Q3 2023 AudioCodes Ltd Earnings Call

Listen only mode and the floor will be opened for questions. After the 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 will now turn the conference over to your host Mr. Roger to Gen V. P of Investor Relations at audio codes Roger over to you.

Thank you Jenny go swimming call today, our Shanghai, Iceberg, President and Chief Executive Officer, <unk>, <unk>, Vice President of Finance and Chief Financial Officer before we begin I'd like to remind you that the information provided during this call may contain forward looking statements relating to audio codes business outlook future economic performance.

Introductions plans and objectives related there too and statements concerning assumptions made or expectations 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 codes industry and target markets in particular shifts in supply and demand.

Market acceptance of new products and the demand for existing products the impact of competitive products and pricing on 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 law.

On 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 the effects of the current terrorist attacks by Hamas and the war in hostilities between Israel.

And Israel, and Hezbollah as well as the possibility that this could develop into a broader regional conflict involving Israel with other parties may affect our operations and may limit our ability to produce and seller solutions any disruption in our operations by the obligations of our personnel to perform military service as a result of current or future military actions involving Israel.

And other factors detailed in audio codes filings with the U S Securities and Exchange Commission audio codes assumes no obligation to update this information. In addition, during the call audio codes will refer to non-GAAP net income and income per share articles has provided a full reconciliation of the non-GAAP net income and earnings per share to its net income and income per share. According.

The GAAP in the press release that is posted on its website before I turn the call over to management I'd like to remind everyone that this call is being recorded 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 by shop type. Please go ahead.

Thank you Roger good morning, and good afternoon, everybody I would like to welcome all to our third quarter 2023 Conference call with me. This morning is unbelievable Chief Financial Officer, and Vice President of Finance for <unk>.

Iran 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 neuron.

Ladies and gentlemen, thank you for your patience. This conference will begin shortly once again. Thank you for your patience on this conference will begin shortly.

Thank you Shaun and Hello, everyone.

Before I start my formal remarks, I would like to remind everyone that in conjunction with our earnings release. This morning, we will both shortly on our Investor relations website, and earning supplemental deck.

[music].

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 will be discussing on this call.

non-GAAP net income exclude share based compensation expenses amortization of expenses related to intangible assets.

Census related to deferred payment in connection with the acquisition of <unk> other income related to a payment made.

By the landlord of the Coty, Inc. A subsidiary of the company in connection with the termination of lease agreement for its offices in New Jersey.

Greetings welcome to audio codes third quarter 2023 earnings conference call.

At this time, all participants have been placed on a listen only mode and the floor will be opened for questions. After the 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.

Financial income related to exchange rate differences in connection with the revaluation of assets and liabilities in non dollar denominated.

Currencies.

Noncash deferred tax expenses or income and noncash lease expense.

Which is required to be recorded during the quarter, even though this is a free rent period under the lease for the company and new headquarters.

I will now turn the conference over to your host Mr. Roger to Gen V. P of Investor Relations at audio codes Roger over to you.

To provide investors with a more accurate view of our current operating performance. We are adjusting lease expenses in our non-GAAP presentation, we calculate the non-GAAP adjustment by sub correcting the noncash lease expenses Julian the quarter for our new offices.

Thank you Jenny goes from the call today are <unk>, President and Chief Executive Officer, and Robert <unk>, Vice President of Finance and Chief Financial Officer before we begin I would like to remind you that the information provided during this call may contain forward looking statements relating to audio codes business outlook future economic performance.

Introductions plans and objectives related there too and statements concerning assumptions made or expectations to any future events conditions performance or other matters are forward looking statements as the term is defined under U S Federal Securities law.

Which are currently under construction.

Our total lease expense.

The exclusion of these noncash lease expenses reflect the fact that we are not required to pay rent with respect to the new office.

These 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.

During the quarter and we are not yet occupying the new officer.

After this adjustment lease expenses and the non-GAAP presentation for the quarter will be equal to the lease expense for our current occupied office.

In the future our non-GAAP presentation will reflect an upward adjustment for lease expenses over the life of the lease for the amount of lease expenses excluded in our non-GAAP presentation June the free rent period.

Market acceptance of 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 manage changes in market conditions as needed possible need for additional financing the ability to satisfy covenants in the company's law.

We will be comparing our third quarter of 2023 results to the prior quarter as we believe it provides a better gauge of our financial performance.

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 the effects of the current terrorist attacks by Hamas and the war in hostilities between Israel hub.

Revenue for the third quarter was $61 6 million, an increase of two 6% over the $60 million reported in the second quarter.

Services revenues for the third quarter were $30 6 million accounting for 49, 6% of total revenues.

And Israel, and Hezbollah as well as the possibility that this could develop into a broader regional conflict involving Israel with other parties may affect our operations and may limit our ability to produce and sell our solutions any disruption in our operations by the obligations of our personnel to perform military service as a result of current or future military actions involving Israel.

The amount of deferred revenues as of September 32023 was 77 8 million compared to $77 7 million as of June 32023.

Revenues by geographical region for the quarter with clip as follows North America, 48%.

And other factors detailed in audio codes filings with the U S Securities and Exchange Commission Auto codes assumes no obligation to update this information. In addition, during the call audio codes will refer to non-GAAP net income and income per share articles 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.

EMEA, 33% Asia Pacific 14%.

In Central and Latin America, 5%.

Our top 15 customers represented an aggregate of 59% of our revenues in the third quarter of which 48% was attributed to our 12 largest distributors.

The 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 by shop type. Please go ahead.

GAAP results are as follows.

Gross margin for the quarter was 66, 5% compared to 64, 1% in Q2 2023.

Operating income for the third quarter was five 8 million or nine 4% of revenues compared to $2 3 million or three 8% of revenues in Q2 2023.

Thank you Roger good morning, and good afternoon, everybody I would like to welcome all to our third quarter 2023 Conference call with me. This morning gives me a unbelievable Chief financial Officer, and Vice President of finance for the codes.

Net income for the quarter was $4 3 million or 14 cents per diluted share compared to $1 1 million or <unk> <unk> per diluted share for Q2 2023.

Iran, who will start off by presenting a financial overview of the core who will then review the business highlights and summary for the core and discuss trends and developments in our business and industry. He will then turn it into the Q&A session, Iran.

non-GAAP results are as follows.

non-GAAP gross margin for the quarter was 67, 3% compared to 64, 5% in Q2 2023.

Thank you Shaun and Hello, everyone.

non-GAAP operating income for the third quarter was $9 6 million or 15, 5% of revenues compared to $5 7 million or nine 5% of revenues in Q2 2023.

Before I start my formal remarks, I would like to remind everyone that in conjunction with our earnings release. This morning, we will both shortly on our Investor relations website, and earning supplemental deck.

non-GAAP net income for the third quarter was $8 3 million or 25 cents per diluted share compared to $5 1 million or 16 cents per diluted shares in Q2 2023.

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.

At the end of September 2023, cash cash equivalents bank deposits marketable securities and financial investment totaled $102 5 million.

I will be discussing on this call.

non-GAAP net income exclude share based compensation expenses amortization of expenses related to intangible assets.

Net cash provided by operating activities.

Fences related to deferred payment in connection with the acquisition of cold weather. So other income related to a payment made.

0.2 million for the third quarter of 2023.

Days sales outstanding as of September 30th.

The landlord of audio clips, Inc. A subsidiary of the company in connection with the termination of a lease agreement for its offices in New Jersey.

<unk> 2023 was 96 days.

