Q1 2023 AudioCodes Ltd. Earnings Call
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Greetings welcome to the audio codes first quarter 2023 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I'll now turn the conference over to your host Roger to Chen you may begin.
Thank you Holly hosting the call today are <unk>, President and Chief Executive Officer, neuron, Baruch, Vice President Finance, and Chief Financial Officer, and Dmitry notice Chief strategy Officer, and head of corporate development before we begin I would like to remind you that the information provided during this call may contain forward looking statements relating to <unk> business outlook.
Future economic performance product introductions plans and objectives related there too.
<unk> 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.
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 <unk> industry and target markets in particular shifts in supply and demand market acceptance of new.
Alex 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.
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 closest 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.
<unk> 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 earnings per share to its net income and income per share. According to GAAP in the press release stated.
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'd like to turn the call over to shop that subtype. Please go ahead.
Thank you Roger good morning, and good afternoon, everybody I would like to welcome all to our first quarter 2023 Conference call with me. This morning is near Umble, Chief Financial Officer, and Vice President of Finance Foggy codes neuron.
Start off by presenting a financial overview of the core I will then review the business highlights and summary for the core and discuss trends and developments in our industry and business, who will then turn it into the Q&A session.
<unk>.
Thank you Scott and Hello, everyone.
First type muscle before I start my formal remarks, I would like to remind everyone that we will make available shortly and earning supplemental deck on our investor Relations website.
As usual on today's call, we will be referring to both GAAP and non-GAAP financial results.
The earnings press release that we issued earlier. This morning contains a reconciliation of the supplemental non-GAAP financial information that I will be discussing on this call.
Revenues for the first quarter were $59 2 million a decrease of 10, 8% over the $66.
4 million reported in the first quarter of last year.
Services revenues for the first quarter.
Were $13 5 million up 10, 8% over the year ago period.
Services revenues in the first quarter accounted for 51, 5% of total revenue.
The amount of deferred revenue as of March 31st 2023 was $77 6 million compared to $76 8 million as of March 31st 2022.
Revenues by geographical region for the quarter were split as follows North America, 46%, EMEA, 31% Asia Pacific 17%.
In Central and Latin America, 6%.
Our top 15 customers, representing an aggregate of 54% of our revenues in the first quarter.
Which 40% was attributed to our 11 largest disagree with those.
GAAP results are as follows.
Gross margin for the quarter was 61, 7% compared to 66, 9% in Q1 2022.
Operating loss for the first quarter was 0.8 million.
Compared to operating income of eight 1 million in Q1, 'twenty planning too.
Net loss for the quarter was 0.2 million or one cents per diluted share compared to operating income of $8 6 million or <unk> 26 cents per diluted share for Q1 2022.
non-GAAP results are as follows.
non-GAAP gross margin for the quarter was 62, 1% compared to 67, 2% in Q1 2022.
non-GAAP operating income for the first quarter was $2 9 million or four 9% of revenue.
Through 11 points.
Or in percent of revenue.
Great.
non-GAAP net income for the first quarter was $2 7 million or eight cents per diluted share compared to $11 2 million or 33 cents per diluted share in Q1 2022.
At the end of March 2023, cash cash equivalents bank deposits marketable securities and financial investment total.
121 5 million.
Net cash provided by operating activities.
It was $3 2 million for the first quarter of 2023.
Day sales outstanding as of March 31st 2023 were 97 days.
In January 2023, we received court approval in Israel to purchase up to an aggregate amount of $25 million of additional ordinary shares. The court approval also permits us to declare a dividend of any part of this amount. The approval is valid through July four 2023.
On February seven 2023, we declared a cash dividend of <unk> 18 per share the dividend in aggregate amount of approximately $5 7 million was paid on March seven 2023.
Regarding head count.
On the heels of the addition of 112 position in 2021.
And 81 position in 2022, we added 12 full time employees in the first quarter of 2023, we ended the first quarter of 2023 with 970 <unk>. Please.
To better align our cost structure to current business environment, We recently undertook actions to reduce head count by 6%.
