefferies. Please ask your question.
Great. Good morning, I wanted to follow up on that on the guidance question, but on the top line I guess, just as I think about the implied numbers it kind of suggests a back half deceleration.
Let's call it about pursat from 18% in the first half of the year.
And the comps are easier in the back half of 'twenty 'twenty versus the back half of 'twenty. One so I guess I'm just trying to maybe understand what you're seeing specifically that that led to the guidance reduction I know you said macro but are you seeing deal cycles get longer are you seeing people do smaller scale projects what is driving.
Uh huh.
The topline downward revision.
Right. So I'll just say initially that you know.
The update really.
Was done due to our.
On the earnings side, Okay, if we would have not.
To update that I, probably would have not changed my update on the revenue.
We provided an update we said, okay, we were going to take down growth from where.
We've guided initially to 13% a year now it's going to be 12% per year. So we don't see that as a major object right to your question. Yeah. We do see some of the projects taking a bit longer time, it's either delaying decisions.
I think the world has been in.
In the previous month.
You know questioning you know how this crisis is developing worldwide.
You know I know that Oh.
In the last months.
You know estimate is more positive, but just to be prudent and not.
Jeff.
The guidance, we gave initially and say okay everything Ron said before no. There are some headwinds we see longer projects, we see some delays, but the impact is.
In income is about 1% that's all.
Okay.
That's helpful and then maybe just in.
In terms of what you're seeing with <unk>.
When youre doing.
Microsoft conversions from Skype for business to teams or as customers move over to zoom phone are you seeing any change in behavior in terms of the footprint.
Are they moving over the entire base that wants are they being more methodical about how quickly they are moving over to the.
The cloud environment I guess, what are you seeing as customers.
That year, helping convert over to the cloud like Oh, Hi, how are you seeing in terms of trends there.
Yes, we definitely see a very strong trend of all Skype for business and scaffolding online accounts.
Moving to teams that you know just to talk numbers right if.
You know.
A year ago.
Ward with Skype for business at a $10 million and 8 million course.
Of course, you know in second quarter, I think we went down to about $2 seven.
Versus the quarter ago was about four so the decline is fairly rapid I know that we know that it's kind of costly.
And assume that it's costly for Microsoft to maintain you know treat.
Three different I would say hum infrastructure and application solutions, such as Skype for business Skype for business online and then teams. So it is with Microsoft interests.
To speed up that process.
And we are aware of.
That fact customers are aware of that fact, and I think you know it will not take you know more than a year before we you know the amount of Skype for business business really goes to almost nothing but again as I've mentioned you know because it's that low this time $2 7 million in the quarter you know unless.
Then even five.
5%.
You know the growth expected intense with substantially dwarf depth kind of Skype for business.
Great. Thanks, taking my question.
Okay.
Thank you. Your next question is coming from Brian <unk> of Needham and company Ryan. Please ask your question.
Alright. Thanks for the question on the strong services growth here was with you already could you live in.
$4 million.
What inning would you characterize we're in in terms of this transition of your new sales from <unk>.
Product over to subscription.
Where are we in that migration today on new sales.
Yes.
Okay. Yeah, it's a good great question actually because we still keep selling products at.
At this stage I think products are.
About 50% so far are in their core but it is a very rapid transition.
Already now if I need to give you an estimate I think that.
Approximately above 25% or maybe close to 30% already moved from you know buying.
You know articles live with a recurring service compared with our Oh Capex.
Transaction and teams so it's a rather rapid ne but again I think we've shown so far.
The ability to grow 100% year over year with articles lives move to recurring.
We do not see actually I would tell you that this is a very.
Accepted very well in the market.
Current difficulties of you know.
Uh-huh chronic.
Lack of you know professional and talents in this space and the inability of large companies to deal with the modernization of their solution.
And actually most of them are very often to execute is not part of their core competence. Many of them are open to using manifest I think managed services at this time are.
Accepted.
Really simply because it alleviates a lot of the issues one is to deal with when he is deploying a new.
Solution in our system. So yeah, we will see continued growth if not 100% of the year I would tend to think that at the next three years, we will see.
15, 100% growth every year.
That's super helpful can you remind us of the gross margin difference.
Your managed services versus your corporate average.
Actually the live because it's with more services and.
The margin there is higher than the one time capex deal.
Got it and just a quick follow up if I could any update on the competitive environment, there, particularly as it relates to Microsoft's own internal solutions for sbcs.
Yeah, I think I've mentioned before you know everything we've discussed so far.
You know relates to enterprise it business.
Microsoft.
Acquired SBC from the meta switch deal is not in this space at all.
Fly to the operator connect.
And there you know I'm actually a substantial ramp up of sales really did not start so we do not see at this stage and impact to our business from that great.
Great to hear that's all I have thank you.
Thank you.
Okay. Your next question is coming from Tal Liana, if the bank Bank of America.
T.
Hi, Thank you good morning, good afternoon, Hi, guys.
Shut that I didn't understand your answer on the previous previous question. So I'll ask it again, but in different way.
You lowered the guide the revenue guidance for the next two quarters is it based on concerns or is it based on declining the orders you've seen from customers.
And where if there was a decline where is it is it specific product lines or specific customers can you elaborate on the revenue side and then on margins.
Why now we've seen supply constraints throughout the last at least four quarters heavy heavy supply constraints actually most companies are saying that it has stabilized it didn't improve but stabilized. So why now we are flagging it more than before.
Okay. So let me answer the second question first.
