Q2 2024 AudioCodes Ltd Earnings Call
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Operator: Good morning, ladies and gentlemen. Please remain on the line. Your conference will begin in just a moment.
Operator: Your conference will be, Pete Newton, AudioCodes, Shabtai Adlersberg, Pete Newton, AudioCodes, Shabtai Adlersberg, [inaudible] [inaudible] Good morning everyone and welcome to the AudioCodes second quarter 2024 earnings call. At this time, all participants are in a listen-only mode, and we will be opening for questions following the presentation. If anyone should require Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Roger Chuchen, Investor Relations at IBM. Roger The Floyd: Thank you, operator.
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Speaker Change: Good morning everyone and welcome to the AudioCodes second quarter 2024 earnings conference call.
Speaker Change: At this time all participants are in a listen-only mode and we will be opening for questions following the presentation. If anyone should require operator assistance during this conference, please press star zero on your phone keypad.
Speaker Change: Please note this conference is being recorded. I will now turn the conference over to your host Mr Roger Chuchen, Investor Relations at AudioCodes. Roger, the floor is yours.
Roger L. Chuchen: Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer, and Niran Baruch, Vice President of Finance and Chief Financial Officer. Before we begin, I'd like to remind you that the information provided during this call may contain forward-looking statements relating to AudioCode's business outlook, future economic performance, product introductions, plans, and objectives related thereto, and statements concerning assumptions made or expectations as to any future events, conditions, performance, or other matters are forward-looking statements as the term is defined under U.S. federal securities law. Forward-looking statements are subject to various risks and uncertainties and other factors that could cause actual results to differ materially from those stated in such statements.
Roger L. Chuchen: Thank you, Operator. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer, and Niran Baruch, Vice President of Finance and Chief Financial Officer.
Roger L. Chuchen: These risks, uncertainties, and factors include, but are not limited to, the effect of global economic conditions in general and conditions in AudioCode's 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 AudioCode's and its customers' products and markets, timely product and technology development upgrades, and the ability to manage changes in market conditions as needed, possible need for additional financing, the ability to satisfy covenants in the company's loan agreements, possible disruptions from acquisitions, the ability of AudioCode to successfully integrate the products and operations of acquired companies into AudioCode's business. Possible adverse impact of the COVID-19 pandemic on our business and result of operations.
Speaker Change: Before we begin, I'd like to remind you that the information provided during this call may contain forward-looking statements relating to AudioCode's business outlook.
Speaker Change: Future economic performance, product introductions, plans, and objectives related thereto, and statements concerning assumptions made or expectations as to any future events, conditions, performance, or other matters are forelooking statements as the term is defined under U.S. federal securities law.
Speaker Change: Forelooking statements are subject to various risks and uncertainties and other factors that could cause actual results that differ materially from those stated in such statements.
Speaker Change: These risks, uncertainties, and factors include, but are not limited to,
Speaker Change: The Effect of Global Economic Conditions in General and Conditions in Auto Codes, Industry, and Target Markets in Particular.
Speaker Change: Shifts in Supply and Demand.
Speaker Change: market acceptance of new products and the demand for existing products, the impact of competitive products and pricing on AudioCodes and its customers' products and markets.
Speaker Change: Timely Product and Technology Development Upgrades and the Ability to Manage Changes in Market Conditions as Needed. Possible Need for Additional Financing. The Ability to Satisfy Covenants in the Company's Loan Agreements.
Speaker Change: possible disruptions from acquisitions.
Speaker Change: the ability of AudioCodes to successfully integrate.
Speaker Change: the products and operations of acquired companies into AudioCode's business.
Roger L. Chuchen: The effects of the current terrorist attacks by Hamas and the war and hostilities between Israel and Hamas and Israel and Hezbollah, as well as the possibility that this could develop into a broader regional conflict involving Israel and other parties, may affect our operations and may limit our ability to produce and sell our solutions. Any disruption in our operations caused by the obligations of our personnel to perform military service as a result of current or future military actions involving Israel and other factors detailed in AudioCodes' filings with the U.S. Securities and Exchange Commission AudioCodes assumes no obligation to update this information.
Speaker Change: possible adverse impact of the COVID-19 pandemic on our business and result of operations. The effects of the current terrorist attacks by Hamas and the war and hostilities between Israel and Hamas and Israel and Hezbollah, as well as the possibility that this could 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.
Speaker Change: 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.
Audicode: and other factors detailed in AudioCodes filings with the U.S. Securities and Exchange Commission.
AudioCodes: AudioCodes assumes no obligation to update this information. In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share.
AudioCodes: AudioCodes has provided full reconciliation of the non-GAAP net income and net income per share to its net income and net income per share according to GAAP in the press release that is posted on its website. Before I turn the call over to management, I'd like to remind everyone that this call is being recorded and archived webcasts 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 Shabtai.
Roger L. Chuchen: In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share. AudioCodes has provided full reconciliation of the non-GAAP net income and net income per share to its net income and net income per share according to GAAP in the press release that is posted on its website. Before I turn the call over to management, I'd like to remind everyone that this call is being recorded, and archived webcasts will be made available on the investor relations section of the company's website at the conclusion of the call. With that said, I'd like to turn the call over to Shabtai. Shabtai, please go ahead.
Shabtai Adlersberg: Thank you, Roger. Good morning, good afternoon, everybody. I would like to welcome you all to our second quarter 2024 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance of AudioCodes. Niran will start off by presenting a financial overview of the Corps. I will then review the business highlights and summary for the Corps and discuss trends and developments in our business and industry. We will then turn it into a Q&A session. Niran.
Shabtai Adlersberg: Shabtai, please go ahead.
Shabtai Adlersberg: Thank you, Roger. Good morning, good afternoon, everybody. I would like to welcome all to our second quarter 2024 conference call.
Shabtai Adlersberg: with me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance of Audiqodes.
Shabtai Adlersberg: Niran will start off by presenting a financial overview of the Corps. I will then review the business highlights and summary for the Corps, and discuss trends and developments in our business and industry. We will then turn it into the Q&A session. Niran?
Niran Baruch: Thank you, Shabtai, and hello, everyone. Before I start my formal remarks, I would like to remind everyone that, in conjunction with our Earlink release this morning, we will post shortly on our investor relations website an Earlink Supplemental Date. 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.
Niran Baruch: Revenues for the second quarter were $60.3 million, an increase of 0.5% over the $6 million reported in the second quarter of last year. Services revenues for the second quarter were $32 million, up 12.3% over the year-ago period. Services revenues in the second quarter accounted for 53% of total revenues. The amount of deferred revenues as of June 30, 2024 was $80.3 million compared to $77.7 million as of June 30, 2023. Revenues by geographical region for the quarter were split as follows: North America 47%, EMEA 35%, Asia Pacific 13%, and Central and Latin America 5%.
Niran Baruch: Thank you, Shabtai, and hello, everyone. Before I start my formal remarks, I would like to remind everyone that in conjunction with our earnings released this morning, we will post shortly on our investor relations website an Earnings Supplemental Deck.
Niran Baruch: Our top 15 customers represented an aggregate of 56% of our revenues in the second quarter, of which 38% was attributed to our nine largest distributors. Gap results are as follows. Gross margin for the quarter was 65.5%, compared to 64.1% in Q2 2023. Operating income for the quarter was $4.9 million, or 8.2% of revenue, compared to operating income of $2.3 million or 3.8% of revenue in Q2 2023. EBITDA for the quarter was $6.2 million, compared to EBITDA of $2.9 million for Q2 2023. Net income for the quarter was $3.8 million, or $0.12 per diluted share, compared to net income of $1.1 million, or $0.03 per diluted share, for Q2 2023. The non-GAAP results are as follows.
Niran Baruch: On today's call, we will be referring to both GAAP and non-GAAP financial results.
Niran Baruch: Non-GAAP gross margin for the quarter was 65.8%, compared to 64.5% in Q2 2023. Non-GAAP operating income for the second quarter was $7.2 million, or 11.9% of revenue, compared to 5.7 million or 9.5% of revenue in Q2 2022. Non-gap EBITDA for water was $8.3 million compared to non-gap EBITDA of $6.2 million in Q2 2023. Non-GAAP net income for the second quarter was $5.5 million, or $0.18 per diluted share, compared to $5.1 million, or $0.16 per diluted share, in Q2 2023.
Niran Baruch: 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.