In June 'twenty to 'twenty, three we received court approval in Israel to purchase up to an aggregate amount of $25 million of additional ordinary shares.

Financial income related to exchange rate differences in connection with the revaluation of assets and liabilities in non dollar denominated.

Court approval also permits us to declare a dividend of any part of this amount. The approval is valid through December 27 2023.

Currencies.

Noncash deferred tax expenses or income and noncash lease expense.

Which is required to be recorded during the quarter, even though this is a free rent period under the lease for the company New headquarters.

On August 1st 2023 we declared a cash dividend of <unk> 18 per share the aggregate amount of the dividend was approximately $5 7 million.

To provide investors with a more accurate view of our current operating performance. We are adjusting lease expenses and our non-GAAP presentation, we calculate the non-GAAP adjustment by sub correcting the noncash lease expense with Julian the quarter for our new offices.

Dividend was paid on August 31st 2023 to our shareholders.

During the quarter, we acquired 880000 of our ordinary shares for a total consideration of approximately $9 million.

As of September 32023, we had $10 million available under the approval for the repurchase of shelf under.

Which are currently under construction for our total lease expense.

The exclusion of these noncash lease expenses reflect the fact that we are not required to pay rent with respect to the new office.

And our declaration of cash dividends.

Regarding Ed Count as discussed last quarter, we undertook actions to reduce headcount to better align our cost structure to the current business environment. The full amount of previously announced headcount reduction and associated cost savings are reflected in our third quarter results.

During the quarter and we are not yet occupying the new offices.

After this adjustment lease expenses and the non-GAAP presentation for the quarter will be equal to the lease expense for our current occupied office.

We ended the third quarter with 938 employees down from 946 employees at the end of the second quarter.

In the future our non-GAAP presentation will reflect an upward adjustment for lease expenses over the life of the lease for the amount of lease expenses excluded in our non-GAAP presentation June the free rent period.

Now to provide an updated guidance.

We reiterate our guidance for revenue for 2023 to be in the range of $240 million to 250 million.

We will be comparing our third quarter of 2023 results to the prior quarter as we believe it provides a better gauge of our financial performance.

We are raising our guidance for non-GAAP diluted earnings per share to be in the range of 65 to 75 cents.

Revenues for the third quarter was 61 6 million an increase of two 6% over the $60 million reported in the second quarter.

Compared to the previously updated the range of 55 to 70 cents.

Services revenues for the third quarter were $30 6 million accounting for 49, 6% of total revenues.

I will now turn the call back over to shop there.

Thank you Ron.

I'm pleased to report solid third quarter of 2023 results against a difficult Michael macro drop backdrop with ongoing strength in our core <unk>.

The amount of deferred revenues as of September 32023 was 77.8 million compared to $77 7 million as of June 32023.

Enterprise business overall, partially offset by softness ignore noncore service provider segment.

Revenues by geographical region for the quarter with clip as follows north.

We continued to perform well in our enterprise business now, reaching a record 90% of company revenues within enterprise, our Ucas business continued to perform well with Microsoft business up 13% year over year, Microsoft teams business grew 20% year over year.

North America, 48%.

Yeah, 33% Asia Pacific 14%.

In Central and Latin America, 5%.

Our top 15 customers represented an aggregate of 59% of our revenues in the third quarter of which 48% was attributed to our 12 largest distributor.

<unk> annual recurring revenues grew north of 50% year over year, ending the quarter at $43 million. We definitely expect came slive annual recurring revenue to grow approximately 50% in 'twenty two 'twenty three as planned earlier in the year.

GAAP result are as follows.

Gross margin for the quarter was 66, 5% compared to 64, 1% in Q2 'twenty to 'twenty three.

Customer experience business grew 13% year over year, and conversational AI business bookings grew over 50% year over year importantly, leading indicators such as thorough amount of newly created opportunities remains robust and new business booking it.

Operating income for the third quarter was 5.8 million or nine 4% of revenues compared to $2 3 million or three 8% of revenues in Q2 2023.

Net income for the quarter was $4 3 million or 14 cents per diluted share compared to $1 1 billion or three cents per diluted share for Q2 2023.

Growing substantially above.

2022 giving us increasing conviction about our business prospects for the rest of 2023 and into 2024.

non-GAAP results are as follows.

non-GAAP gross margin for the quarter was 67, 3% compared to 64, 5% in Q2 'twenty to 'twenty three.

As referenced earlier, our noncore service provider segment remains challenged down about 50% year over year. This is primarily attributable to customer, suggesting capex plans delayed projects and tightened inventory investment amidst the challenging microenvironment impose.

non-GAAP operating income for the third quarter was $9 6 million or 15, 5% of revenues compared to $5 7 million or nine 5% of revenues in Q2, 2023.

I want to note. However that we have won several new projects with leading service providers that can provide incremental revenue contribution in 2024.

non-GAAP net income for the third quarter was $8 3 million or 25 cents per diluted share compared to $5 1 million or 16 cents per diluted shares in Q2, 2023.

Another positive development in the third quarter is the continued evolution you know our conversational AI space.

At the end of September 2023, cash cash equivalents bank deposits marketable securities and financial investment totaled $102 5 million.

Its emergence as a key growth engine for the next years, our investments in the conversational AI Frac innovation are paying off and have successfully positioned to our ucas and CX.

Net cash provided by operating activities.

Segments Professor of sustainable top line growth conversational AI bookings grew over 50% year over year.

Zero point to me the one for the third quarter of 2023.

Days sales outstanding as of September.

Since our announcement of the Microsoft team certification of Voka CIC in July 2023.

30, 2023 was 96 days.

In June 'twenty to 'twenty, three we received court approval in Israel to purchase up to an aggregate amount of $25 million of additional ordinary shares.

Our lightweight a first M C gas platform.

We have seen a step up in customers' interest and engagement the success with our CCAR. So Frank is that being a pull through effect on our on the rest of our conversational AI portfolio in particular in our degenerative AI powered recording services.

Court approval also permits us to declare a dividend of any part of this amount. The approval is valid through December 27th 2023.

On August 1st 2023 we declared a cash dividend of <unk> 18 cents per share the aggregate amount of the dividend was approximately $5 7 million.

We are stepping up our efforts into cognitive surface space with key investments in speech to text and generative AI and L. L. M technologies in that regard, we believe that we own unique advantage in maintaining a very comprehensive knowledge and several key vital technologies.

Dividend was paid on August 31st 2023 to our shareholders.

During the quarter, we acquired 880000 of our ordinary shares for a total consideration of approximately $9 million.

Which are a really vital to create efficient systems are we on technologies such as telephony.

As of September 30, 2023 we had $10 million are available under the approval for the repurchase of shelf Honda and or declaration of cash dividends.

Voip networking and variety of cognitive services technologies.

Integrating these technologies with the vast experience we have in delivering full end to end solution and services creates for us clear unique advantage and capability to emerge as a strong player in the emerging voice AI space.

Regarding Ed Count as discussed last quarter, we undertook actions to reduce head count to better align our cost structure to the current business environment.

The full amount of previously announced at come through reduction in associated cost savings are reflected in our third quarter results.

As an example to the advantage we have developed with our conversational AI in the UK space.

Now seeing rising interest in progress made is there a meeting insights a workflow productivity application for meetings in the enterprise space.

We ended the third quarter.

938 employees.

From 946 employees at the end of the second quarter.

Coupling meeting insights with the line of devices with developed for the meeting rooms.

Now to provide an updated guidance.

Position position us with a unique leading solution for the emerging meeting space.

