Q3 2022 AudioCodes Ltd Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the audio codes third quarter 2022 earnings conference call.
At this time, all participants have been placed on a listen only mode and the 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 Chen VP of Investor Relations Roger over to you.
Thank you operator hosting the call today are shop tight atmospheric President and Chief Executive Officer, Tom 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 relating to <unk> business out.
Look 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.
We're 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 audio codes industry and target markets in particular shifts in supply and demand market except.
And some new products and the demand 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 match 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.
They already have 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 audiophile its filing with the U S Securities and Exchange Commission Audiophiles assumes no obligation to update this information and it didn't.
During the call audio codes will refer to non-GAAP net income and income per share audio codes 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 would like to remind everyone that this call is being recorded an 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 shop to shop that please go ahead.
Thank you Roger good morning, and good afternoon everybody.
I'd like to welcome all to our third quarter 2022 Conference call with me. This morning is Iran Bull Chief Financial Officer, and Vice President of Finance for the codes neuron would start off by presenting a financial overview of the core.
I will then review the business highlights and summary for the quarter and discuss trends and developments in our business and industry.
He will then turn it into the Q&A session.
Iran.
Yes.
Okay.
Thank you shopped and Hello, everyone.
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 supplemental non-GAAP financial information, but I will be discussing on this call.
Our revenues for the third quarter were $69 7 million, an increase of 10% over the $63 4 million reported in the third quarter of last year.
Services revenues for the third quarter were 26.8 million up eight 2% over the year ago period.
Services revenues in the third quarter accounted for 38, 5% of total revenues.
The amount of deferred revenues as of September 32022 was 75.8 million up from $72 1 million as of September 32021.
Revenues by geographical region for the quarter were split as follows North America, 46%, EMEA, 33% Asia Pacific, 15% and Central and Latin America, 6%.
Our top 15 customers represent at an aggregate of 59% of our revenues in the third quarter of which 45% was attributed to our 11 largest distributors.
GAAP results are as follows gross margin for the quarter was 62, 8% compared to 69, 6% in Q3 2021.
Operating income for the third quarter was 7 million or 10, 1% of revenues compared to 10 million or 15, 8% of revenues in Q3 2021.
Net income for the quarter was $5 4 million or 17 cents per diluted share compared to $8 3 million or 24 cents per diluted share for Q3 2021.
non-GAAP results are as follows non-GAAP gross margin for the quarter was 63, 2% compared to 69, 9% in Q3 2021.
non-GAAP operating income for the third quarter was 10 8 million or 15, 5% of revenues.
Compared to $13 5 million or 21, 4% of revenues in Q3, 2021.
non-GAAP net income for the third quarter was $10 5 million or 32 cents per diluted share compared to 12 points 9 million or <unk> 38 cents per diluted share in Q3, 2021.
At the end of September 2022, cash cash equivalents bank deposit financial investments and marketable securities totaled $126 7 million.
Net cash provided by operating activities was $2 1 million for the third quarter of 2022.
Day sales outstanding as of September 32022 were 80 days.
During the quarter, we acquired 273000 of our ordinary shares for a total consideration of approximately $6 1 million.
On August 2nd 2022 we declared a cash dividend of <unk> 18 cents per share the dividend in aggregate amount of approximately $5 7 million was paid on August 31 2022.
Regarding the head count on the heels of.
112 position in 'twenty 'twenty 155 positions in the first half 'twenty 'twenty. Two we had 29 full time employees in the third quarter 2022.
We reiterate our guidance for 2022 as follows we expect revenues in the range of $275 million to $282 5 million and non-GAAP diluted net income per share of $1 35 to $1 45.
I will now turn the call back over to shop there.
Yes.
Thank you Darren.
Before I start my formal remarks, I would like to remind everyone that in conjunction with our earnings release. This morning, we have posted on our Investor Relations website, an earnings supplement deck.
So getting to the results plus.
Please to report solid financial results for the third quarter of 2022 growing revenues, 10% year over year.
As stated in our press release earlier. This morning, we see good continued business momentum in the Ucas and the customer experience markets. Despite some macro uncertainty.
Key drivers of our growth in the third quarter of 'twenty, two came from Ucas or a Microsoft teams related business grew nearly 20% year over year.