Niran Baruch: Revenues for the second quarter were $60.3 million, an increase of 0.5% over the $60 million reported in the second quarter of last year.
Niran Baruch: Services revenues for the second quarter were $32 million up 12.3% over the year-ago period. Services revenues in the second quarter accounted for 53% of total revenues.
Niran Baruch: The amount of deferred revenues as of June 30, 2024 was $80.3 million, compared to $77.7 million as of June 30, 2023.
Niran Baruch: Revenues by geographical region for the quarter were split as follows. North America 47%, EMEA 35%, Asia-Pacific 13%, and Central and Latin America 5%.
Niran Baruch: Our top 15 customers represented an aggregate of 56% of our revenues in the second quarter, of which 38% was attributed to our 9 largest distributors.
Niran Baruch: Gap results are as follows. Gross margin for the quarter was 65.5% compared to 64.1% in Q2 2023.
Niran Baruch: Operating income for the quarter was $4.9 million or 8.2% of revenues, compared to operating income of $2.3 million or 3.8% of revenues in Q2 2023.
Niran Baruch: EBITDA for the quarter was $6.2 million compared to EBITDA of $2.9 million for Q2 2023.
Niran Baruch: Net income for the quarter was $3.8 million or $0.12 per diluted share compared to net income of $1.1 million or $0.03 per diluted share for Q2 2023.
Niran Baruch: non-GAAP results are as follows. non-GAAP gross margin for the quarter was 65.8% compared to 64.5% in Q2 2023.
Niran Baruch: non-GAAP operating income for the second quarter was $7.2 million or 11.9% of revenues, compared to $5.7 million or 9.5% of revenues in Q2 2023.
Niran Baruch: Non-gap EBITDA for water was $8.3 million compared to non-gap EBITDA of $6.2 million in Q2 2023.
Niran Baruch: Non-GAAP net income for the second quarter was $5.5 million or $0.18 per diluted share compared to $5.1 million or $0.16 per diluted share in Q2 2023.
Niran Baruch: At the end of June 2024, cash, cash equivalents, bank deposits, marketable securities, and financial investments totaled $93.7 million. Net cash used by operating activities was $2.9 million for the second quarter of 2020. Purchase of property and equipment was $8.8 million in the quarter, significantly higher than historical periods related to leasehold improvements related to our new cooperated quarter in Israel. We expect CAPEX to remain elevated in the third quarter, after which we expect this line item to return to historical levels. Day sales outstanding as of June 30, 2024 were 108 days.
Niran Baruch: At the end of June 2024, cash, cash equivalents, bank deposits, marketable securities, and financial investments totaled $93.7 million.
Niran Baruch: Net cash used by operating activities was $2.9 million for the second quarter of 2024.
Speaker Change: Purchase of property and equipment was $8.8 million in the quarter, significantly higher than historical periods related to leasehold improvements of our new cooperated quarter in Israel.
Niran Baruch: We expect CAPEX to remain elevated in the third quarter, after which we expect this line item to return to historical levels.
Speaker Change: Day sales outstanding as of June 30, 2024 were 108 days.
Niran Baruch: In July 2024, we received court approval in Israel to purchase up to an aggregate amount of $20 million of additional ordinary shares. The court approval also permits us to declare a dividend on any part of this amount. This approval is valid through January 1st, 2025. During the quarter, we acquired 116,000 of our ordinary shares for a total consideration of approximately 1.2 million. Earlier this morning, we also declared a cash dividend of $0.18 per share. The aggregate amount of the dividend is approximately $5.5 million. The dividend will be paid on August 29, 2024, to all of our shareholders, off record at the close of trading on August 15, 2024.
Speaker Change: In July 2024, we received court approval in Israel to purchase up to an aggregate amount of $20 million of additional ordinary shares.
Speaker Change: The court approval also permits us to declare a dividend of any part of this amount. This approval is valid through January 1st, 2025.
Speaker Change: During the quarter we acquired 116,000 of our ordinary shares for a total consideration of approximately 1.2 million.
Speaker Change: Earlier this morning, we also declared a cash dividend of $0.18 per share. The aggregate amount of the dividend is approximately $5.5 million. The dividend will be paid on August 29, 2024, to all of our shareholders of record at the close of trading of August 15, 2024.
Niran Baruch: This is Outlook. As it relates to our 2024 financial, we are reiterating our revenue guidance range of $240 to $250 million. On the profitability side, we are adjusting our guidance practice for this year and going forward to non-gap EBITDA from non-gap net income per share. Additionally, effective second quarter 2024, we have adjusted our tax expense presentation as calculated in our non-GAAP earnings per share to include only the tax impact of the non-GAAP adjustment as applicable in relation to the GAAP tax expense.
Speaker Change: With this outlook, as it relates to our 2024 financial, we are reiterating our revenue guidance range of $240 to $250 million.
Speaker Change: On the profitability side, we are adjusting our guidance practice for this year and going forward to non-gap EBITDA from non-gap net income per share.
Speaker Change: Effective second quarter 2024.
Speaker Change: We have adjusted our tax expenses presentation as calculated in our non-GAAP earnings per share to include only the tax impact of the non-GAAP adjustment as applicable in relation to the GAAP tax expense.
Niran Baruch: Prior to this quarter, our practice was to adjust non-cash deferred tax expenses or income as part of our non-gap reconciliation. Specifically, this deferred tax non-gap adjustment derived mainly from the tax expenses recognized due to the realization of the company's net operating losses deferred tax assets. We believe this change in tax expense presentation has no notable impact on the true cash generation of the business.
Speaker Change: Prior to this quarter, our practice was to adjust non-cash deferred tax expenses or income as part of our non-GAAP reconciliation.
Speaker Change: Specifically, this deferred tax non-gap adjustment derived mainly from the tax expenses recognized due to the realization of the company's net operating losses deferred tax asset.
Speaker Change: We believe this change in tax expense presentation has no notable impact on the true cash generation of the business.
Shabtai Adlersberg: With approximately $22 million of U.S. NOLs at the end of the second quarter of 2024, we believe that our actual tax payment will continue to be lower than the gap tax expenses for the foreseeable future. To elevate any potential confusion from the change in tax expense presentation during 2024 and to more readily highlight the cash earnings potential of the business in the future, we believe it is reasonably prudent to provide guidance based on non-GAAP EBITDA in 2024 and for the foreseeable future.
Speaker Change: with approximately 20, 20, 20.
Speaker Change: 2 million of U.S. NOLs at the end of the second quarter of 2024.
Speaker Change: We believe that our actual tax payment
Speaker Change: will continue to be lower than the gap tax expenses for their foreseeable future.
Speaker Change: to elevate any potential confusion.
Speaker Change: from the Change in Tax Expense presentation during 2024.
Speaker Change: and to more readily highlight cash earnings potential of the business in the future, we believe it is reasonably prudent to provide guidance based on non-GAAP EBITDA in 2024 and for the foreseeable future.
Shabtai Adlersberg: On that basis, our non-GAAP EBITDA guidance for 2024 is $33 to $39 million, which is unchanged as implied in the non-GAAP EPS outlook previously provided on our first quarter, 2024 earnings call. This 2024 non-GAAP EBITDA guidance compares to 31 million generated in 2023. I will now turn the call back over to Shabtai. Thank you, Niran.
Speaker Change: On that basis, our Non-Gap EBITDA guidance for 2024
Speaker Change: is $33 to $39 million.
Speaker Change: which is unchanged as implied in the Non-Gap EPS Outlook previously provided on our first quarter, 2024, Earnings Call.
Speaker Change: This 2024 Non-Gap EBITDA guidance compares to $31 million generated in 2023.
Speaker Change: I will now turn the call back over to Shabtai.
Shabtai Adlersberg: I'm pleased to report Soli's second quarter 2024 results, marked by the second consecutive quarter of positive top line growth and ongoing momentum in our Microsoft and conversational AI business with a sequential uptick in the legacy gateway business, with an enterprise business which represents. About 90% of our revenue, our UCAS business continued to perform well, highlighted by Microsoft Teams business up 3.3% year-over-year for the core, and Microsoft Teams live managed services annual recurring revenues growing 35% year-over-year. In the CEX business, the customer experience business, we made progress as planned, and our healthy pipeline continues to support a positive outlook for the second half of the full year 2024.
Shabtai Adlersberg: Thank you, Niran.
Speaker Change: I'm pleased to report Solid Second Core 2020 for results.