We reiterate our guidance for revenue for 2020 three to be in the range of 240 million to 250 million.

Few more notable developments in the third quarter are defined.

We are raising our guidance for non-GAAP diluted earnings per share to be in the range of 65 to 75 cents compared to the previously updated the range of 55 cents to 7%.

So professional and managed services continues to evolve at a meaningful pace.

Services accounted for 49, 6% of revenues and grew 13, 8% year over year.

I will now turn the call back over to shop there.

Compare to mirror two 4% in the previous score with an acceleration in growth rate primarily related to timing of professional services completion.

Thank you Ron.

I'm pleased to report solid third quarter of 2023 reserve against the difficult Michael macro drop backdrop with ongoing strength in our core enterprise business overall, partially offset by softness in our non core service provider segment.

What has fueled our ongoing momentum in services is primarily our lives subscription business, which ended the third quarter at $43 million annual recurring revenues up from 40 million last quarter. Additionally, we ended the quarter with total contract value for alive subscription.

<unk> performed well in our enterprise business now, reaching a record 90% of company revenues within enterprise our U S business continued to perform well with Microsoft business up 13% year over year.

Growing close to 10% up from over 120 million in second quarter, and providing us with increasing level of revenue visibility, we expect strong momentum and live services to continue for the balance of 2023 and beyond and reiterate or.

Microsoft teams business grew 20% year over year and lifetimes annual recurring revenues grew north of 50% year over year ending the quarter at 43 million, we definitely expect team's live annual recurring revenue to grow approximately 50 per.

Recurring revenue target of $46 million to $50 million by the end of this year.

Few more notable developments in the third core are the following.

Sent in 'twenty, two 'twenty three as planned earlier in the year.

We see a shift in our product mix to software and services Noncore Hot war related product percentage of our revenues are now down to around 20%.

Customer experience business grew 13% year over year, and conversational AI business bookings grew over 50% year over year.

Contributing to increase in gross margin or revenue non core hardware relates to business lines, such as the service provider C. P IP phones and technology legacy.

Ultimately, leading indicators such as thorough amount of newly created opportunities remains robust and new business bookings are growing substantially above 20.

As we continue to add new value add voice software application and services. We expect hardware related percentage you know our product mix to decrease to below 20% and to contribute to the continued increase in gross margin in coming years.

2022 giving us increasing conviction about our business prospects for the rest of 2023 and then into 2024.

As referenced earlier, our noncore service provider segment remains challenged down about 50% year over year. This is primarily attributable to crescent was suggesting capex plans delayed projects and tightened inventory investment amidst the challenging microenvironment impose.

Another major trend in our sales operation is the shift from Capex selling through recurring revenue sales a trend that will affect our long term financial model and relating mainly to both the topline and our bottom line results.

The top line or the revenue line, we expect annual revenue growth to moderate to the range of 6% to 12% compared to the previous years, our annual growth rate.

To note. However that we have won several new projects with leading service providers that can provide.

Your mental revenue contribution in 2024.

And that's a positive.

Was range was between 10 and 13%. This decline is a direct result of moving to recurring revenue where cognition is spread over 36 to 60 months rather than recognizing in a single quarter.

However, the bright side of it is that on the earnings side the trend of the trend this strength contributes to key results.

A better visibility in future course revenue base, that's being built up.

Sequentially quarter over quarter, and then higher profitability is a result of the ability to add managed services on top of selling products. This in return will contribute to higher annual earnings growth rate, which we estimate to settle at the 25% to 50% range annually.

Some examples of the overall, a strong operational progress and execution I would like to provide some details of a couple of major wins in the U S government space, which positions us to emerge as a major player in the vertical.

We're talking about the federal agency issued an RFP for IP phone and associated services.

Part of its long term migration plan from Cisco.

Cisco Microsoft teams platform. After 18 months of extensive testing we recently received.

We received an initial award of teams certified that'd be fun and over.

T O R infrastructure device management software and wrapped up with our professional services support. This contract covers the option to purchase over 25000, IP phones and associated that's suffering surfaces over the period of five years, while long term dollar value.

This contract will be significant and I would like to emphasize the strategic nature of the swing first the deal establishes direct relationship with the end customer and establishes a beachhead from which we can pull through other products in our portfolio.

In further in furtherance of for land and expand strategy that we have successfully executed upon over the past several years second after completing additional acquisition certification steps, which are expected in the next couple of months. We this solution will be available for purchase.

To the broader federal agency audience, expanding our market reach by many multiples.

In addition to our.

Direct sales efforts in the federal vertical recently won one point to me a $1 2 million contract.

Over 36 months with a tier one system integrator, providing white-glove life premium services to another federal agency.

In support of its migration of 4000 users to Microsoft teams phone from legacy suppliers. This decision is driven by desire to upgrade from Tdm to IP based voice services and to create an end to end teams UC experience, which in the process enables the customer to.

Terminated iqos maintenance contracts with legacy PBX vendors for background. This is a large federal agency with over 50000 employees, whose many bureau spread across the U S. The recent win includes.

The core of this agency and we are working on several similar opportunities in the bureau level concurrently.

Before turning to detailed business segment discussion, let's quickly shift to profitability metrics and guidance.

Third quarter of 2023, non-GAAP EPS was 25 cents.

Significantly significantly exceeding our internal budget on the back of higher than expected non-GAAP gross margin and lower opex.

Third quarter non-GAAP gross margin was 67, 3% versus previous quarter of 64, 5%. The improvement is primarily attributable to higher utilization of service resources and more favorable service product mix third quarter non-GAAP Opex was $31 nine.

Down from the 33 million level in the prior quarter and in line with the 2 million quarterly stepped down in Opex.

Plants from the first score of 2023, all in connection with our previously announced cost cutting measure.

We ended the quarter with headcount of 938.

Employees down from the.

978 people, we added in the first quarter, we will continue to align our opex the current market environment and business line performance with the aim of executing to our commitment of delivering significant operating leverage in 2024.

On the guidance front, we are reiterating our 2023 of your revenue guidance of 240 to 250 million and adjusting non-GAAP EPS guidance to 65 to 75 cents to reflect better than expected third quarter earnings results and ongoing Momo.

This outlook builds in continued conservative enterprise spending environment and cost saving impact from our previously announced cost cutting initiative. In addition, we expect our opex to decline in the next two years as a result of edging the U S. Dollar against these really new Israeli shekel where steps.

We took in previous periods will contribute nicely towards lower expenses.

Getting to a more a main business fine, let's talk first about Microsoft Microsoft business or bookings increased 13%.

Year over year in third quarter was in which Microsoft teams grew 21%.

At the same time Skype for business was down 75%.

Kai for business now at less than 2% of overall, Microsoft business is now at the minimum level of less than 5 million annually.

Starting in 2024, who will no longer break out the mix of teams versus Skype for business.

From a Geo perspective, North America was again, the standout performer, while EMEA seems to have stabilized for the first nine of 2023, Microsoft Windows grew 7% year over year. Overall, we added 284, new teams accounts in the quarter, a slight increase from 200.

<unk> 82 in the <unk>.

Core was the robust year to date growth in our pipeline or credit opportunities remain.

We remain optimistic about the long term growth potential for our Microsoft business.

As a reminder, Microsoft recently disclosed over 17 million P. S N users, representing 45% growth year over year, However, still representing just a fraction of the overall $320 million seems monthly active users we believe the low.