Which should yield a chameleon.
Annualized saving with full run rate expected to be realized in the beginning of the third quarter.
We plan to evaluate additional cost saving measures over the next six to 12 months.
We adjust our guidance for 2023 as follows we now expect revenues in the range of 240 million to $250 million down from $286 million to 300 million.
And we now guide for non-GAAP diluted net income per share in the range of 50% to 70 cents down from our prior outlook of one dollar and 35 cents to $1.50.
I will now turn the call back over to shop thing.
Thank you Ryan.
It is.
As we announced earlier this score our first quarter 2023 financial results were impacted materially by the slowing global economy and rising us then.
Worldwide.
<unk> trends are manifested in enterprise and service provider customers and partners.
Decision cycles on product purchases, primarily in EMEA. We've also seen North America service providers manage their inventories more tightly.
They focus on cash flow optimization in backlog reduction.
Amongst the business lines this warm us.
Third is the service provider CPE line coding.
Accounting for roughly 10% to 10% to 15% of our revenues annually. This line has declined roughly 20% in the quarter year over year to provide some context around this wonderful on north American carrier customers pose the orders at the beginning of the core until the care as you.
He lives in much of the existing inventor and its warehouses those at the end of the first score product shipments to this customer is resumed.
While the macroeconomic drums seem today seem to persist for the rest of the year. We do not expect further decline beyond the first quarter 'twenty three with that expect service provider segment declined roughly 20% in 2023 is the impact from inventory rationalization airports.
From North American carriers to slow this upside over the course of the year.
The other business line that has suffered a decline was the IP phone line, which was mostly affected in Europe , we have seen channel partners both in purchasing for their inventories.
As a result of customers delaying product purchase decision.
For our second quarter in a row now we saw similar such trends in North America on a brighter note. The backlog that is being pushed forward is very high at this stage and represents tens of minutes of value that could materialize.
When this crisis is over.
One important.
Want to make is that none of these lines discussed so far is specific strategic to our business and as such the overall impact to our business going forward.
During the quarter.
Now that we've discussed with once wrongdoing first score let me draw the call to progress made in the quarter and what went well.
And all the activity in our main lines of business remained intact and went well as planned at the Ucas and <unk> markets, although marginally affected by the overall deceleration of the UK space in the first score of 2023.
It is important to emphasize it's our results do not reflect the change in the enterprise customer appetite to migrate to next generation platforms, such as Microsoft teams and zoom phone, nor a change in the competitive dynamics the competitive mode that we build with our voice technology and expertise you know.
Is it <unk> business remains strong and intact, Roger we attribute the softness to enterprises cautious buying behavior is.
So our customers are economizing in a tight budget environment.
Floating Microsoft recent earnings results discussing continued strength of five out of a number of monthly active users to over 300 million.
We believe our secular drivers remain strong.
As customers continue to consolidate the primer.
<unk> cool primary vendor platforms to drive cost effectiveness, while doing more with less however, we believe there are three potential reasons for the disconnect you know our results.
The first one potential lag and activation of phone licenses as customers optimize networking budgets.
Headwinds from the ongoing headcount rationalizations and third migration from historical license and maintenance model, which is capex to recurring.
<unk> or managed services.
Model all in all I would point out that any any capex David in the past is now transformed into roughly 20% of value.
On an opex basis, which means that we do miss some of those hum.
Revenues due to the fact that the overall sale is now extended over several.
Yes.
The growth in the UK and CX areas, where services, which have demonstrated growth of 10, 8% year over year with professional and managed services growing 11, 8% year over year.
Service revenues.
So this is a business now represents 51, 5% of our quarterly sales.
With increased focus on moving to recurring business sales, our managed services business live and live cloud ended the quarter at 35 million annual recurring revenues up over.
Over 60% year over year with total contract value now with above 110 million. We now expect live managed services to continue to grow at above 50% growth rate throughout 2023, and we target annual.
Our revenues to reach between 46 and 50 million by the end of this year, we don't see any reason for that growth rate to not continue in following years, So I'm talking about rail.