Speaker Change: marked by the second consecutive quarter of positive top-line growth and ongoing momentum in our Microsoft and conversational AI business with sequential uptick in the legacy gateway business.
Speaker Change: with an enterprise business, which represents...
Speaker Change: About 90% of our revenue, our UCAS business continues to perform well, highlighted by Microsoft Teams Business App, 3.3% year-over-year for the core, and Microsoft Teams Live Managed Services annual recurring revenues growing 35% year-over-year.
Speaker Change: In the CEX business, customer experience business, we made progress as planned, and our healthy pipeline continues to support a positive outlook for the second half of the full year, 2024.
Shabtai Adlersberg: The conversational AI business revenue was up 10.5% year over year, and bookings grew over 50% year over year. Judging by the success we enjoyed in the development of the emerging conversational AI business in the second quarter and the first half of 2024, provides us with strong conviction with regard to the potential for future success in this area and positions conversational AI as a second strong leg and gross engine for the company next to our Microsoft Live team. Our managed services business continues to evolve to become our key go-to market. The services business grew 12.7% and accounted for 53% of revenue in the second quarter, compared to 47% present in the year ago period.
Speaker Change: Conversational AI business revenue was up 10.5% year over year. Bookings grew over 50% year over year. Judging by the success we enjoyed in the development of emerging conversational AI business in the second quarter and the first half of 2024,
Speaker Change: provide us with strong conviction with regards to the potential of future success in this area, and positions Conversational AI as a second strong leg and growth engine for the company next to our Microsoft Live Teams business.
Speaker Change: Our managed services business continues to evolve to become our key go-to market.
Speaker Change: Services business grew 12.7% and accounted to 53% of revenue in the second quarter, compared to 47%.
Shabtai Adlersberg: What has fueled ongoing momentum in services is our live managed services, which grew about 35% year-over-year and ended the second quarter at $56 million annual recurring revenue, putting us on track to achieve our guidance of $64 to $70 million for exit 2020. Our focus and investment made in recent years are paving our growth for a strong recurring business with strong legs deeply rooted in growing markets such as UCAS, CCAS, and conversational AI The growth of two key business areas has contributed the most to the ongoing growing booking trend. First and foremost, our live business.
Speaker Change: Dissent in the ErgoCore.
Speaker Change: What has fueled ongoing momentum in services is our live managed services, which grew about 35%.
Speaker Change: year-over-year, and ended second quarter at $56 million.
Speaker Change: Annual Recurring Revenue, putting us on track.
Speaker Change: to achieve our guidance of 64 to 70 million exit 2024.
Speaker Change: Our focus and investment made in recent years are paving our growth for a strong recurring business with strong legs deeply rooted in growing markets such as UCAS, CCAS and conversational AI.
Speaker Change: The growth of two key business areas has contributed the most to the ongoing growing booking trends.
Shabtai Adlersberg: Live Teams managed services rely substantially on our live platform, a mature voice services delivery portal and platform with unparalleled unique scale and position for Teams Voice, which provides us an edge in the communications and collaboration market. The strength of live platforms stems from the comprehensive, large-scale of services delivery support. Among these are connectivity services, where we hold about 70% of the market share, contact center services, which were added last year based on our VOCA CIC AI-first contact center for teams, recording, analytics, and inference services, and, nowadays, conversational AI services.
Speaker Change: First and foremost, our live business.
Speaker Change: Live Teams managed services rely substantially on our live platform, a mature voice services delivery portal and platform with unparalleled unique scale and position for Teams Voice, which provides us an edge in the communications and collaboration market.
Speaker Change: The strength of live platforms stems from the comprehensive, large-scale of services delivery supports.
Speaker Change: Among these are connectivity services, where we hold about 70% market share.
Speaker Change: Contact Center Services, which were added last year based on our VOCA-CIC AI-first Contact Center for Teams. Recording, Analytics, and Inference Services. And nowadays, Conversational AI Services.
Shabtai Adlersberg: We are thus well positioned to win a large portion of the Microsoft Teams Value-Added service. This can be seen through the rapid booking growth and adoption of live services in the market, which again, as I've mentioned, grew 35% in 2024. Just to give you one of the most important numbers, which do not show in our financials and are not part of our balance sheet, AudioCodes Live and Managed Services back, which are many services that we sold but haven't yet invoiced for or delivered in full, was $67 million at the end of the second quarter 2023, compared to just $29 million at the end of the second quarter 2022.
Speaker Change: We are thus well positioned to win a large portion of the Microsoft Teams Value Added Services.
Speaker Change: This can be seen through the rapid booking growth and adoption of live services in the market.
Speaker Change: which again, as I've mentioned, grew 35% in 2024.
Speaker Change: Just to give you one of the most important numbers, which do not show in our financials and are not part of our balance sheet, AudioCode's live and managed service backlog.
Speaker Change: Those are many services that we sold but haven't yet invoiced or delivered in full.
Speaker Change: was at the end of the second quarter $67 million, compared to just $29 million at the end of the second quarter of 2023. This represents 133% year-over-year growth, and that speaks for the strength of the Microsoft Teams Live business.
Shabtai Adlersberg: This represents 133% year-over-year growth, and that speaks for the strength of Microsoft Teams Live. Second, and emerging in a big way in 2024 is the area of conversational AI services. We have already won several projects this year. Starting from a low base in previous years, we saw about 50% growth in bookings in 2024, and we aim to end up with over 10 million.
Speaker Change: Second, and emerging in a big way in 2024, is the area of conversational AI services.
Speaker Change: We have already won several projects this year, starting from a low base in previous years. We saw above 50% growth in bookings in 2024, and we aim to end up
Shabtai Adlersberg: As we all know, Gen-AI technology is fueling much modernization and innovation in modern workplace applications in the enterprise space due to its unique ability to support the creation of new advanced services while cutting substantial costs and time. At AudioCodes, we enjoy a very unique position due to the fact that we own one of the most comprehensive sets of technologies, including telephony, networking, network and device management, security, cloud infrastructure, cognitive services, services practice, and more.
Speaker Change: above $10 million this year.
Speaker Change: As we all know, GNI technology is fueling much modernization and innovation in the modern workplace applications in the enterprise space, due to its unique ability to support creation of new advanced services while cutting substantial costs and time to market.
Autecodes: At AudioCodes, we enjoy a very unique position due to the fact that we own one of the most comprehensive set of technologies, including telephony, networking, network and device management, security, cloud infrastructure, cognitive services.
Shabtai Adlersberg: At the same time, we invest in expanding our capabilities in the area of applying advanced GenAI and large language models technologies for conversational AI technology. As such, we have become a prime contractor for these GenAI-related projects, which are fairly complex and difficult to implement. That is our unique advantage.
Autecodes: and more. At the same time, we invest in expanding our capabilities in the area of applying advanced gen AI and large-language models technologies for conversational AI technologies.
Autecodes: As such, we have become a prime contractor for these Gen-AI related projects, which are fairly complex and difficult to implement. That is our unique advantage.
Shabtai Adlersberg: Let me take a step back now to provide a broader perspective on our business history and evolution in recent years and provide you with a basis for the outlook for 2025 and beyond. The decline in our legacy business relating to the service provider business during 2023 and the first half of 2024, coupled with our revenue model shift from capital expenditure sales to recurring business, were the main factors that drove a halt to our growth story during the years 2020 to 2022.
Autecodes: Let me take a step back now to provide a broader perspective on our business history and evolution in recent years and provide you with a basis for the outlook for 2025 and beyond.
Autecodes: Declining our legacy business relating to the service provider business during 2023 and the first half of 2024, coupled with our revenue model shift,
Autecodes: from CapEx sales into recurring business, who are the main factors that drove a halt in our growth story during the years 2020 to 2022.
Shabtai Adlersberg: However, these were also the years where we worked hard to build our live platform and business in UCAS and CCAS and invested in building our conversational AI business. As legacy business decline starts to moderate in 2024 and beyond, with Ucast, CX, and CAI, and our favorable competitive position in our markets, we are confident in our ability to return to growth in both revenue and profits starting in 2025 and beyond. Before turning to detail these discussions, let's quickly shift to the second core profitability metric.
Autecodes: However, these were also the years where we have worked hard to build our last platform and business in UCAS, CCAS, and invested in building our conversational AI business.