Phone voice penetration provides us with ample multiyear runway to drive ongoing penetration gains. He also silver recovery for IP phone business, where demand from end users recovered significantly although what we experience in first half 2023, as a result of inventory.

Plays.

One key area for us in the Microsoft business is his team's live enterprise deals, which represent each of high total contract value I'm glad to inform that in the third quarter, we were able to sign.

In the process enables the customer to terminate its iqos maintenance contracts with legacy PBX vendors for background. This is a large federal agency with over 50000 employees, whose many bureau spread across the U S. The recent win includes the headquarter of this agency.

And close three accounts valued each above $1 million and five more accounts with an average total contract value of about half a million. This success rates helps us to build.

It's a very stable growing backlog of monster and revenues for the next 36 months and beyond.

And we are working on several similar opportunities in the bureau level concurrently.

Yeah.

Moving to customer experience third core our contact center business.

Our bookings grew 13% year over year with strengths in North America, and APAC could recessionary OE bookings grew more than 50% year over year.

Before turning to detailed business segment discussion, let's quickly shift to profitability metrics and guidance.

Third quarter 2023, non-GAAP EPS was 25 cents significantly significantly exceeding our internal budget on the back of higher than expected non-GAAP gross margin and lower opex.

While we are pleased with the ongoing momentum in our customer experience segment, what may be less surprising to investors is the underlying transformation and theres been a slide if we look back.

The past period of similar growth in customer experience in 2000 2020 in 2020 'twenty one revenue growth than was driven primarily by our OEM operations and core SBC and connectivity solution.

Third quarter non-GAAP gross margin was 67, 3% versus previous quarter of 64, 5%. The improvement is primarily attributable to higher utilization of service resources and more favorable service product mix third quarter non-GAAP Opex was $31 nine.

Often sold on a capex basis at.

At that time, we had benefited mainly from increased volume of calls going into the contact centers during the pandemic.

Down from the 33 million level in the prior quarter and in line with the 2 million quarterly step down in Opex.

Fast forward to today.

Growth vectors are multifacet.

Plants from the first quarter of 2023, all in connection with our previously announced cost cutting measure.

Benefiting not only from increasing customer experience call volume, but also product innovation and introduction and kind of recession, I, particularly our vodka CIC service suffering.

We ended the quarter with headcount of 938.

Clearly the heavy R&D investment we have made in these emerging areas over the past couple of years are now starting to bear fruit wherever they see click to call voice that connect.

Employees down from the.

978 people, we added in the first quarter, we will continue to align our opex to current market environment and business line performance with the aim of executing to our commitment of delivering significant operating leverage in 2024.

Those platforms are among the new sources of growth.

This transformation of for our customer experience business is not only improve the percentage of recurring mix, but also added additional growth drivers, which ultimately should position. This segment for more sustainable long term growth.

On the guidance front, we are reiterating our 2023 of your revenue guidance of $240 million to $250 million and adjusting non-GAAP EPS guidance to 65 to 75 cents to reflect better than expected third quarter earnings results and ongoing Momo.

At this stage I should mention that Microsoft teams.

And Microsoft business account for almost two thirds of our quarterly business, while CX now contribute about 20%.

This outlook builds in continued conservative enterprise spending environment and cost saving impact from our previously announced cost cutting initiative. In addition, we expect our opex to decline in the next two years as a result of edging the U S. Dollar against these really new Israeli shekel where steps.

Lets move to discuss our recently introduced <unk> platform for the Microsoft teams environment.

Since the announcement of Microsoft teams certification for lightweight AI first team's biggest platform, we've seen a step up in customer interest and engagements.

We took in previous periods will contribute nicely towards lower expenses.

The success with our Ccs offering is having a pull through effect on the rest of our conversational air portfolio. In particular are you know are a generative AI based value add solution, let's talk about our recent contract win that demonstrates our success in diversifying our revenue streams beyond authors.

Getting to a more a main business fine, let's talk first about Microsoft Microsoft business or bookings increased 13%.

Year over year in third quarter was in which Microsoft teams grew 21%.

At the same time Skype for business was down 75%.

Additional business of selling session border controls and connectivity.

Cafe business now at less than 2% of overall, Microsoft business is now at a minimum level of less than $5 million annually Sally.

This win relate to have a very large auto service firm with broad distribution of local affiliates across.

The United States the customer is on a legacy platform routing and from incoming customer calls from centralized offline to appropriate local branch.

Starting in 2024, who will no longer break out mix of teams versus <unk>.

Skype for business from a Geo perspective, North America was again, the standout performer, while EMEA seems to have stabilized for the first nine of 2023, Microsoft Windows grew 7% year over year.

Working closely with a tier one system integrator. We were recently selected to provide our conversation life Euro system in a deal was over a million a total contract value over the next 36 months.

Overall, we added 284, new teams accounts in core.

The significance of this deal is twofold. One this is one of the largest contract value contracts in Norfolk, a CFC products to date. This year, we think a very steep increase in bookings in that line.

<unk> increased from 282 in the second quarter was a robust year to date growth in our pipeline or created opportunities.

We remain optimistic about the long term growth potential for our Microsoft business.

Second when fully implemented the 400 concurrent channels to be deployed demonstrates the scalability of the Vulcan safety platform, which should better position us to target progressively larger deal opportunity and third these deals demonstrate the flexibility of the platform as customers can purchase.

As a reminder, Microsoft recently disclosed over 17 million PSA end users, representing 45% growth year over year, However, still representing just a fraction of the overall $320 million seems monthly active users we believe the low teens.

The lightweight Ccs system, including conversational AI or I V or on a standalone basis.

Phone voice penetration provides us with ample multiyear runway to drive ongoing penetration gains. He also silver recovery for IP phone business, where demand from end users recovered significantly although what we experience in first half 2023, as a result of inventory.

Now moving to our voice AI connect platform.

A major communication platform as a service customer recently unveiled an innovative new service powered by our voice that connect solution, which enables its enterprise and customers to expedite rollout of virtual agents, thereby driving productivity improvements and cost savings our solution.

Place.

Yeah.

One key area for us in the Microsoft business is his team's live enterprise deals, which represent each a high total contract value I'm glad to inform that in the third quarter, we were able to sign.

<unk> seamless backend integration and connection to both right frameworks contact centers and to see best customer.

And close three accounts valued each above $1 million and five more accounts with an average total contract value of about half a million. This success rates helps us to build.

Separately, we recently received from a multinational health care company large follow on purchase so far voice AI connect solution, providing connectivity services to various conversational AI platforms in support of virtual agents and virtual assist use cases.

It's a very stable growing backlog of monthly recurring revenues for the next 36 months and beyond.

Discussing right now it's over 1 million dollar annual recurring revenue to RT codes is an early adopter of conversational AI and we believe that the advance of generative AI can help accelerate time to market with this technology and look forward to working with other customers in their journey to drive productivity improvements.

Moving to customer experience third quarter, our contact center business.

Our bookings grew 13% year over year with strengths in North America, and APAC conversational AI bookings grew more than 50% year over year.

While we are pleased with the ongoing momentum in our customer experience segment, what may be less apparent to investors is the underlying transformation in this business line, if we look back.

Movements.

Lastly, I'll speak about our meeting insight solution, we see ramping interested in our platform for handling meetings and calls across the organization among those function recording transcription analytics sharing distribution in archiving to date with tens of new accounts onboard.

The past period of similar growth in customer experience in 2000 2020 in 2020 'twenty one revenue growth than was driven primarily by our OEM operations and core SBC and connectivity solution.