I think what's live for Microsoft teams managed services continued to grow and reached a level of 28 million.
Our.
Nearly 10% growth over the year ago period, putting us well on track to achieve our 2022 targets.
Over a $30 million.
Importantly, total contract value for less absorption exceeded 90 million, providing us with increasing level of revenue visibility. We've also witnessed good momentum in the customer experience market, where our business was down 5% year over year after being up over 20 per.
<unk> in the prior quarter. The decline was driven mainly by seasonal softness in Europe . We expect this business to return to growth in the fourth quarter as we continue to see a strong pipeline of opportunities for the core.
I'd like to emphasize that we have not seen any evidence of competitive pressure or environment changes.
Another positive development in the third quarter with stronger than anticipated activity.
In the service provider.
P business related to carry all IP transformation in PSTN shutdown projects, which have reemerged Boston damage our service provider business grew for the second.
Consecutive core and up over 40% this quarter and contributed to a strong pipeline for the next year and.
Another growth driver of our business is conversational AI, which grew over 30% in the quarter. We saw increased activity in enterprise voice with coding and compliance recording and in the meeting space. Additionally, we had record bookings in the conversational IV are.
And continued growth in our voice AI connect platform, enabling voice capability for the growing world of jet boats.
Lastly, I am glad to report that despite evidence of slowing macro activity, leading few cases to longer sales cycles. We are pleased to have maintained healthy topline growth and profitability relative to our UCC X Spears, which speaks to the secular growth trends.
And our strong market position.
On the operations front, we so lower than anticipated gross margin and operating margin as compared to previous quarters.
Our non-GAAP .
Gross margin came in at 63 point too.
Percent influenced by two primary factors first higher supply chain costs, we incurred $1 2 million, though of higher component costs in the third quarter versus the year ago period.
I'm glad to report that we now forecast the extra components costs to be around 500000, only for the fourth quarter, which is a major release compares to the third quarter just ended.
Actually relief also against each of the previous course of 2022.
Which were all in the range of one five to $1 2 million if that gross margin is expected to be higher in the fourth quarter by about 100 basis.
Basis points just from that.
Murray.
Product mix accounted for the balance of the gross margin difference.
Ranks in the service provider CP and.
An increase in sales associated with IP phone and meeting rooms collectively accounted for a greater percentage of our sales this quarter.
This.
These products are hardware base, and typically carry lower than corporate average margin.
Sure.
non-GAAP operating margin was 15, 5% and was largely impacted by lower gross margins and by higher operating expenses.
Referring to the FX third quarter at 22 represents our low lowest edged rate of the U S Gulf to Israeli shekels, which contributed roughly 100 basis points to the non-GAAP margin decline on a year by year basis Edcon grew year by year by 13.
5%.
As a result of our increased investment will talk more about it in a minute. These two factors were offset by tightening golf.
Discretionary expenses that led to our non-GAAP opex growing eight 1% year over year, while our revenues grew 10% year over year.
On the heels of this development our non-GAAP earnings per share came in at 32 cents, which compares to 38 cents in the third quarter of 2021.
In early early 2021, we announced the planned two year inquiries investment cycle in R&D sales and.
Marketing and services.
To better capitalize on secular growth opportunities and you know our.
<unk> markets attending much of these objectives for the increased spending we are now determined to balance our expenses for the balance of this year and into 2023.
Over the coming course, we expect to show improved operating leverage in the following areas one tightening of spending as we approach the end of the planned investment second lien 2023 to reduction of above 80% of the 2022 cost associated with component supplier.
And related purchases we.
We estimate 2022 extra costs to be around $4 4 million and so we're talking here about a savings of more than $3 5 million in 2023.
Bottom line.
And then more favorable.
FX edge, Inc. In 2023 as those rates.
Our rates were fixed now and we do expect again.
Again in 2023.
Now, let's dive into some of our most important core business engine, we choose the Microsoft business as discussed previously Microsoft business grew nearly 20% year over year and makes up over 50% of our business teams grew 30% year over year was.
Skype for business declined roughly 40% year over year and accounted for less than 10% of the quarterly Microsoft business.
Tim's newly created opportunities total amount has grown consistently over the last three course and up over 25% year over year in the third quarter, which provides a strong basis for further growth in coming quarters, we had another strong quarter for Microsoft teams account additions.