Speaker Change: Shabtai Adlersberg, Niran Baruch
Speaker Change: As legacy business declines, starts to moderate in 2024 and beyond,
Speaker Change: less impact on our overall results and live and conversational AI service businesses keep growing double digits every year. We believe we will see growth re-emerging as of 2025 and beyond. With growth in recurring business
Speaker Change: We are confident in our ability to return to growth in both revenue and profits starting in 2025 and beyond.
Speaker Change: Before turning to detail these line discussions, let's quickly shift to second core profitability metrics. Thank you.
Shabtai Adlersberg: Our non-gap gross margin in the quarter came at 65.8% within our 65 to 68 long-term range and Compris to 65.2, present in the first quarter of 2024 and second quarter 2023 levels of 64.5. This year over year margin improvement is primarily attributable to a more favorable product mix, namely software and services. Second Non-Gap Op-Ex.
Speaker Change: Our non-gap gross margin in the quarter came at 65.8% within our 65 to 68 long-term range and compares
Speaker Change: 265.2
Speaker Change: percent in the first quarter of 2024 and second quarter 2023 levels of 64.5. This year over year margin improvement is primarily attributable to a more favorable product mix, namely software and services.
Shabtai Adlersberg: Second quarter non-gap OPEX was $32.5 million, in line with our expectations, representing a small sequential decrease relating to our latest headcount rationalization initiatives. As a reminder, we expect the bulk of the $1.5 million quarterly expense initial reduction, of which about $1.2 million is still to be realized in the third quarter of 2024, and thus to contribute to further reduction in the OPEX in the third quarter of 2024 and beyond. Reference ad count, we ended the second quarter with an ad count of 940, down from 959 in the first quarter and as compared to 946 people in the employees in the second quarter, second quarter of 2022. The year-over-year improvement in on-gap gross margin in OPEX led to an on-gap operating income of $7.2 million, or an 11.9% margin, just this year ago, of $2.9 million, or 4.9 percent.
Speaker Change: Second, Non-Gap OpEx.
Speaker Change: Second quarter non-gap OPEX was 32.5 million, in line with our expectations, representing a small sequential decrease relating to our latest headcount rationalization initiatives.
Speaker Change: As a reminder, we expect the bulk.
Speaker Change: of $1.5 million quarterly expense initial reduction.
Speaker Change: of which about 1.2 million.
Speaker Change: is still to be realized in the third quarter of 2024 and thus to contribute to further reduction in the APEX in third quarter of 2024 and beyond.
Speaker Change: Reference ad count, we ended the second quarter with ad count of 940 down from 959 in the first quarter and as compared to 946
Speaker Change: people in the employees in the second quarter 2023.
Speaker Change: The year-over-year improvement in non-GAAP gross margin in OPEX led to non-GAAP operating income of $7.2 million, or an 11.9% margin less this year ago of 2.9% or 4.9% margin.
Shabtai Adlersberg: On a guidance front, with steady performance in the second quarter and pipeline opportunities for strategic areas of business remaining healthy, we are reiterating our 2024 revenue guidance of $2,040 million to $2,050 million. Additionally, as explained earlier by Niran, we are introducing full-year non-GAAP EBITDA guidance of $33 million to $39 million, which is unchanged as implied from the non-GAAP EPS guidance provided during last quarter In 2023, the known gap EBITDA was 31 million.
Speaker Change: On a guidance front, with steady performance in the second core and pipeline opportunities for strategic area of business remaining healthy.
Speaker Change: We are ready to write a 2024 revenue guidance.
Speaker Change: of 2040 to 2050 million.
Speaker Change: We are introducing full year non-GAAP EBDAA guidance of $33 to $39 million, which is unchanged as implied from the non-GAAP EPS guidance provided during last quarter's earnings call.
Speaker Change: In 2023, known gap EBITDA was $31 million.
Shabtai Adlersberg: Now let's move to some business. Let's talk about Microsoft. In terms of our strategic business lines, Microsoft Teams business grew 3.3% in the second quarter year-over-year, with a steady increase in the live managed services, which grew 35%. Second quarter live business growth puts us on track to land within our full year 2024 annual recurring revenue target range of 64 to 70 million, representing an average annual growth of 35-40% compared to 2023.
Speaker Change: Now let's move to some of the business lines.
Speaker Change: Let's talk about Microsoft. In terms of our strategic business lines, Microsoft Teams business grew 3.3% in second quarter year-over-year, with steady increase in the live managed services, which grew 35%.
Speaker Change: Second quarter live business growth puts us on track to land within our full year 2024 annual recurring revenue target range of 64 to 70 million, representing an average approximately annual growth of
Shabtai Adlersberg: Revenue was led again by steady growth in the North American region. From a recurring versus capex perspective, second quarter recurring live bookings made accounted for 43% compared to 39% in the year ago, or more than 10% year-over-year improvement. The one-time or capex portion of TIM. revenue was, accordingly, 57% compared to 61% in the year ago quarter.
Speaker Change: 35 to 40 percent compared to 2023. Revenue was led again by steady growth in the North American region.
Speaker Change: From a recurring versus capex perspective, a second quarter recurring live bookings accounted for 43% compared to 39% in the year ago quarter, more than 10% year-over-year improvement. The one-time or capex portion of TIMSS
Speaker Change: Revenue was codingly 57% compared to 61% in the year ago quarter.
Shabtai Adlersberg: As a reminder, and with Microsoft's recent disclosure of over 20 million PSTN users, representing just a fraction of the over 320 million Teams monthly active users, we believe the low Teams phone voice penetration is less than 10% and thus provides us with ample multi-year runway to drive ongoing penetration gains. As such, UCAS and Microsoft Teams remain with high potential. Microsoft now estimates that Teams phone adoption growth is predicted to be about 30% year over year. Microsoft last reported, Lastly, reporting in the previous quarter was that they were at about 3 million Teams phone ads in the previous three quarters.
Speaker Change: As a reminder, and with Microsoft's recent disclosure of over 20 million PSTN users representing just a fraction
Speaker Change: of the over 320 million Teams monthly active users. We believe the low Teams phone voice penetration is less than 10% and thus provide us with ample multi-year runway to drive ongoing penetration gains.
Speaker Change: As such, UKS and Microsoft teams remain with high potential.
Speaker Change: Microsoft now estimates that Teams phone adoption growth is predicted to be about 30% year-over-year. Microsoft last reported
Speaker Change: Lastly, reporting in previous quarter was that they are at about 3 million Tim Sloan ads in the previous three quarters.
Shabtai Adlersberg: We believe that the key driver to further or accelerated growth of Teams phone is the current Microsoft push on the use of co-pilot for meetings and calls analytics, so expect a good market lying ahead. In a new area for us, making rooms for teams, we saw good momentum and growth in revenue from our MTR business, where we are, at the end of the second quarter, already at the same level as the entire revenue for the MTR business throughout 2022.
Speaker Change: We believe that the key driver to further or accelerated growth of Teams phone is the nowadays Microsoft push on use of co-pilot for meetings and calls analytics, so expect good market lying ahead.
Speaker Change: On a new area for us, making rooms for teams, we saw good momentum and growth in revenue from our MTR business, where we are at the end of the second quarter already at the same level of the entire revenue for the MTR business throughout 2023.
Shabtai Adlersberg: Just to remind or talk about one key win in the core, we signed a 36-month contract with a multinational consumer goods firm, providing live essential services to initial 20,000 Teams users, VoiceSits, with plans to rise over the next two years to reach nearly 100,000 users as the customer continues to migrate to Teams from its legacy PBX vendor. Winning marquee, Enterprise Accounts, is complex. Take time.
Speaker Change: Just to remind or talk about one key win in the core.
Speaker Change: We signed a 36-month contract with a multi...
Speaker Change: National Consumer Goods Firm, providing live essential services to initial
Speaker Change: 20,000 Teams users.
Speaker Change: with plans to rise over the next two years to reach nearly 100,000 users as the customer continues to migrate to Teams from its legacy PBX vendor.
Speaker Change: Winning marquee enterprise accounts with complex requirements takes time.
Shabtai Adlersberg: Also, initial contract wins may not be meaningful. So, long-term, building trust with customers and executing an online expense strategy by leveraging a broad portfolio of products and services has proven to be an effective recipe for generating material revenue contribution with these accounts over time. Now let's move to the customer experience business. In the CX business, our healthy pipeline continues to support a positive outlook for the second half and full year 2024. Revenue declined about 10% year-over-year in the quarter, impacted by the push-out of a large deal owing to customer-specific circumstances and much related to material changes in the market environment.