Growing business very large and the customer experience market, we saw healthy customer activity during the quarter.
Our direct enterprise customer.
Experienced business roughly flat year over year.
Now to the.
The reduction in force and updated operating expenses budget for 2023.
Given customer spending remains pressured by macroeconomic uncertainty near term, we have taken steps to adjust our cost structure and reduce our head count and operating expenses.
We plan for a reduction in force by approximately 8% to 10% over the next six to 12 months with 6% of that effective immediately.
Roughly talking about 60, plus positions workforce worldwide. This reduction enforce should provide the opex relief setting in the beginning of the third quarter of 2023.
The reduction in force was concentrated in R&D and sales functions globally, yielding $8 million of annualized opex.
Opex savings with full run rate expected to be realized in the beginning of third quarter. This step will allow us to stabilize our operations and financials for the rest of 2023, if it helps to balance our need to maintain investment in strategic areas of our business while meaningfully improving.
Near term profitability we.
We do expect that this reduction enforce plan will help substantially improved 2024 financial results, while we plan to see a return to revenue growth coupled with reduced the opex to improve earnings for 2024 by more than 50% as compared to this year.
We will continue to evaluate additional cost cutting initiatives based on changes in our business environment.
Now to some of our key business line, let's talk about Microsoft Microsoft business declined 2% year over year in the quarter with teams up 5%, while Skype for business down over 50% Skype for business is now to a very.
At meaningful level.
A level of between one to $1 5 million of core the same factors that influenced our total revenue impacted our Microsoft business, namely cautious enterprise customer spending behavior, leading to order push outs and downsizing of scope and contracts are signed with the weakness, particularly.
Acute in the EMEA region importantly, we have not seen any project cancellations.
<unk> projects already in motion are continuing as planned should also mentioned that we really do not see any competitive pressure in this area, which is our key business area.
With the above 250, new teams accounts in the quarter up from 256 added in the year ago period, which is an indication there despite.
Difficult macro conditions customers continue to migrate from legacy telephony systems. Two next generation <unk> platform all bets at the more rigid faced a long term opportunity with Microsoft teams remains unchanged.
Instruments, delivering collaboration platform with Microsoft having recently disclosed over 300 million monthly active users up from over $280 million, that's quarter team's fone PSTN attach rate at the low digit single.
At the low single digit percentage of overall.
Monthly active users provide us.
<unk>.
Multi year runway to drive ongoing penetration gains.
Yeah.
Well alive annual recurring revenue primarily consists of managed services sold to large enterprises and customers I would like to call out increasing momentum from our <unk>.
<unk> cloud, our white label, the voice connectivity and application platform.
This self service SaaS.
SaaS platform is available for multi vendor you see in CX environments, such as teams Webex zoom and target service provider and system integrators worldwide. We have scored some notable wins globally. We now have over 50 customers on the platform and adding by a number of tier one carrier.
For this.
Ramp up is continuing and we believe as we add on functions to live cloud this platform automated solution for connecting businesses too.
Themes and other UK solutions.
We'll pick steam and will drive much of our revenues in the future overall, we expect strong momentum in live services to continue in 2023.
Now to the global services business Invoicing was pretty strong we saw healthy new service.
Created worldwide.
While total invoicing for the first score for total services was about eight four.
Growth year over year, we sold 112, 5% growth in the professional services year by year.
Articles live in minutes of backlog.
At this at the end of the first quarter of 2003 was 52 million, that's compared to 26 million at the end of the first quarter 2022. This represents roughly 96% year over year grow with Dell. So that's about the strength and the appeal before alive minutes.
<unk> been discussing this.
Now, let me move to the voice AI business. This is becoming a more important business.
Our overall future Oh actually I would say that while we keep strong on the networking business.
We invest a lot in terms of budget and the voice AI business.
The business was up 5% year over year on the back of ongoing momentum seen in voice that connect and Volker.
IC products, we are projecting strong growth in this business over the long haul among leading solution and products in that business or the voice that connect.