We added.
298 accounts versus 248.
And the year ago period, which speaks to the ongoing healthy adoption of teams in our growing pipeline.
To that end, we expect Microsoft wins to be up nearly 20% in 2022 to a run rate of between 140 and $145 million you really excited about the multi year growth opportunity to upsell voice services.
Microsoft teams environments.
Save a reminder, there are over 270 million monthly active users and Microsoft recently disclosed only about $12 million Tim.
Teams PSC and users, implying only low single digits percent.
Penetration, suggesting significant multiyear underway for growth.
Recently, our market share within Microsoft ecosystem for DAC routing application remains strong and is well above 50%.
Our records life attempts managed services subscription increased nearly 100% year over year end the quarter and reached a level of 28 million annual recurring revenues nearly 100% growth year over year, and putting us well on track to achieve 2022 target of.
Crossing the $30 million.
Total contract value for our lives absorption exceeded $90 million provided us with increasing level of revenue visibility.
Now to our next emerging business, which is.
The contact center or customer experience.
Third quarter revenues were down 5% year over year after being up 20% in prior quarter decline was driven seasonality.
I'm sorry, the decline was driven mainly by Susan softener in EMEA, we expect a return to growth in the customer experience market.
In.
The fourth score backlog for the fourth quarter suppose this expectation.
This stage on an annual basis year to date customer experience business was $31 million gross of about six 5% compared with the same period 2021.
Looking out to 2023, we see growing adoption of new product and services launched the ARINC.
The past 12 months based on the increased investment cycle in 2021 and 2022.
Its product and services should help boost revenue growth among them.
Accounts of various areas in which we are growing.
Growing activity.
Activity related to web RTC submissions.
Vacations, such as click to call application, allowing.
People to call over the internet to their target companies in contact centers conversational IV our solution.
<unk> connect which enables voice connectivity to voice enabled CRM chat bots, and IV A's and finally recording solution, which are very.
In need these days with the evolution of the price of <unk>.
Ucas among them, we count our smart compliance recording and meeting he said for.
Meeting space.
Now, let's shift gear to another very important pillar of our business, which is the services segment.
So dear.
Driving growth in services, which consists of maintenance and support professional services and recurring life subscription is key to our success in executing our multi year transformation to software and service revenue stream.
Services revenue grew 88, 2% year over year in the quarter and accounted for 38, 5% of revenues while service revenues growth was lower than usual.
Largely attributed to timing, we saw strong invoicing activity in services and invoicing activity grew close to 15% year over year with regards to invoicing I should mention too that professional and managed services were up 23% year over year.
We had excellent execution again in all our subscription as I've mentioned before overall, we ended the third quarter of $28 million as mentioned earlier, our importantly, we benefit from multi year visibility from this revenue stream is live customers often sign for 36 months plus contracts.
We ended September quarter with over 90 million.
Total contract value.
<unk> term, we expect services revenues growth to outpace that of product.
Now to something Thats, usually is not part of our go to our.
Presentation, but just as important thing before I turn the call over to the operator for the Q&A session.
<unk> talked about our strategy of how we navigate through the current economic slowdown.
This is partially based on our own past experience in the dotcom crisis of 2001 to 2000 inventory a year ago. So we entered the 2000 and 1003 dotcom crisis with a rock solid balance sheets around 140 million on our balance sheet Hunter than 90 M.
<unk> and R&D expense of $10 6 million quarterly during that period up to the end of 2003 during the dotcom crisis R&D head count grew.
From 190 to trend in a 30 and expense R&D expense grew 50% as we increase investments in innovative products, which allowed us to emerge winner from this crisis. We took this position as we add the money the power demand par that technology base.
And our customers to rely upon in a market that we were confident in returning to normal growth once the crisis is over.
Firstly, we suffered from abbvie losses during that period.
Our competitors DCF is it there to either cut back on investments exit the business or ultimately.
Fell by the wayside.
This ongoing innovation fueled new product launches that help us to gain market share and drives outsized revenue growth.
To give you an idea of how we went through that crisis. So revenue numbers for the periods, where whereas photos in year 2000, we sold $72 million.