Speaker Change: Also, initial contract win may not be meaningful. So, long-term, building trust with customers and executing an online expense strategy by leveraging broad portfolio of products and services have proven to be an effective recipe to generating material revenue contributions with these accounts over time.
Speaker Change: Now let's move to the customer experience business. In the CX business, our healthy pipeline continues to support a positive outlook.
Speaker Change: for the second half and full year 2024.
Speaker Change: Revenue declined about 10% year-over-year in the core, impacted by push-out of a large deal owing to customer-specific circumstances.
Shabtai Adlersberg: We do expect a portion of this deal to close in the third quarter, with the balance in the fourth quarter. Pipeline generation of opportunities remains healthy, and we have good visibility in this segment for the rest of the year. We see a growing number of large contact center migration to cloud projects choosing our services and products to refresh their voice infrastructure. This quarter, we closed several large deals with banking, financial services, and insurance organizations in North America, Asia Pacific, and EMEA.
Speaker Change: and much related to material changes in the microenvironment. We do expect a portion of this deal to close in the third quarter with the balance in the fourth quarter.
Speaker Change: Pipeline generation of opportunities remains healthy, and we have good visibility in this segment for the rest of the year. We see a growing number of large contact center migration to cloud projects, choosing our services and products to refresh their voice infrastructure.
Speaker Change: This quarter we closed several large deals with banking, financial services, and insurance organizations in North America, Asia Pacific, and EMEA.
Shabtai Adlersberg: Live 6 is our voice services suite for contact center, and now it's delivered using our live platform, which generalizes the way the services are delivered and allows us to offer additional services to complete our value proposition to Parnas and Lodzka. Just to mention some of the customer experience live services. I'll mention just four.
Speaker Change: Life 6 is our voice services suite for contact center and now it's delivered using our live platform which generalizes the way the services are delivered and allows us to offer additional services.
Speaker Change: to complete our value proposition to partners and large customers.
Speaker Change: Just to mention some of the...
Speaker Change: Customer Experience Life Services. I'll mention just four. The first one is bring your carrier solution or SIP connection.
Shabtai Adlersberg: The first one is our bring your carrier solution or SIP connection. This is our core competency, which is tied to our SBC business, and where we deliver superior voice quality for large global contact centers. We know that at this stage, only about 20% of the global contact center workforce has migrated. So there is a very long runway ahead. We forecast that in each of the next three years, our revenues from this application will grow about 25% a year.
Speaker Change: This is our core competency.
Speaker Change: which is tied up to our SBC business, and where we deliver superior voice quality for large global contact centers.
Speaker Change: We know that at this stage, only about 20% of the global contact center have migrated. So a very long runway ahead.
Speaker Change: We forecast that in each of the next three years, our revenues from this application will grow about 25% a year.
Shabtai Adlersberg: The second service is our omni-voice channel solution, or as we call it, click-to-call. In this area, we expect high growth. We are sharpening our go-to-market strategy and shaping it, but we believe that within the next three years, this will help to add more than $20 million of revenues going forward. Then we can talk about a call regarding call security, and then we can talk about enhanced voice service analytics. I will not provide more details, but we can definitely provide those details in calls after the call.
Speaker Change: Second service is our omni-voice channel solution, or as we call it, click-to-curl.
Speaker Change: In this area, we expect high growth. We are sharpening our go-to-market and shaping it, but we believe that within the next three years, this will help to add more than $20 million of revenues.
Speaker Change: Then we can talk about a call regarding call security, and then we can talk about an answer or service analytics. I will not provide more details, we can definitely provide those details in calls after the call.
Shabtai Adlersberg: In terms of revenues, just to give you some idea about the way LiveCX revenue has evolved, we started with about $2 million in 2022. In 2023, revenue grew to $6.8 million with more than 30 projects compared to just 15 the year before. In 2024, we had about $3.1 million in booking, the first half. And then we had a very interesting win with a large financial institution in the U.S. We see an increasing number of projects with financial institutions migrating to the cloud. Naturally, these large projects require longer decision cycles that may delay signatures.
Speaker Change: In terms of revenues, just to give you some idea about...
Speaker Change: the live CX revenue has evolved. We started with about $2 million in 2022. In 2023, revenue grew to $6.8 million with more than 30 projects compared to just 15 the year before. In 2024,
Speaker Change: About $3.1 million in booking, the first half, and then we have a very interesting win with a large financial institution in the U.S. We see increasing number of projects with financial institutions migrating to the cloud.
Speaker Change: Naturally, these large projects require longer decision cycles that may delay signature.
Shabtai Adlersberg: In the third quarter, we won a project with U.S. Bank that ordered our new call security service, adding an additional 30% on top of the voice connectivity revenue. Now, let me move to the conversational AI business. Shifting to that business, revenue was, as I've mentioned, 10.5% year over year, and booking grew about 50% for the core.
Speaker Change: In third quarter, we won a project with U.S. Bank that ordered our new call security service adding additional 30% on top of the voice connectivity revenue.
Speaker Change: Now, let me move to the conversation on business shifting.
Speaker Change: to that business. Revenue was, as I've mentioned, 10.5 percent year over year. Booking grew about 50 percent for the core. We expect it to become a second most important gross engine for the company going forward, with total contract value expected to grow to $10 million this year.
Shabtai Adlersberg: We expect it to become a second most important gross engine for the company going forward, with total contract value expected to grow to 10 million this year. We expect total contract value to grow for this line at least 30% to 50% year-over-year in each of the coming years, so definitely a key activity. To provide more color on our investment in conversational AI, I'll point out the following. First, again, as I've mentioned before, we believe that the majority of business to be done in CAI relates to AI project implementation, where GenAI plays a critical role.
Speaker Change: We expect Total Control Value to grow for this line at least 30-50% year-over-year in each of the coming years, so definitely key activity.
Speaker Change: to provide more color on our investment in conversational AI, I'll point out the following. First, again as I've mentioned before, we believe that the majority of business to be
Speaker Change: Thank you.
Shabtai Adlersberg: However, most of the value lies in the integrated solution. While Gen AI and conventional AI are key to deliver a solution, the ability to compete and be successful in providing a full working surface solution to the enterprise space is highly dependent on system and cloud services, where we have an edge over competition. This is where AudioCodes shines.
Speaker Change: lies in the integrated solution.
Speaker Change: While Gen-AI and Conventional AI are key to deliver a solution, the ability to compete and be successful in providing a full-fledged solution is key.
Shabtai Adlersberg: and Shabtai Adlersberg.
Shabtai Adlersberg: We have extensive experience in a multitude of technology areas, including telephony, networking, device management, security, cloud infra, cognitive services, services practice, and more. At the same time, we invest in fine-tuning Gen AI applied research for this project. I'll mention that out of, in R&D for... Ed Count of about 350 engineers and software developers. We currently employ more than 100% in the voice. AI Activities, which is close to one-third of it. Growth of UCAS and CCAS is heavily dependent these days on the application of CAI, and Gen AI.
Shabtai Adlersberg: Networking, Device Management, Security, Cloud Infra, Cognitive Services, Services Practice, and more. At the same time, we invest in fine-tuning Gen-AI applied research for this project.
Shabtai Adlersberg: I'll mention that out of, in R&D force...
Speaker Change: EdCount of about 350 engineering software developers. We currently employ more than 100% in the voice.
Shabtai Adlersberg: AI activities, which is close to one-third of it. Growth of UCAS and CCAS is heavily dependent these days on the application of CAI, GenAI. Microsoft CoPilot growth clearly depicts this dependency. And thus, we believe we have an edge in our building a strong baseline for future business expansion.
Shabtai Adlersberg: Microsoft's co-pilot growth clearly depicts this dependency, and thus, we believe we have an edge in building a strong baseline for future business expansion. Creativity is increasing, in mainly the verticals of finance, health care, and government. Talking about solutions, we have now in production three SaaS applications that provide multi-tenant operation over Azure. Leading is Voca-CAC, our AI-first Azure native contact center for Microsoft Teams. Then we have an interaction recording application called SmartApp 360, which provides compliance recording and enterprise recording.
Shabtai Adlersberg: Key activity increasing mainly in the verticals of finance, healthcare, and government.
Shabtai Adlersberg: Talking about solutions, we have now in production three...
Shabtai Adlersberg: SAS applications, which provide multi-tenant operation over Azure. Leading is VOCA CIC, our AI-first Azure native contact center for Microsoft Teams.