Two the platform for processing enterprise voice interactions in meetings and calls in terms of when Sal mentioned that we recently scored significant win with an Israeli government branch for large number of users. Additionally, we are gearing up towards a cloud based multi tenant so first the service application with.

Often sold on a capex basis at that time, we had benefited mainly from increased volume of calls going into the contact centers during the pandemic.

Fast forward to today, our growth vectors are multifaceted.

Benefiting not only from increasing customer experience call volume, but also product innovation and introduction in conversational AI, particularly our volcker CIC service offering.

Full generative AI integration, which is expected for Jay early next year.

Now to the geopolitical risks.

Clearly the heavy R&D investment we have made in these emerging areas over the past couple of years are now starting to bear fruit wherever they see click to call voice AI connect.

Situations before I conclude I'd like to briefly address the impact on the operation from a war and recent developments in Israel.

As a global organization, providing sales support and maintenance spending all major geographies, we have not seen any material impact short term or long term disruption from this conflict.

Those platforms are among the new sources of growth.

This transformation for our customer experience business is not only improve the percentage of recurring mix, but also added additional growth drivers, which ultimately should position. This segment for more sustainable long term growth.

There are.

There have not been any delays in our logistical challenges. It's our operational systems are cloud based we are should solid business continuity.

At this stage I should mention that Microsoft teams.

Around 10% of overall employees in Israel, mostly in R&D position have been called up to the army duty.

And Microsoft business account for almost two thirds of our quarterly business, while CX now contribute about 20%.

Side from few weeks delaying small number of projects in R&D Theres no impact to our productivity for the rest of the employees are based in Israel work is conducted in hybrid mode to ensure everyone's safety and security today I'm heartened by the fact that all of our employees and families are safe.

Lets move to discuss our recently introduced <unk> platform for the Microsoft teams environment.

Since the announcement of Microsoft teams certification for lightweight AI first steams fixed platform, we've seen a step up in customer interest and engagements.

I would like to state that our hearts.

The success with our Ccs offering is having a pull through effect on the rest of our conversational AI portfolio. In particular are you know are a generative AI based value add solution, let's talk about our recent contract win that demonstrates our success in diversifying our revenue streams beyond authors.

<unk> are resolved.

We're impacted by these terrorists attack reopened pray for the full recovery of those who were wounded and for the safe return of those we're still missing we wish for days of long lasting peace in the region and around the world.

To wrap up my.

Additional business of selling session border controls and connectivity.

Presentation of the last six months, we have navigated well in an ongoing difficult macro environment definitely balancing the achievement of shows two milestones, while maintaining laser focus on our long term transformation to a software and services company.

This win relates to have a very large auto service firm with broad distribution of local affiliates across.

The United States the customer is on a legacy platform routing in from incoming customer calls from centralized offline to appropriate local branch.

In the short term, we have accelerated growth in key strategic areas of our business Microsoft teams phone comprehensive voice solution.

Working closely with a tier one system integrator, we were recently selected to provide our conversational IV our system in a deal was over a million a total contract value over the next 36 months.

Our customer experience and conversational AI and successfully executed on cost saving program, both of which have contributed to significant expansion in our margins in third quarter at the same time, which is the all of this we did not lost sight of longer term objective of expanding our total addressable market.

The significance of this deal is twofold. One this is one of the largest startup contract value contracts in Norfolk, a CFC products to date. This year, we think a very steep increase in bookings in that line.

So for the accomplishments include.

One gained significant traction into the unified communications space with U S. Federal agencies, a vertical that we've previously pursued only opportunistically and second successfully transferred the CX segment into a dynamic business with multifaceted growth drivers. These developments backed by <unk>.

Second when fully implemented the 400 concurrent channels to be deployed demonstrates.

The ability of the Vulcan safety platform, which should better position us to target progressively larger deal opportunity and third it will demonstrate the flexibility of the platform as customers can purchase the lightweight ccs system, including conversational AI or I V or on a standalone basis.

Our business, leading indicators such as pipeline remaining robust give us increasing confidence in returning the company to top line growth with ongoing operation leverage.

Now moving to our voice AI connect platform.

Improvements in 2024 and with that I have concluded my presentation for the session.

A major communication platform as a service customer recently unveiled an innovative new service powered by our voice AI connect solution, which enables its enterprise and customers to expedite rollout of virtual agents, thereby driving productivity improvements and cost savings our solution.

Okay.

Thank you very much we will now be conducting our question and answer session. If you would like to ask a question. Please press star.

One on your phone keep happening now.

Formation time will indicate that your line is in the queue. You May press star two if you would like to remove your question from Nicky participants.

<unk> seamless backend integration and connection to both threat frameworks contact centers and to the sea bass customer set.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the keys.

Separately, we recently received from a multinational health care company large follow on purchase so far voice AI connect solution, providing connectivity services to various conversational AI platforms in support of virtual agents and virtual assist use cases this.

Well see poll for any questions.

Thank you. Your first question is coming from Ryan Macwilliams of Barclays. Brian Your line is live.

This customer now it's over 1 million dollar annual recurring revenue to RT codes is an early adopter of conversational AI, who we believe that the advent of generative AI can help accelerate time to market of this technology and look forward to working with other customers in their journey to drive productivity.

Hey, Thanks for taking my question and congrats to you on the Oracle team for the strong execution during this difficult period.

Products like Microsoft co pilot or enterprise could drive more enterprise customers to put their communications on Microsoft teams and that in turn to utilize your solution that article to help them do that for things like voice.

Movements.

Lastly, I'll speak about our meeting insight solution, we see ramping interest in our platform for handling meetings and calls across the organization. Among those functions recording transcription analytics sharing distribution and archiving to date with tens of new accounts onboard.

Yes. Thank you Ryan Yeah. Indeed, there is that is the play in and I believe you know justice Microsoft thinks that you know.

Moving from one telephony solution partner like in the past like could be Cisco avaya and anyone else into teams.

Two the platform for processing enterprise voice interactions in meetings and calls in terms of when sell mention that we recently scored a significant win with an Israeli government branch for large number of users. Additionally, we are gearing up towards a cloud based multi tenant so first the service application with.

It will be really desirable mainly if on top of teams you can provide higher valued applications and this is indeed, the world's copilot provides and this is indeed, what you were trying to do with our.

Values of voice of their application right I mean look I see I see is a contact center and or IV are on top of a team's fone.

Full generative AI integration, which is expected for Jay early next year.

Now to the geopolitical risks.

Same goes for meeting inside same goes for smarter. So yeah, I definitely believe that with co pilots, becoming useful and in our country.

Situations before I conclude I'd like to briefly address the impact on the operation from a war and recent developments in Israel <unk>.

As a global organization, providing sales support and maintenance spending all major geographies.

Contributing to our gaining more insight into the phone system and voice interaction.

We have not seen any material impact short term or long term disruption from this conflict.

You know, resulting from it yes that will definitely help in the future to the grocer for Microsoft teams phones.

There are.

There have not been any delays in our logistical challenges. It's our operational systems are cloud based we are assured solid business continuity, Iran, 10% of overall employees in Israel, mostly in R&D position have been called up to the army duty is.

Excellent and then you guys have.

Pretty.

Strong exposures in terms of facing off against the macro with.

Federal customers in large enterprises.

Time to Microsoft for things that I think I've been a little more resilient at least so far.

During this earning season as we talk to some of your largest customers or potential customers. What are they saying right now about next year like do they think they can grow next year or are they still.