Activity solution meeting insights and our intelligent virtual agent solutions. Let me go one by one voice that connect was pretty successful in the first quarter.
Invoicing.
<unk> grew 75% year over year.
Booking was strong actually so here more than 10% growth year over year.
We could have grown further.
Unfortunately, we had some delays in.
Project with several of our major customers and then unit newly created opportunities.
Grew above 30% in the quarter. So all in all very successful product, we don't see any competition to it the product allows.
Sip telephony to be connected to cognitive services and if you will.
Chad GPT that solution. So a very successful product then let's move to Volcker CIC <unk>, our entry level, Microsoft teams Native <unk>.
Contact center application for the <unk> market and it has generated growing interest.
2022, and we plan to step up our efforts in this area.
Volker as the modern lightweight contact center solution designed to provide.
Right.
Integration with Microsoft teams voice, allowing companies to effectively deliver a top notch service experience with Carlos over their existing teams voice infrastructure.
Using powerful automation capability local allows easy no code configuration of self service IV outflows. This combined built in conversational AI with CRM and database.
Together with smart routing to Qs agents departments and company contracts empowering employee experience using CX capability. The volcker solution integrates the Microsoft teams using with <unk> model.
Latest in U S integration method powered by Azure from indications services.
Q1, 2023 marked another peak performance periods for the <unk> solution with bookings above half a million, which is equivalent to the overall bookings level of 2022, new opportunity creation was at 92 newly created opportunities in the first quarter that is.
Three times.
As big.
When compared to the first quarter of 2022.
Creation of opportunities vessels as of today Luca CIC is 47 accounts worldwide out of which 37 were acquired.
In the past year alone.
Now to meeting insights meetings.
Meeting so the lifeblood of every organization, where valuable company information is shared among participants.
Because meeting insights as an enterprise meeting management solution designed to unlock this mountain of information Treasurer summarize an annualized inflammation related in these meetings and share it across the organization to substantially improve productivity and information sharing among managers and employees leveraging articles.
The vast vast voices duties and state of the art voice AI technology together with.
Integrating it with.
LLM technologies.
Large language model.
Models.
Apologies such as chat GPT and other advanced cognitive services meeting he said easily captured in <unk>.
And either they're all meeting generated content from team collaboration and training session to sales and recruitment calls it generates at the medical meeting summaries and insights greater organizational data repository and makes important organizational information searchable and access like never before using the notification.
Mobile client technology, we already have taken steps to adopt chat GPT in our models.
Meeting solution to enable advanced AI <unk> speech analytics, we plan to deploy.
In coming weeks.
The first such implementation, we expect voice AI. It is now actually running in alpine than we.
We do plan to ship it to beta customers in less than a month from today, we expect voice AI to achieve.
Acceleration in the rest of 2022 and beyond to further expand our success in the UK in six markets.
And with that I'm coming to the end of my.
While results were impacted in the quarter by difficult macro conditions, causing the change.
In customer spending decision a behavior.
And extended sales cycles, we are confident that our secular growth drivers and competitive position remain intact. We continue to see ample opportunity for innovation in the conversational AI business and transition to live services at customers.
Undergoing digital transformation to cloud with our core U S segment, and with that I would like to turn the call back to the operator for the Q&A session.
At this time, we will be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
Press Star two if you would like to remove your question from the queue.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment, while we poll for questions.
Your first question for today is coming from Greg Burns Sidoti <unk> company.
Good morning.
Can you just walk us through the $50 million decline in the <unk>.
Full year revenue outlook.
Uh huh.
The buckets of revenue driving those declines.
What parts of the business are accounting for that.
Okay. So basically.
We really took a cautious position.
Basically.
Saying that due to the fact that the macro trends are not changing as we step into the second quarter and we did.
Roughly $60 million in the first quarter towards natural for us to.
Basically plan for a year that would be either flat or slightly growing.
The last debt went down primarily as I've mentioned in the call or.
Cps are mainly sold to service providers.
Also.
Also.