Shabtai Adlersberg: Then we have an interaction recording application called SmartTap 360, which provides compliance recording and enterprise recording. And then we have Meeting Insights, an enterprise-grade meeting collaboration tool.
Shabtai Adlersberg: And then we have Meeting Insights, an enterprise-grade meeting collaboration tool. We do intend to expand the activity in CAI by providing, going forward, an on-premise solution for Meeting Insights and interaction analytics for contact centers, add more automation on top of Meeting Insights, and more custom products. Turning a bit to VOCA CIC, VOCA CIC is our sub-mentionaire first contact center solution for teams. It plays well into the company's overall live business and strategy, where we enjoy the benefit of upsell to our existing customer base. Bookings were already at 70% at the end of the second quarter, already at 75% compared to last year. We expect them to close to double this year.
Shabtai Adlersberg: We do intend to expand the activity in CAI by providing, going forward, an on-premise solution for meeting insight and interaction analytics for contact centers, add more automation on top of the meeting insights and more custom projects.
Shabtai Adlersberg: Turning a bit to VocaCIC. VocaCIC is our submission AI-first contact center solution for teams.
Shabtai Adlersberg: It plays well into the company's overall live business and strategy, where we enjoy the benefit of upsell to existing customers.
Shabtai Adlersberg: customer base. Bookings are already at 70% at the end of second quarter, already at 75% compared to last year. We expect them to close to double this year.
Shabtai Adlersberg: To mention a few more data points, the VOCA CIC pipeline increased 35% compared to last year, and in education with five additional channel partners this quarter. We onboarded our first ever omni-channel contact center with a leading Fortune 500 manufacturer with a contact center with more than 300 agents. We ran a large migration project with more than 200 IVRs. Again, this is in EMEA, moving a customer from Zoom to TIMS. And then we have VoxAC's largest deployment to date, now handling 2.5 million calls a month.
Shabtai Adlersberg: Revenues are already 130% above the entire 2023. We expect to almost triple them in 2024. To mention a few more data points, VOCA CIC pipeline increased 35%
Shabtai Adlersberg: We won additional education accounts in North America, now serving 5 educational customers in the U.S. in total. We have continued momentum with channel partners.
Shabtai Adlersberg: In education, we signed five additional channel policy scores. We own Bois de Dau first ever omni-channel contact center with a leading Fortune 500 manufacturer.
Shabtai Adlersberg: with a contact center with more than 300 agents. We run a large migration project of more than 200 IVRs. Again, this is in EMEA, moving a customer from Zoom to Teams. And then we have VOCA's largest deployment to date, now handling 2.5 million calls a month.
Shabtai Adlersberg: Turning into Meeting Insights, Meeting Insights is a SaaS application and an organizational enterprise solution that captures, analyzes, and organizes every Microsoft Teams meeting in an organization, allowing company-wide information sharing and enabling substantially better decision-making for managers and company management, using information delivered in meetings across the organization.
Shabtai Adlersberg: Turning it to Meeting Insights. Meeting Insights is a SaaS application.
Shabtai Adlersberg: and Organizational Enterprise Solutions that captures, analyzes, and organizes every Microsoft Teams meeting and organization, allowing company-wide information sharing and enabling substantial better decision-making for managers and company management.
Shabtai Adlersberg: At AudioCodes, we have used Meeting Insights for more than two years now, and we process nowadays more than 150 meetings a day. Needless to say, we experience high..., very high productivity gains based on this using the application. AudioCodes Meeting Insights is part of a growing portfolio of SaaS applications and services in the conversational AI domain, which unleashes the power of AI by transforming Teams meetings into Business Insights, delivering efficient use of information and data exchange throughout a meeting, and accelerates business productivity and organizational decision-making intelligence.
Shabtai Adlersberg: using information delivered in meetings across the organization.
Shabtai Adlersberg: and Shabtai Adlersberg.
Speaker Change: Very high productivity pickup based on this, using the application.
Speaker Change: AudioCodes meeting inside is part of a growing portfolio.
Speaker Change: SAS Application Services in the Conversational AI Domain, which unleashed the power of AI by transforming Teams meetings into business insights, delivering efficient use of information and data exchange throughout a meeting, and accelerates business productivity and organizational decision-making intelligence.
Shabtai Adlersberg: I am pleased to inform you that at the end of last week, a leading online publication, UC Today, has selected AudioCodes Meeting Insight as the winner of its Best Use of AI category in its UC Awards 2024.
Speaker Change: Glad to inform that this is the end of last week.
Speaker Change: an online publication, leading online publication, UC Today, has selected AudioCodes Meeting Eastside as the winner of its Best Use of AI category in its UC Awards 2024.
Shabtai Adlersberg: The awards judges recognize Meeting Insight's ability to leverage conversational AI to enhance user productivity and overall communication experience. Just to mention some data points: we've seen, we have delivered, they completed the deployment of the SAS solution throughout the first quarter. We've seen tremendous growth in the second quarter, more than 30%. We now expect to grow very fast.
Speaker Change: The awards judges recognized meeting insight, ability to leverage conversational AI to enhance user productivity and overall communication experience.
Speaker Change: Just to mention some data points, we've seen we have delivered, they completed the deployment of a SAS solution throughout the first core. We've seen tremendous growth in second core.
Shabtai Adlersberg: The use of AI in Meeting Insight will probably double month over month. We see many organizations starting to use LLM technology and insights and prompts from Meeting Insights. Going forward, we plan to expand the Teams solution to provide a solution for the Zoom, Google Meet, and Cisco WebEx environments. And we intend also to provide a solution for storage to be on-premises rather than just in the cloud. We do intend, on top of the Hebrew and U.S. and U.K. English, to provide a few more European languages already next month, August, providing German, French, Dutch, Italian, Spanish, and more.
Speaker Change: More than 30%. We now expect to grow very fast. The use of AI in meeting insight will probably...
Speaker Change: month over month. We see many organizations starting to use LLM technology and insights and prompts from Meeting Insights.
Speaker Change: Going forward we
Speaker Change: We plan to expand the team's solution into providing a solution for the Zoom, Google Meet, and Cisco Webex environments. And we intend also to provide a solution for storage to be on-prem rather than just cloud.
Speaker Change: We're doing TED on top of the Hebrew and U.S. and U.K. English to provide...
Speaker Change: A few more European languages already next month, August , providing German, French, Dutch, Italian, Spanish, and more. So we expand rapid growth. We expanded that business that is just a few thousands of people.
Shabtai Adlersberg: So we expanded that business that was just a few thousands of dollars in 2024 to deliver millions, a few millions in 2024. Just to again mention that we are working to expand the solution in many areas I mentioned. We will add automation on top of it, and unique features that will allow to improve productivity, such as, you know, prepare me for my next meeting; you will get a message on your mobile, and you will be ready to deal with anyone that you are at a meeting with and action item with. We will add more integration into CRMs and meeting notifications. And with that, I'll wrap up. So we have.
Speaker Change: in 2024 to deliver millions, a few millions in 2025.
Speaker Change: Just to again mention that we are working to expand the solution in many areas I mentioned. We will add automation on top of it. Very unique.
Speaker Change: [inaudible]
Speaker Change: We'll add more integration into CRMs and meeting notification.
Shabtai Adlersberg: Delivered on our business priorities in the core, fostering growth in strategic areas of our business while successfully executing on cost-reduction initiatives. We believe this lays the foundation to support healthy top-line growth in the long term while driving significant margin expansion in 2024 and beyond. And with that, I have concluded my presentation, and we'll move the session to Q&A. Thank you, operator. Thank you very much.
Speaker Change: With that, I'll wrap up.
Speaker Change: Delivered on our business priorities and the core, fostering growth in strategic areas of our business while successfully executing on costs.
Speaker Change: Reduction Initiatives. We believe this lays the foundation to support healthy top-line growth long-term while driving significant margin expansion in 2024 and beyond.
Speaker Change: With that, I have concluded my presentation and will move the session to Q&A. Thank you, operator.
Operator: We will now be conducting our question and answer session. If you would like to ask a question, please press star 1 on your phone. Confirmation Tome will indicate that your line is active. You may press star 2 if you would like to remove your question. For anyone using speaker equipment, it might be necessary to pick up your handset.
Speaker Change: 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 1 on your phone keypad now.