Side from few weeks delaying small number of projects in R&D Theres no impact to our productivity for the rest of the employees based in Israel work is conducted in hybrid mode to ensure everyone's safety and security today I'm heartened by the fact that all of our employees and families are safe.

Because they are on better footing being more enterprise.

We're comfortable continuing with a.

Large enterprise bluffing deployments, just wanted to kind of hear how they're thinking about their budgets and their place in the macro at this point.

I would like to say that our hearts.

<unk> are resolved.

Yeah, I'm I'm less in in a direct touch and quite frankly, we deeply you know looking to make 2003 as successful.

We're impacted by these terrorist attack reopened pray for the full recovery of those who were wounded and for the safe return of those we're still missing.

Four days of long lasting peace in the region and around the world.

And if not yet I mean, we we entering our planning phase normally are in November and December we can.

To wrap up my.

Presentation of the last six months, we have navigated well in an ongoing difficult macro environment definitely balancing the achievement of short term milestones, while maintaining laser focus on our long term transformation to a software and services company.

Though judged by their actions and you know from what we can see.

I think definitely Microsoft teams is an essential platform.

All four are collaborating both.

You know on Prem and in remotely and I think it is really is that they will do exactly what you know you just answered on the previous questions. They will simply look to enhance their productivity definitely generative AI will.

In the short term, we have accelerated growth in key strategic areas of our business Microsoft teams phone comprehensive voice solution.

Our customer experience and conversational AI and successfully executed on cost saving program, both of which have contributed to significant expansion in our margins in third quarter at the same time, which is the all of this we did not lost sight of longer term objective of expanding our total addressable market.

We'll be there to drive more Oh voice based.

Software applications so.

We have not seen a decline I'm not aware of them you know substantial uptake.

So for the accomplishments include one gained significant traction into the unified communications space with U S. Federal agencies, a vertical that we've previously pursued only opportunistically and second successfully transferred the CX segment into a dynamic business was not defensive growth driver.

Please see the business continuing developing I mean, Microsoft will grow for us this year around the 10 ish 10, 12% and we expect to see that next year and I think that the increasing maturity and more value from applications will definitely help to drive.

These developments backed by core business trading indicators, such as pipeline remaining robust give us increasing confidence in returning the company to top line growth with ongoing operation leverage improvements in 2024 and with that I've concluded my.

We will.

Definitely help to drive usage of.

The system so.

No no decrease.

You know modest increase.

I appreciate it that's all looking for okay.

The presentation for the session.

Thank you very much. Your next question is coming from Greg.

Okay.

Thank you very much we will now be conducting a question and answer session.

Of Sidoti and company your line is live.

Good morning.

You would like to ask a question. Please press star one on your phone keep a.

I appreciate the.

The improved momentum or execution, you had quarter over quarter, but can you just remind us what what what is the primary drivers of the year over year decline, particularly around I guess on the product side of the.

Time will indicate that Youre line is in the queue. You May press star two if you would like to remove your question from Nicky.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the keys Baseball's amendment wealthy poll for any questions.

The business is.

<unk>.

Give us a little bit more color on the.

The primary drivers of the year over year decline in I guess.

Thank you. Your first question is coming from Ryan Macwilliams of Barclays. Brian Your line is live.

The outlook for getting back to revenue growth.

Yes. It has some good planning lately with the split so far our business between enterprise and service provider, Yes, we can see and definitely in third quarter, we've seen that more than before enterprise businesses is well only some.

Hey, Thanks for taking my question and congrats to you and the Oracle team for the strong execution. During this difficult period, Shanghai do you think products like Microsoft co pilot or enterprise could drive more enterprise customers to put their communications all Microsoft teams and then in turn utilize.

Growth and we have not seen any you know except for a slight decrease in the first scoring in Microsoft the rest of the year, we see you know growth.

Your solutions erotica to help them do that for things like voice.

The other side of the business, which is service provider really suffers badly give you. Some rough numbers. We are looking on the overall 2023, you know take one line are the service provider CPE, a weird reached about $40 million level of revenue last year. This year.

Yeah.

Yes. Thank you Ryan yes. Indeed, there is that is the play in and I believe you know justice Microsoft thinks that you know.

Moving from one telephony solution partner like in the past like could be Cisco avaya and anyone else into teams.

We do not expect more than $30 million.

We'll be really desirable mainly if on top of teams you can provide higher valued applications and this was indeed the word copilot provides and this is indeed, what you were trying to do with our <unk>.

So the major decrease in product value comes from product. There you know use by service provider, namely gateways and service provider and MSB are also there was an issue of inventories of five defaults, which due to you know high interest rates.

Failure of voice of their application right I mean look I see I see is a contact center in or IV are on top of our team's fone.

No.

Same goes for meeting inside same goes for smarter. So yeah, I definitely believe that with co pilots, becoming useful and.

Drove ponderous to.

Hold less inventories. However, let me give you want perspective that we have not mentioned so far about the you know say the declining gateways and MSB are you know as the world moves from a P. S into IP increasingly you know I would tell you that you know are a longer term.

Contributing to gaining more insight into the phone system and voice interaction.

You know, resulting from it yes that will definitely help in the future to the growth of our Microsoft team's fone.

Excellent and you guys have a.

Since we assumed that in the next three to five years, we will see a decline in sales of other products are mainly gateways and MSB are at but that was primarily based on the Saar that the process would be linear.

Pretty.

Strong exposures in terms of facing off against the macro with.

Federal customers in large enterprises.

Kind of Microsoft where things that I think I have been a little more resilient at least so far.

During this earnings season, as you talk to some of your largest customers or potential customers. What are they saying right now about next year like do they think they can grow next year or are they still.

Unfortunately due to the.

Global crisis in 2023.

This process has accelerated and I believe that we have seen the majority of that decline occurring already.

Because they're on better footing being more enterprises more comfortable continuing with a.

Large enterprise sloughing deployments, just want to kind of hear how they're thinking about their budgets and their place in the macro at this point.

In the first three quarters of 2023 so.

Basically I think what we should have went through the next three to five years.

Yeah, I'm I'm less in in a Zurich touch and quite frankly, we deeply you know looking to make 2003 successful.

You know substantial part of it we got we went through in 2023. So that's that's what drove our product decline also IP phones. I think you know I mentioned, the the high cost of inventory.

Not yet I mean, we we entering our planning phase normally are in November and December.

But we're seeing a comeback one area that we have not touched and mentioned just briefly the MTR the meeting rooms, and we do expect we have invested heavily in the last two years to prep it.

We can.

So judge by their actions and our you know from what we can see.

<unk>.

Think definitely Microsoft teams is an essential platform.

And we believe that we will start to see the benefit of it already in 2024. This is a huge market. We know there was a big push by Microsoft into the MTR space in 2022, which are subsidized a bit because of the inflation.

For collaborating both on Prem and in remotely and I think it is really.

Will do exactly what you just answered on the previous questions. They will simply look to enhance their productivity definitely generative AI.

The high inflation and interest rates.

We'll be there to drive more a voice based.

We which affect you know hardware cost.

Our fully if we see that changing somewhere in mid 'twenty four or towards the end of the year I believe that already in 'twenty five we'll see big ramp up in that so we will probably go up in products.

Software applications so.

We have not seen a decline I'm not aware of.

You know substantial.

I will take a while.

Please see the business continuing developing I mean, Microsoft should grow for us this year around 10 ish 10, 12% and we expect to see that.

Okay. Thank you and you mentioned I guess the.

The hardware mix on the the noncore piece and I guess, you just kind of discuss some of that but in the core on the enterprise side, what's the mix of.