We you know, we watch or costs in this market and our ability to you know get.
Get delivery and supply I can tell you that towards the end of the second quarter, you know the two or three manufacturers, which we use you know most of them and so their issues. So we believe that going forward you know I'm not sure. You know we are not using the same volume that you know large companies are using.
With our volume, we believe that third quarter will be a nice improvement in and actually I'm told that in the fourth quarter. It will be minimal. So that's what we're seeing you know here internally of 30 kids.
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Can you remind me on your first question what.
It is regarding <unk>.
The revenue the question is simple.
Simple terms, where do you see the weakness.
That drives you to lowered the revenue guidance for the next two quarters is this coming from specific customers or specific product is it is it.
Related to order cuts what drives you to lower the guidance for the next two quarters.
Okay on the revenue side, Okay, No order cuts no specific.
You know situations with specific customers is simply taking into account we have seen the velocity.
And that we had two years ago in providing.
Oh.
Rather can surfaces and getting to revenues and the picture in the second quarter. It was more difficult right I think we all experienced headwinds anywhere in this world So Jeff being more precautions.
Simply you know we have.
Again, I have mentioned that with revenue thats not the reason for providing an updated guidance. It suggests since some updating guidance you know it should this will take that into account and so we lowered it by 1% nothing specific it's simply longer.
Projects decision.
Decision being taking a lower than before et cetera.
And where do you.
Right.
And this this 1% it's 1% for the year, but it is greater for the next two quarters, just because of the math.
And where do you expect if you think about kind of where to take it from where do you expect the weakness to be for the next two quarters is it.
I'm trying to understand is that okay.
Certain projects or certain customers or is it more general kind of all over the places is it services is it product is it shipments.
Listen I'm you know just give you an idea it's not tied to any specific area I'll give you. The reason for it right I mean, we're talking about deals you know.
No.
A contact center.
That could be you know $1 million inside that could be a half a million in size you know so.
Just a a removal of one project or a project declining I mean, we deal with you know revenue of close to $70 million a quarter, so the ability to be.
Beyond top and such.
Environment.
You know I I I assume I need to leave more space.
Space for Mrs. Here, and there it's not tied to any specific area. So not tied to Microsoft It's all tied to specifically to the contact center, it's not tied to the service.
Service provider space.
All in all if I want to take the overall environment into account.
So if I have to basically our estimate I would probably say that.
Middle of 2022, contrary to the beginning of 2022 chances are that it's going to be harder to achieve the revenue targets and that's why we've made the change.
And I know you don't provide guidance for 'twenty three but from your discussions with your customers and the projects you're involved in do you already see some cautiousness from customers about project push outs or anything that could suggest that we should be cautious on on the following year.
Not really no I actually Oh.
Actually I can tell you that you know we discussing second quarter I'll tell you that through year end, we have already July July behind Us I can see.
Tell you to pick up in projects in July is very strong we have not heard.
And even one case projection for 2023.
Going down I think Microsoft keeps growing well you know if you want to take Microsoft announcement, a week ago. You know they are taking you know a more.
You know is very.
Very cautious right now limiting.
The hiring try and said before.
I need to relate to that right and I think there was another announcement in May I believe whereas as I mentioned that they intend to.
Chris the rate of hiring in certain areas, including our space too so.
So taking that into account new makes me make a estimate that you know we're not different than Microsoft right.
Got it.
Last question is about your own hiring.
And your own kind of workforce what are your plans and how do you adjust to the environment.
So we keep hiring I mean.
You know we've stated that this quarter, we added 31 position 20.
About 18 full time employees in 13 and outsource positions. We've continued to hire I can tell you that I'm sitting daily and weekly with new request our services business growth, we need to add people. We have more position, we would like to increase our business in Asia Pacific because it's growing very nicely.
We would love to have positioned so all in all.
We simply need to be in control of how we grow.
We will continue to hire.
Got it great. Thank you.
Sure.
Thank you very much. Your next question is coming from Brian Mcwilliams from Barclays. Brian . Please ask your question.
Hi, This is Jack on for Brian . Thanks for taking the questions. So you hit a strong inflection point in the CX business coming off the first quarters year over year decline. After this return to growth versus the first quarter should we expect this momentum to continue into the third thanks.
Yeah right.
Ill tell you that from what we see already in the third quarter. We are in good position to continue to grow in the third quarter and all in all I will tell you that the disruption in that market.
And the whole fast growth of our no call automation and conversational solutions, Yes, we will see contact center.
Growing up.
Great. Thanks, and then in the first quarter, you discussed, bringing the call her so virtual agent into the global market in the second half of the year are there any sort of update here.
So we're talking about progress, but there's no big contracts that they can talk about I can tell you that a new solution that we got.
Got to the market in the second quarter.
For conversational I V R.
We are receiving a very.
Strong reception and we are right now the product is now being trialed.
Between five and 10, new accounts and sensitive.
Yeah.
It seems to be a gap in the market that we can cover with that new product.
Alright, that's it from me thanks shutdown.
Thank you Brian .
Ladies and gentlemen, as a reminder, if you wish to ask a question. Please press star one on your phone at this time.
Okay. We appear to have no further questions in the queue would you like me to hand back over for closing.
Yes.
Well, thank you operator.
I'd like to thank everyone, who attended our conference call today with continued good business momentum in the second quarter of 2022 and strong underlying market trends in our industry. We believe we are on track for another year of growth in 2022, we look forward to your participation in our next quarterly conference call. Thank you all.
Have a nice day.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.