In here 2001 in the first half of the crisis, we sold 36 going down 50%.
Emerging back from the crisis end of to 2003, Oh, we sold 44 million and then going forward.
Five years to 2008, we then sold the Hunton and 75 million. So from a bottom of 36 million in 2001, we grew to $175 million in 2008.
Same by the way for operating income we entered the year 2000 with.
Close 2000 with $90 million at the end of 2001, who lost $19 million.
2003, we lost $10 million, but then in year 2008, we earned 13 million. Obviously these numbers tell the whole story, we do believe that similar such strategy. These days will take us higher in two to five years from now now heading into potentially another.
Potentially.
People are mild recession, we are in even better position as we have a similarly, a pristine balance sheets today, but now with very strong profitability that can further fuel our innovation to help us leapfrog the competition whenever we emerge out of this economics.
Downturn.
And with that I've basically completed my presentation for today and I'd like to turn the session to Q&A.
Operator.
Thank you very much.
Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone.
We ask that while pacing. Your question you. Please pickup your handset if listening when I speak assigned to provide optimal sound quality. Please hold while we poll for questions.
Thank you. Your first question is coming from Ryan Macwilliams from Barclays. Ryan Your line is live.
Okay.
Thanks for taking the question Chuck license I feel like you've seen at all in this industry. How do you think about how the next 12 months plays out for cloud Communications like do you think you'll see any difference in strength between cloud voice versus customer experience during that time period heightening audio codes can best help customers during these macro difficulties.
Right.
Ryan I'm glad to say that you know we haven't seen any change in terms of the trends in both the ucas into six markets. So.
And we have not seen almost any change also in the adoption of Microsoft teams and customer experience solutions. So we believe that transfer will be well.
Should we suffer from longer cycles of sales and or you no longer project, yes that could be the case, but I don't think that will effect.
But by a more than a few percentage at least this is the experience we have.
Perfect and then one for neuron nice to hear about improving operating leverage from here, maybe how should we think about the magnitude of that you think about maybe EBIT margins in 2020 or 2021, it sounded like a target for what audio because just trying to get back to you here.
Hi, Ryan as shop.
Mentioned.
Just a second.
Sorry for that.
Ryan has shopped I mentioned earlier, we had two years of investments mainly at.
Adding more personnel.
And as I mentioned, we added.
Third 12 position in 2021 and more than that.
80 position so far in 2022 and by that we are planning to.
Topped.
The two years investment.
In more adding personnel.
We believe.
And due to the two reasons that chapter I mentioned also during the call the FX.
We share this quarter was.
The worst hedging grade that we had and the component extra bite that repaid we believe that.
Effective the fourth quarter, we will start to see an improvement in the getting back to operating leverage.
Of course for 2022, we will.
The update.
The.
The guidance for 2022 when we release our fourth quarter results.
We see 2023 elements.
Okay. Thank you. So much. Your next question is coming from Greg Burns of Sidoti and company. Your line is life.
Good morning.
Discuss the sequential decline.
Decline in Servicers revenues, what's driving that.
And maybe we could just start there.
Yes.
Mainly timing.
The best way to refer to.
Services, especially maintenance contracts is referring to all year simply because there are deviations between the two.
<unk> of this.
Usually those are three year contracts switch.
<unk> signed.
No.
Time pressure on sending them. So it may move from one.
The debt.
On an annual basis.
I think the mix is such that the coal contracts or usually in the range of 8% to 10% annually. However, we.
Can you continue to mentioned professional services and managed services grow.
80% so the combination of the two allies somewhere between 10 and 15.
Okay and then.
Maybe if you could just give a little more color about the types of customers that are signing up for live is that mostly smbs or is it SMB to enterprise.
The size of the customer signing up and when you look at the mix of sales to the teams environment could you just kind of break out what is what.
What percent of that business, our new business is coming from recurring services like live versus traditional capex sales.
Right so yes.
The optimal crossroads for life.
Using.
The mid market.
Mid market company.
Basically smaller companies do not have the breadth and the need for capital services.
A company that.
<unk> 3000.
7000, or so will be.
Opportunity by live.
They would focus on their core competence.
No need and it actually the bank could be difficult to obtain those covenants and resources that can help them.
Iran teams.
So.