Next year, and I think that the increasing maturity and more value from applications will definitely help to drive.

Hardware versus software.

Definitely help to drive usage of.

On that part of the business, particularly around our species.

The system so.

Yeah.

No no decrease.

Good news on that you know SBC as a major line for us.

You know modest increase.

I appreciate that's a little more okay.

Daniel level of revenues for sbcs give or take about $120 million now we.

Thank you very much. Your next question is coming from Greg.

We constantly move more to sulfur so many for new SBC solution. You know are cloud based and even more than that you know while in a small branch offices you need to use some hardware we know in a process of moving from.

<unk> Company, Greg Your line is live.

Good morning.

I appreciate the.

The improved momentum or execution, you had quarter over quarter, but can you just remind us what what what is the primary drivers of the year over year decline, particularly around I guess on the product side of the.

Proprietary designed hard worried that we engage with in the past, we now moving into using sulfur that's embedded in service we purchased from other parties. So all in all majority of for SBC is going to become software base, and and and and that's the trend there.

The business is.

Give us a little bit more color on that.

The primary drivers of the year over year decline in I guess.

The outlook for getting back to revenue growth.

Yes. It has some good planning lately with the split so far our business between enterprise and service provider, Yes, we can see and definitely in the third quarter, we've seen that more than before enterprise businesses is well known as some <unk>.

Therefore, you know the very high gross margin that we will enjoy.

Okay.

Thank you.

Sure Hi, much.

Your next question is coming from Ryan Koontz of Needham <unk> Company Ryan Your line is live.

Growth and we have not seen it.

Fab four slides crazy in the first scoring in Microsoft.

Brian Your line is live.

Rest of the year, we see you know.

Growth.

The other side of the business, which is service provider really suffers badly give you. Some rough numbers. We you know looking on the overall 2023.

Oh, sorry about that my bad I was muted.

I'm back.

Nice quarter I wanted to see if you could unpack the gross margin strength.

Well nice job you did there.

Take one line the service provider CPE.

You talked about product mix in software and services.

We reached about 40 million lateral of revenue last year. This year, we do not expect more than $30 million.

The shift to subscription and software are kind of key.

Key driver there on gross margins or is there more to understand if you could help us unpack that thank you.

So the major decrease in product value comes from product. There you know use by service provider, namely gateways and service provider and MSB are.

Alright, no. It's it's mainly relates to the improvement in our.

Service revenues, which is now about 50% of total revenues.

Also there was an issue of inventories of 50 funds, which due to you know high interest rates you know drove partners too.

<unk>.

<unk>.

And also relate to more of a software as part of the product.

<unk> gross margin.

Hold less inventories. However, let me give you one perspective that we have not mentioned so far about the.

Product shop dimension, the SBC was very strong this quarter.

You know say the declining gateways and MSB are.

In a better gross margin than the <unk>.

As the world moves from PSTN to IP increasingly you know I would tell you that you know are our longer term prints, we assumed debt in the next three to five years, we will see a decline in sales of hardware products, mainly gateways and MSB are.

Other.

Products such as the MSB are in IP phones, so it's mainly relates to the product mix.

Got it that's helpful neuron and.

With regards to that.

The software services revenue, 50% is there further upside in margins in that business as you continue to scale or do you feel like you really achieved.

And but that was primarily based on the Saar that the process would be linear.

Your goals there within that that mix.

Unfortunately due to the.

And that margin.

Global crisis in 2023.

And now if we look at the supplemental deck that we published with our results on our website you will see that our long term target for gross margin is 65% to 68%. So there is.

This process has accelerated and I believe that we have seen the majority of that decline occurring already in.

In the first three quarters of 2023 so.

Basically I think what we should have went through the next three to five years part you.

More room for improvement in gross margin.

Great. Thanks, and then one follow up I could on the on the AR AI products and your kind of strategy around pricing and.

You know substantial part of it we got we went through in 2023. So that's that's what drove our product decline also IP phones. I think you know I mentioned, the the high cost of inventory.

Maybe your cost advantages you have from bringing that technology in house.

But we're seeing a comeback one area that we have not touched and mentioned just briefly the MTR the meeting rooms, and we do expect we have invested heavily in the last two years to prep it.

Considering the different.

Commercial strategies out there on one side, you've got Microsoft co pilot charging a very hefty premium for their capabilities, you've got zoom who's.

Essentially given away.

And we believe that we will start to see.

Whats your approach to your AI.

The fact that the benefit of it already in 2024. This is a huge market.

AI feature set with regards to costs.

And then how do you cost compared to maybe others that are dependent on outsourced.

We know there was a big push by Microsoft into the MTR space in 2022, which are subsidized a bit because of the inflation to the high inflation and interest rates.

Using outsourced models. Thanks.

Which affect you know hardware cost.

Okay. Thank you Ryan I think this was a very interesting question that I'll tell you you know usually when you go to market you want to penetrate the market you know causes less import.

Hopefully if we see that changing somewhere in mid 'twenty four or towards the end of the year I believe that already in 'twenty five we will see a big ramp up in that so we will probably go up in products.

So you drive them with you know.

Let's call it quick and dirty using many cloud based services that may cost a bit.

Okay. Thank you and you mentioned I guess the.

The hardware mix on the noncore piece I guess, you just kind of discuss some of that but in the core on the enterprise side, what's the mix of.

Once you become successful.

And cost becomes an issue I think you need to include in your strategy the ability to move.

Of hardware versus software.

Two solution, including generative AI solution that.

That part of the business, particularly around our species.

That will owned by yourself.

There's a huge.

Yeah.

Good news on that SBC as a major line for us.

[laughter] fast first running for the in the industry that provides them you know a lot of you know open source solutions for generative AI in our our plans for the future and you know we definitely would like to decrease cost base on our solution developed internally.

The annual level of revenues for sbcs give or take about $120 million now.

We constantly move more to sulfur so.

Many for a new SBC solution, you know are cloud based and even more than that you know while in a small branch offices you need to use some hardware we know.

I would also add that due to the issue of security you will find many large.

Corporation enterprises in an entity as government entities et cetera that are forbidden from using you know a cloud solution and therefore.

In the process of moving from proprietary designed hard worried that we engaged with in the past we now moving into using sulfur that's embedded in service we perched.

Mastering those technologies and bringing them.

Purchase from other parties. So all in all majority of for SBC is going to become sofa base and that's the trend and therefore, you know the very high gross margin that we will enjoy.

Into your development team and potentially developing on Prem solution.

The will resolve both in you know, obviously security, but then with substantially lower costs. So one needs to navigate among all of those options and find out the one that's best.

Okay.

Yes.

Sure very much.

Your next question is coming from Ryan Koontz of need and company Ryan Your line is live.

Suitable for them.

That's great. Thanks, Dan. Thanks, that's all I have thank you.

Sure. Thank you very much. Your next question is coming from.

Ryan Your line is live.

<unk> from Jefferies.

Line of life.

Oh, sorry about that my bad I was muted.

Hey, guys. This is actually belief at Simmons on for some odd.

Hi.

Nice quarter I wanted to see if we could unpack the gross margin strength, Oh, well nice job you did there.

You guys talked about how our leading indicators robust new business bookings would have grown substantially over over last year, maybe double clicking and asking another in another way you talked about last quarter, how bookings experienced a measurable improvement over Q1 in terms of an update on that bookings track over the course of Q3.

You talked about product mix in software and services.

The shift to subscription and software.

A key driver there on gross margins or is there more to understand if you could help us unpack that thank you.