Products sold in the IP phone product line.
So we add to took some.
Of the growth we expected for other areas.
Thats mentioned.
The meeting rooms in the Microsoft teams space will we.
Prior to 2000 January 2023, we envision substantially larger growth.
That is not at that also.
If we watch the trends in the Microsoft Camp, while we were growing 10% to 15%.
Year over year in the prior years.
In the first quarter, we were about 3%.
So we need to take all these factors into account when we plan for the full annual.
Forecast than that that was the result.
Yes.
Okay.
Yeah.
Thank you and then.
How big is the IP phone business what percent of your revenue is IP phones and other.
Hardware like that I guess that would also include.
Youre meeting room applications.
Yes.
Right. So IP phone business was roughly above 10% last year.
And we believe that this year it will not reach more than.
60% to 70% of that.
Unfortunately.
Just to tell you that as I've mentioned.
We have a huge backlog of opportunities.
To supply we are in a stage, where it's already a second quarter in a row, where.
You know purchases are being pushed to the next one March was really very clear in that trend.
Thanks, Luke rather okay in January and February in March was so several deals being pushed that as the second quarter in a row. So that that's what's happening I think all in all if you both phones and CP are capex type of sales, while you could see.
The.
The recurring business sales really did not suffer as much as the Capex and I think this is part of what we saw.
In the first quarter.
Okay. Thank you.
Your next question for today is coming from Simona at Jefferies.
Hi, This is nathan marrying on for Matt Thanks for taking our questions.
So if I look at your EPS guidance, how should we think about your product gross margins going forward is it should we assume that your <unk> level is that is a fair range.
Yes so.
With regard to gross margin.
This quarter, we ended at 62 point.
1%, which is a major decline compared to last year.
Part of it relates to product mix.
And the other relates to the reduction in total revenue because part of the Cogs is actually a fixed cost.
So all in all.
We believe gross margin should improve slightly.
In the next few quarters.
Mainly at the second half of the year.
Okay understood and then if we think about that the channel partners.
Shocking.
Any sign that thats going to normalize.
How should we think about kind of the <unk>.
The seasonality throughout the year or should we just assume kind of ahead.
<unk> levels are a fair way to think about it.
Okay.
Well Unfortunately.
The outlook going forward.
On the economic side is not changing we don't see any.
Any change to the behavior.
I think it's all even though we all know that it's all tied to the inflation rate in the.
Interest rates and as long as those are.
And at the same level and we don't see any change in those.
I would not expect.
And especially when the cost of money is that high I would not expect that stocking.
Resume.
Sooner than a change in the overall economy.
Thank you.
Sure.
Your next question for today is coming from Tao Liana at Bank of America.
Hi, guys.
Wanted to take a.
Maybe step back and think about the macro.
We're seeing other companies dealing with channel inventory.
Inventory in the hands of the customers and that's why orders are coming down and we're also seeing companies dealing with high backlogs and that's why I also orders are coming down.
And the question is when you look at your weakness what's the source of it is it coming because projects are getting cancelled or is it coming because.
There is channel inventory and backlog, but the deployments continued to be at the same rate I'm trying to understand if the weakness how how temporary how much visibility you have to have recovery, meaning how temporary is the weakness.
Okay.
So we do believe that we have not seen that phenomenon in previous quarters up until the end of 2022.
I think.
The worsening conditions.
Earlier in the year really cause service providers and channels too.
Basically hold purchases and do better inventory control.
Now as we have mentioned.
One example in the call of one big service provider.
Customer that halted all purchasing.
In January but as soon as it is used a lot of its backlog.
No its warehouses.
In the month of March we saw as we saw them coming back to purchasing so really I think I think you know.
The amount.
The amount of backlog that was.
Sitting in warehouses.
Absolutely.
Diminish to a level of war from now on we will not see any impact from that side or are there still the impact of customers.
Rationalizing their expenses and pushing products in or.
Making them smaller right.
Lay off employees so.
These are the two factors so.
As long as the economic situation is not changing now we do not see any abrupt changes to what already happened in Q1.