Speaker Change: A confirmation tome will indicate that your line is in the queue. You may press star 2 if you would like to remove your question from the queue. For anyone using speaker equipment it might be necessary to pick up your handset before you press the keys. Please wait a moment whilst we poll for questions.
Operator: Please wait a moment while... Your first question is coming from Ryan MacWilliams of Barclays. Ryan, your line is... Hey guys, this is Damon Cozumel from Ryan MacWilliams. Thanks for taking my question. Great to see improved service business growth year-over-year in the quarter. Can you help us understand what the key drivers of growth were in the quarter and how we should think about growth in the product-versus-service business lines in the back half of the year?
Speaker Change: Thank you. Your first question is coming from Ryan MacWilliams of Barclays. Ryan, your line is live.
Speaker Change: Hey guys, this is Damon Cozumel from Ryan MacWilliams. Thanks for taking my question.
Operator: Yeah, actually, again, anyone who wants to understand, you know, the prospects of our business should pay attention to two key lines of business. One is the live and Microsoft Live Teams, which is the managed services business, which is now about 53% of services, growing nicely year over year. This is where we put most of our energy and resources.
Speaker Change: Yeah, actually, again, you know...
Speaker Change: business lines. One is the live and Microsoft live teams, which is the managed services business. Services is now about 53 percent, growing nicely year over year.
Shabtai Adlersberg: We have built, I think the strength comes from the fact that we have developed over several years a platform called Live Platform. And it's based on connectivity services for which we are known, right, both Gateway and SBC. But then, throughout the years, we've added, you know, more services, first and foremost, management services, so we can manage the addition and deletion of user sites. We then added on top of that, you know, the Contact Center Teams application, which provides for, you know, contact center applications. We've added recording solutions.
Speaker Change: This is where we put most of our energy and resources. We have built, I think the strength comes from the fact that we have developed throughout several years a platform.
Speaker Change: It's based on connectivity services for which we are known, right, both Gateway and SBC. But then throughout the years, we've added, you know, more services. First and foremost, management services, so we can manage addition, deletion of user sites.
Speaker Change: contact center applications. We've added recording solutions. Nowadays, recording and, you know, transcription and inference become key.
Shabtai Adlersberg: Nowadays, recording and, you know, transcription and inference have become key in the evolution of both UCaaS and CKaaS solutions. So, adding those services further strengthens them. So, our strategy here is to lend and expand. So, we usually lend with our connectivity services, which we consider to be, you know, the dominant leader in the market. And then we simply, you know, tunnel and do an upsell of voice-related business applications to each such account. We had a very important win with UCF, the University of Central Florida, one of the top three universities in the U.S.
Speaker Change: [inaudible]
Speaker Change: [inaudible]
Shabtai Adlersberg: They have been using our SBCs for a long time, and because they recognize us as a trusted, reliable supplier, when we offered them to evaluate our contact center solution, they took it, and last year, we signed the contract. So again, it's lend and expand and the addition of more services, and you can expect, I was talking about meeting inside, I was talking about the new coming solution, let's talk about interaction analytics for contact center, etc.
Speaker Change: They've been using our SBCs for a long time.
Speaker Change: And because they recognize us as a trusted, reliable supplier, when we offered them to evaluate our contact center solution, they took on it, and last year we signed the contract.
Speaker Change: It's this.
Speaker Change: You know, again, it's land and expand and the addition of more services and you can expect, right, I was talking about.
Speaker Change: [inaudible]
Shabtai Adlersberg: So we see a long runway for voice-related business applications in the Live Teams environment. This is why we believe that having this integrated platform is a very high integration platform for it. I believe that that puts us substantially above any seeable competition. So we've kind of built a moat, if you will, for the Microsoft Teams phone business, and with the long runaway growth, we're fully confident that that growth will continue. So that's one leg.
Speaker Change: It's very high integration to it. I believe that that puts us substantially above any seeable competition. We've kind of built a moat, if you will.
Speaker Change: for the Microsoft Teams phone business. And with the long runaway, we're fairly confident that that growth will continue.
Shabtai Adlersberg: The other one, which is just a new, substantially smaller leg, which is the CAI, Conversational AI. So here again, we bring our many years, 20, 25 years of experience in a multitude of technologies, as I've mentioned. We believe not too many organizations may have this type of comprehensive set of technologies, resources from telephony, networking, management, you name it. Now, since we are, and we have a group that is specializing in evaluating and optimizing large language models in Gen-AI. So we are basically marrying the old system and software and cloud services abilities with the new Gen-AI activity that the internal group is handling. We're working with OpenAI LLM and with cloud services and evaluating several more.
Speaker Change: So that's one leg. The other one, which is just the new, you know, substantially smaller leg, which is the CAI, Conversational AI.
Speaker Change: Here, again, you know, we bring our, you know...
Speaker Change: We have many years, 20, 25 years experience in multitude of technologies as I mentioned. We believe not too many organizations may have this type of comprehensive set of technologies.
Speaker Change: resources from telephony, networking, management, you name it. And now since we are and we have a group that is specializing in evaluating and optimizing
Speaker Change: Large language models in Gen AI. So we are basically marrying, you know, the old system and software and cloud services
Speaker Change: abilities with the new Gen-AI
Speaker Change: activity that the internal group is handling, right? We're working with...
Speaker Change: OpenAI, LLM, and with, you know, cloud and if anything, several more. So we definitely expect that our ability to deliver end-to-end full solution based on these capabilities.
Shabtai Adlersberg: So we definitely expect that our ability to deliver end-to-end full solutions based on these capabilities will become a very strong driver for success in the future. So those are the two key elements upon which we will base our business going forward.
Speaker Change: will become a very strong driver for success in the future. So those are the two key elements upon which we base our business going forward.
Shabtai Adlersberg: Thank you, Shabtai. Great to see the continued improvement in the conversational AI product. Can you help us understand what kind of customers are adopting that product? And is the customer appetite for adopting AI use cases better than your expectations?
Speaker Change: Thank you Shabtai. Great to see the continued improvement in the conversational AI product. Can you help us understand what kind of customers are adopting that product and is customer appetite for adopting AI use cases better than your expectations?
Shabtai Adlersberg: So we have, well, my strategy was always to set up here in Israel next to Edcor, where we have great access to a lot of businesses. So we have a few projects running already and completely delivered, both in the financial sector, in the government sector, and in the healthcare sector. So, for example, you know, we completed a project with the Israeli Red Cross Ambulance Service back in 2021 that has been operational for three years now. We have delivered two projects for the government space. We are delivered already, you know. The Israeli largest medical service organization is called Clalit. It has 4.5 million subscribers.
Speaker Change: Yes, so we have, well my strategy was always to set up here in Israel next to EdCorp where we have got great access to a lot of businesses.
Speaker Change: So, we have a few projects running already and completely delivered, both in the financial sector, in the government sector, and in the healthcare sector.
Speaker Change: So, for example, you know, we completed a project with the Israeli Red Cross Ambulance Service back in 2021, that's working for three years now. We have delivered two projects for the government space.
Speaker Change: We are delivered already, you know, the Israel's largest medical service organization is called Clalit. It has 4.5 million subscribers.
Shabtai Adlersberg: We have, you know, a solution for co-steering, and now we have one for, you know, setting, course. It's running like 100,000 calls a day. So, at this stage, I would say that we have, you know, close to 10 different applications, which are not based on the center products, right? It's not.
Speaker Change: We have, you know, a solution for cold steering and now we have for, you know,
Speaker Change: It's running like 100,000 calls a day. So at this stage, I would say that we have close to 10 different applications, which are not based on the same products, right? It's not.
Shabtai Adlersberg: Voca-CAC, and it's not Meeting Insight, it's projects where you need to connect to a contact center, you need to connect to a cellular phone environment, you need to do management of elements, you need to transcribe, extract, infer, record, deliver reports, and analytics. A lot of areas where we can shine. Thank you, Shabtai. I'll hide back in the queue.
Speaker Change: Roka CAC, and it's not Meeting Insight, it's...
Speaker Change: Projects where you need to connect to a contact center, you need to connect to a cellular phone environment, you need to do management of elements, you need to transcribe, to extract, to infer, record.
Speaker Change: Deliver Reports, Analytics.
Speaker Change: A lot of areas where we can shine.
Speaker Change: Thank you Shabtai, I'll hide back in the queue. Appreciate it.