<unk> bought these mid market the App and also to gain some.
Larger enterprises and.
The process you know as time goes on the percentage of larger companies growth.
Okay.
Sorry, what was the second question.
I was just asking what the percentage of the mix of.
The team's revenues coming from traditional Capex sales.
New sales coming from traditional versus ly recurring.
Yeah.
Okay. So the way it looks now.
At this stage is above 20%.
Overall the team so.
To breakdown into Capex sales and live.
80% or less than <unk>, 75% to 80% at this stage of our Capex.
So in about 20% to 25%.
Recurring revenues lifestyles.
Okay, and then can you just.
Quantify the FX impact this quarter, how much did that impact the topline.
And.
Yeah the margins.
Yes, so basically this was the worst.
Quarter vary in terms of the edge, we add in.
Comparing to a year ago quarter, we declined.
Those 5% so.
The impact was around 100 basis points.
Going forward, we know and we have actually we have an edge that's fronts well.
Over one nutrient into 'twenty four we already know that doing an annual calculation will benefit from.
The edge compared to 22 in a major way.
Country, so already in Q4.
We'll have a better rate.
Almost.
Over the third quarter and this will continue.
Grow further.
2023.
Okay.
The FX impact the topline at all this quarter.
Let me, let me let me run.
Yeah.
Hi, Greg actually yes, we have some revenues and nominated in euros. So about let's say, 10% to 20% of our total quarterly revenues are in euro.
And due to the weakness of the euro against the U S. Dollar this quarter we.
Software also.
At the top line and you can do the math.
Okay.
Alright, thank you.
Thank you very much. Your next question is coming from Ryan <unk> of Needham and company Ryan Your line is life.
Hi, Good morning. Thanks for the question I wanted to double click if we could on the Microsoft teams environment, which obviously is a big growth driver for the company and specifically the phenomenon of direct routing versus operator connect.
Seems to me, we're starting to see these larger service provider partners begin to move to this operator connect model.
Which my understanding is that simplifies some of the onboarding for the enterprise by integrating into the administration of teams itself. So my question is how does that change affects your business selling into direct routing versus operator connect are you seeing operator connects begin to happen yet.
And.
And your current direct routing business.
How is your exposure spread across.
Traditional service provider operators versus.
Versus kind of a next generation cloud voice providers.
Yes.
Sure.
Actually it <unk> make a.
A big distinction between that.
<unk> roofing and operator connect.
That accrual you usually target's enterprise companies.
And that is an ongoing.
For the past few years already so very active growing strongly opera connect is a new offering.
The letter that now.
Not really kicked in yet.
That was due in <unk>.
Evaluate and make preparation.
The service will probably be more applicable to smbs.
And so we can other area, but right now.
That has not started yet.
For us.
We will keep currently on.
While working diligently to be on the enterprise side with dark roofing.
And we have done everything necessary to compete.
Well.
Operator connect when any thoughts.
<unk>.
We may see starting to take off second half of 'twenty three.
Not known yet so but again.
We tend to be fairly competitive with will talk more about that.
One key.
Different strategic advantage, we believe having that is that we usually try to marry behind connectivity with business applications and that is something that none of our competitors and that will become we believe substantially more.
Fourth abuse of by debit book value so.
We're hoping for that too often.
Okay. That's super helpful. Sure Alright, Thanks, one quick follow on discussion.
Some of the cloud providers like eight by agent and <unk> central with their own <unk>.
Correct routing offerings. They claim that there is an improved level of contact center integration with direct routing versus operator connect.
Is that true from your perspective.
Yes that is a very logical.
Let's see.
That cruising is basically a connectivity solution. However, can you talk about the needs are.
Business or voice services.
They also need all of the different you know.
Voice business application date coding a contact center.
Other areas in that regard, yes, it definitely makes sense its contact center will grow on the heels of Clawback.
Helpful. Thanks, a lot I'll pass it on.
Okay. Thank you very much there appears to be no further questions in the queue I will now hand back over to the management for any closing remarks.
Well. Thank you operator, I would like to thank everyone, who attended our conference call today.
With continued good business momentum in 2022.
Strong underlying market trends in oil industry and believe we are on track to another year of growth.
2022, we look forward to your participation in our next quarterly conference call. Thank you 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.