How did that compare to Q1, and Q2 and kind of a follow up can you can you kind of rank order and speak to the products and offerings that are driving that bookings and pipeline activity.

Hi, Brian No, it's mainly relates to the improvement in our.

Service revenues, which is now about 50% of total revenues.

And maybe the products and offerings.

Maybe a little less successful and then potentially a headwind to that activity.

And.

And also relate to more of a software as part of the product.

Right. Yeah. So you know in our conversation I would you know our split the discussion into two we have you know currently.

<unk> gross margin.

<unk> shop dimension, the SBC was very strong this quarter.

Currently two lines, which are already up and running and generating revenues and profits, but are I would say mildly and scope of you know and those are you know the smart pen and voice and connect.

In a better gross margin than the.

The other.

Products such as the MSB are in IP phones, so it's mainly relates to the product mix.

Do have a major focus and emphasis on too fast developing business lines in this conversational AI and those would be vocal CIC a secrecy platform for teams and second one is the meeting SaaS platform for enterprise voice interaction processing.

Got it that's helpful and neuron in width.

With regards to that.

The software services revenue, 50% is there further upside in margins in that business as you continue to scale or do you feel like you really achieved.

Your goals there within that that mix.

And that margin.

We definitely see.

Maturity is driving the evolution of these obviously they need in the market. So.

And if we look at the supplemental deck that we published with our results on our website you will see that our long term target for gross margin is 65% to 68%. So there is.

Booking is growing definitely due to the fact that there's ink crew is need in the market for this type of solution and we're glad to be among the front runners who can provide it.

More room for improvement in gross margin.

Great. Thanks, and then one follow up I could on the on the AI products and your kind of strategy around pricing and.

Got it and then if I can sneak a second one in there I want to ask Brian's question, maybe a different way.

Maybe your cost advantages you have from from bringing that technology in house.

How should we think about the sustainability of gross margins over the next call. It a handful of quarters should we expect a lot of quarter over quarter variability or should we expect that that the product mix.

Considering the different.

Promotional strategies out there on one side, you've got Microsoft co pilot charging a very hefty premium for their capabilities, you've got zoom who's.

It will be generally similar or potentially improving compared to the Q3 the quarter you just reported in subsequent quarters.

Essentially giving it away.

What's your approach to your AI.

AI feature set with regards to Carsten.

Right.

And then how do you cost compared to maybe others that are dependent on outsourced.

We haven't done yet.

You know a detailed analysis, but I will tell you that basically.

Using outsourced models.

I think we've seen some of the worst in.

In the hardware side of the business, mainly the service for the CPA and the phones.

Okay. Thank you Ryan I think this was a very interesting question that I'll tell you you know usually when you go to market, we want to penetrate the market.

So we do not expect.

Those lines to grow.

And therefore, you know the hardware part of the mix will not affect gross margins, we see growth coming from you know silver and services related business, mainly in Microsoft teams phone in customer experience in conversational AI, all our majority which is sulfur so.

Cost is less important so you drive them with you know.

Let's call it quick and dirty using many cloud based services that may cost a bit.

Once you become successful as any.

Cost becomes an issue I think you need to include in your strategy the ability to move.

I do expect gradual.

Growth going forward and do you know.

Two solution, including generative AI solution.

You know our EM.

Long term financial model, we basically try to basically target the range of 65 to 68 or even you know I would dare to say then into three years from today will reach the 70, so we will not see big.

That will owned by yourself.

There's a huge.

Fast fast running forward in industry that provides.

Lot of open source solutions for generative AI in our plans for the future and you know we definitely would like to decrease cost base on our solution developed internally I would also add that due to the issue of security you will find me.

Uh huh.

Change in the trend. So we I think we would see gradually increase towards the 68 and thereafter, so that's what we plan.

Many large.

Corporation enterprises, and entities government entities et cetera.

Got it thank you very much.

Keith just a reminder.

That are forbidden from using you know a cloud solution and therefore.

The remaining question you press Star one on your phone keypad now.

Mastering those technologies and bringing them into.

Okay that appears to be the end of the question session I'm going to hand back over to the management for any closing remarks.

Into your development team and potentially developing on Prem solution.

The will resolve Bozian, obviously security, but then with <unk>.

Thank you operator, I would like to thank everyone, who attended our conference call today.

Substantially lower costs, so one needs to navigate among all those options and find out the one that's best.

On the heels of good third quarter and solid pipeline this quarter fourth quarter, we have high confidence in our ability to successfully expand our business this year and in coming years, we look forward to your participation in our next quarterly conference call. Thank you all.

Super Bowl for them.

That's great. Thanks, that's all I have thank you.

Sure. Thank you very much. Your next question is coming from Samad Samana from Jefferies. Your line is life.

Have a nice day.

Thank you very much. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.

Hey, guys. This is actually believe at Simmons on for some odd.

You guys talked about how our leading indicators robust new business bookings that have grown substantially over over the last year, maybe double clicking and asking another in another way you talked about last quarter, how bookings experienced a measurable improvement over Q1.

Or an update on that how did bookings track over the course of Q3.

How does that compare to Q1, and Q2 and kind of a follow up can you can you kind of rank order and speak to the products and offerings that are driving that bookings and pipeline activity.

And maybe the products and offerings that had been maybe a little less successful and then potentially a headwind to that activity.

Right. Yeah. So you know in our conversation I would you know our split the discussion into two we have.

Currently two lines, which are already up and running and generating revenues and profits, but are I would say mildly and scope of <unk>.

And those are you know the smart ethane and voice and connect.

Do have a major focus and emphasis and too fast developing business plans in this concession AI and those would be volcker CIC a secrecy platform for teams and second one is the meeting SaaS platform for enterprise voice interaction processing.

But we definitely see.

Maturity is driving the evolution of this obviously the need in the market. So.

Booking is growing definitely due to the fact that the ink crew is need in the market for this type of solution and we're glad to be among the front runners who can provide it.

Got it and then if I can sneak a second one in there I want to ask Brian's question, maybe a different way.

How should we think about the sustainability of gross margins over the next call. It a handful of quarters should we expect a lot of quarter over quarter variability or should we expect that the product mix.

It will be generally similar or potentially improving compared to the Q3 the quarter you just reported.

The second quarters.

Right.

We haven't done yet.

A.

Detailed analysis, but I will tell you that basically.

I think we've seen some of the worst.

In the hardware side of the business, mainly the service for the CPA and the phones.

So we do not expect that.

Those lines to grow.

And therefore, you know the hardware part of the mix will not affect gross margins, we see growth coming from software and services related business, mainly in Microsoft teams phoning in customer experience in conversational AI, all our majority which is software so.

I do expect gradual.

Growth going forward and.

In RF.

Long term financial model, we basically tried to basically target the range of 65 to 68 or even you know I would dare to say then into three years from today, we will reach the 70, so we will not see big.

Uh huh.

Change in the trends.

I think we would see gradually increase towards the 68 and thereafter, so that's what we plan.

Got it thank you very much.

Thank you just a reminder, if there are any remaining question you press star one on your phone keep happening.

Okay that appears to be the end of the question session I'm going to hand back over to the management for any closing remarks.

Thank you operator, I would like to thank everyone, who attended our conference call today on the heels of good third quarter and solid pipeline. This quarter first quarter, we have high confidence in our ability to successfully expand our business this year and in coming years, we look forward to your participation in our next quarterly.

Conference call. Thank you all.

Have a nice day.

Thank you very much. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.