But.
On the other side, we can see yet any improvement.
In that respect.
But when you I don't know how much visibility you have to and projects. When you look at your big customers.
Do they continue to deploy at the same rate. So if they have inventory and it's just the inventory adjustment. It means that they continue to deploy the same rate. So do they continue to deploy the same rate or do you see slowdown in the rollout of projects that projects are being slowed down or canceled or pushed out.
Talking about the end customers and end customers kind of.
Right, So yes, our primary customers.
Those who we target usually in retarding neutral roughly on either a Microsoft in our contact center customers Youre talking about large companies large companies.
May slow down a bit projects, but all in all we have not seen major push outs of complete project core delays by more than a year. What we are seeing is.
Delayed decision on the expense so when you're talking about.
<unk> project as well.
Give you a number I mean, we grew 60% year over year, meaning that it's longer term project is of a managed services type.
There is little chance that it will be.
Cancer, then push out completely however, I want to say it.
Capex deal, where you need to spend you know half a million or more than a million and a.
Opportunity than maybe due to financial conditions, you may decide that you want to push it. So that gives you a kind of an idea overall you know we see good customer behavior, yes.
Hum.
We've seen some project being but thats not a phenomena the strong companies the large companies keep deploying and we adjust.
If you we have mentioned on our website, we have one big.
The company in Japan that is.
And with us to deploy.
Global project, we have another U S based retailer company large retail companies or also started was signed with US and then started to deploy so the projects are there, it's only maybe a slower deployment sector little or whatever but that's the whole differ.
Yes.
And sorry last question is there a change in the pricing environment. As a result is there a change in the competitive environment do you see competitors other competitors getting more aggressive because of the slowdown.
None none we do not see any competition in our markets.
Some people, sometimes make a mistake and compare it to another company that's active in the SBC space, but I will tell you that we do not see any competition.
In the Microsoft Space. So you know there's no pressure at all.
It's really more our ability to add more services and more application as I've mentioned, you know if you think about us being able to deploy <unk> solutions and our contact center solution in our meeting in San solution in that environment, we just improve our ability to get.
Increased our pool from those.
Customers.
We have not seen pressure on the compensate this effect.
Thank you.
Sure.
Your next question is coming from Ryan Macwilliams at Barclays.
Alright, Thanks for taking the question. This is Ben on for Ryan Macwilliams. Just the first question is are you seeing any slowing slowing on a planned phone deployments at the enterprise level due to macro and then also what is your outlook look like for contact center. It sounds like that sounds like that business is pretty healthy.
Right so yeah.
No.
The bottom line is that you know while last year, we grew about 15% year over year on the large enterprises in the Microsoft space, We will see this year.
Lower.
Rate of growth.
In the first quarter, it was 3% down, but we do expect that it will.
But going on also the fact that.
Skype for business really went almost to zero and Tim screw teams grew 5%. So we believe that the Microsoft.
Okay.
You know our growth.
Maybe 5% to 10%.
As compared to two 5% last year, but thats all.
A result of the economic situation.
Okay, Perfect and then just any thoughts on your teams versus zoom in your product portfolio and any differences you're seeing.
We haven't mentioned zoom in this call, but yes, we do have good business with whom we worked with them on federal projects.
Yes, we have not seen any major.
Sure.
Change in the behavior.
Our ability to win project with them.
First quarter.
Okay. Thanks for taking the question.
Sure.
Once again, if there are any questions or comments. Please press star one on your telephone keypad.
We have reached the end of the question and answer session and I will now turn the call over to management for closing remarks.
Yeah.
Thank you operator, I would like to thank everyone, who attended our conference call today with more focused planning for the rest of 2023 better control of our expenses to be in line with revenues this year and strong underlying market trends in our industry in coming years, we have high confidence.
And in our ability to expand our business in coming years, we look forward to your participation in our next quarterly conference call. Thank you very much have a nice day.
This concludes.
Today's conference and you may disconnect your lines at this time. Thank you for your participation.
Okay.