Shabtai Adlersberg: I appreciate it. Sure. Thank you, Ryan. Thank you very much. Your next question is coming from Ryan Koontz of Neal. Ryan, you know, Thanks. I want to take a different tack on the last question about the transition from license over subscription, and as we think about this over, a multi-year view, you know, at what point do you expect growth to re-inflect as you see this transition from product over to service. Do you have an idea?
Ryan: Sure. Thank you, Ryan.
Speaker Change: Thank you very much. Your next question is coming from Ryan Koontz of Niedermann Company. Ryan, your line is live.
Ryan Boyer Koontz: Thanks, I want to take a different cut at the last question about the transition from license over subscription and we think about this over a multi-year view you know at what point do you expect
Ryan Boyer Koontz: growth to re-inflect as you see this transition from product over service? Do you have...
Shabtai Adlersberg: Can you set any kind of goalposts out there when you think you might see this return to revenue recognition growth again, you know, approaching high single-digit or maybe double-digit? Yeah, I believe that, you know, the decline of legacy is moderating. And at the same time, we see many services picking up and CAI services at the same time. Based on our, you know, visibility, you know, we should talk about two to three courses going forward.
Speaker Change: An idea, can you set any kind of goalposts out there when you think you might see this return to revenue recognition growth again, you know, approaching high single digit or maybe double digit?
Speaker Change: And at the same time, you know, we see many services picking up and CAI services at the same time. Based on, you know, our, you know, visibility, you know, we should talk about two to three course.
Shabtai Adlersberg: So I expect that, Actually, either first quarter or second quarter 2025, we are definitely going into growth. I believe that now that our business will be primarily based on recurring business and not one-time sale business, chances for decline such as happened to us back in 2023 and this year will not repeat themselves. We expect growth to come back in the second quarter of 2025 and beyond. It's really helpful, thank you for that.
Speaker Change: going forward, so I expect that...
Speaker Change: Actually either first core or second core at 2025. We are definitely going into growth.
Speaker Change: and I believe that now that our business will be primarily based on recurring business.
Speaker Change: and that, you know, one-time sale business.
Speaker Change: Chances for a decline such as happened to us back in 2023 and this year will not repeat themselves. So we expect growth to come back a second quarter of 2025 and beyond.
Shabtai Adlersberg: On the recovery and the legacy gateways, anything going on there? I mean, it just doesn't seem like the operators are particularly investing a lot these days. So wondering what's behind your recovery and legacy gateway shipment. Yeah, you know, when we looked into, you know, the history of gateway sales, we saw that, you know, back in the 23rd first quarter and this first quarter of 24, there was a sharp decline between the first quarter to the last quarter in a year to the first quarter in the year. And then it stabilized for the rest of the year.
Speaker Change: That's really helpful, thank you for that. On the the recovery and the legacy gateways, anything going on there? I mean it just doesn't seem like the operators are particularly investing a lot these days, so wondering what's behind your recovery and legacy gateway shipments.
Speaker Change: Yeah, you know, when we looked into, you know, the history of gateway sales, we saw that, you know, back in 23 First Corps and this Corps, this First Corps of 24.
Speaker Change: There was a sharp decline between the last quarter in a year to the first quarter in the year, and then it stabilized for the rest of the year.
Shabtai Adlersberg: So we do expect that, you know, gateway business will not continue to decline or will definitely moderate its decline throughout 24. All in all, I believe that we already, you know, just give you a quick, I think, all in all, if I'll sum up the total, you know, back at the end of 2022, our combined gateway business was roughly about $90 million. At the end of this quarter, I think we got somewhere to around $60 million. I don't believe we will see a decline of more than another 10 or 15 minutes throughout the coming quarter.
Speaker Change: So, we do expect that, you know, gateway business will not continue to decline, or it will definitely moderate its decline throughout 24.
Speaker Change: All in all, I believe that we already, you know, just give you a quick think, all in all, if I'll sum up the totals, you know, back in the end of 2022, our combined gateway business was roughly about $90 million.
Speaker Change: At the end of this quarter, I think we got somewhere to like $60 million.
Speaker Change: I don't believe we will see a decline of more than another 10 or 15 minutes throughout the coming course. So all in all, I think we already experienced the largest drop.
Shabtai Adlersberg: So all in all, I think we have already experienced the largest drop. And so it will moderate and, you know, will vanish. Helpful. And just a quick housekeeping one here on the higher cash use in the quarter. You mentioned the headquarters modernization investments there that will continue in the third quarter. Any other puts and takes on the cash use in the quarter?
Speaker Change: And so it will moderate and, you know, will vanish.
Speaker Change: Helpful and just a quick housekeeping one here on the higher cash use in the quarter you mentioned the headquarters modernization
Speaker Change: Investments there that will continue in third quarter. Any other puts and takes on the cash use in the quarter? Yeah, I did see that the accounts receivable was up and things like this, but anything else you'd call out on the cash flow that drove you guys to have a higher use in the quarter?
Niran Baruch: Yeah, I did see that the cash receivable was up on things like this. But anything else you can call out on the cash flow that drove you guys to have a higher usage in the quarter? Hi Ryan, this is Niran. So, you know, we had a very nice cash flow, operating cash flow, in the first quarter. It was 15 million dollars.
Speaker Change: Hi everyone, this is Niran.
Niran Baruch: So, you know, we had a very nice...
Niran Baruch: So, no dramatic change during this quarter, although you saw a slight increase in our account receivables, but there were no issues with collection or a doubtful allowance with regard to the account receivables. We managed to lower the inventory level. So, all in all, we believe we will return to positive operating cash flow in the third quarter and then after. With regard to the capital expenditures, yes, it relates to our new headquarters.
Niran Baruch: $15 million dollars so
Speaker Change: No dramatic change during this quarter, although you saw a slight increase in our accounts receivables.
Speaker Change: But there is no issues with the collection or a doubtful allowance with regards to the counter receivables.
Speaker Change: We managed to lower the inventory level. So all in all, we believe we will back to positive operating cash flow at the third quarter and then after.
Speaker Change: With regards to the capital expenditures, yes, it relates to our new headquarter.
Niran Baruch: We will have a few more millions invested in the third quarter, and then we will be back to the regular level that we used to have before. Got it. Thanks, Niranda. That's all I've got. Appreciate it. Your next question is coming from Samad Samana of Jefferson. Hey guys, this is Billy. To the first question, there are a lot of conflicting narratives right now.
Speaker Change: We will have a few more millions invested in the third quarter and then we will back to the regular level that we used to have before.
Speaker Change: Got it. Thanks, Niranda. That's all I've got. Appreciate it.
Speaker Change: Thank you very much. Your next question is coming from Samad Samana of Jeffreys. Samad, your line is live.
Speaker Change: Hey guys, this is Billy Fitzsimmons on for Samad.
Billy Fitzsimmons: Maybe first question, there are a lot of conflicting narratives right now on the macro front and what this means for the UCAS and CCAS vendors. I'd be curious if you guys have seen any material changes in either
Shabtai Adlersberg: Castor Seacast Spending from a Macro Backdrop Perspective Quarter for Quarter or as you look out to the third, Okay, well, all in all, I believe, and we also, you know, review information provided by analysts in the space, contact center activity doesn't seem to stop. Actually, it continues. If you take Enterprise Connect back in March of this year, it was, you know, fully active and intensive on all contact center applications. That's growing. There is no impact from the global economy. UCAS is growing less and less.
Speaker Change: UCAS or CCAS spending from a macro backdrop perspective quarter over quarter or as you look out to the third quarter. Thank you.
Speaker Change: Okay, well, all in all, I believe, and we also, you know,
Speaker Change: Review information provided by analysts in this space.
Speaker Change: Contact center activity doesn't seem to stop. Actually, it continues, you know, if you'll take Enterprise Connect back in March of this year.
Speaker Change: It was, you know, fully active and intensive on all contact center applications. That's growing. And no impact from the global economy. U.S. is growing less.
Shabtai Adlersberg: However, still very strong. [inaudible] co-pilot, and likes. We'll definitely... give a push to the UCAS use case simply because now there's ample, actually excellent technology that allows us to provide substantially more value from analyzing meetings and calls in the enterprise. So while we've been using data, messages, email messages, and our files, digital files to derive our intel from, nowadays, that information exchange in meetings, which is, we sit in meetings all day, so there's a huge amount of new We do expect that GenAI, Copilot, and a few more chatbot technologies will definitely help to increase the use of UCAS. So all in all, we are optimistic that in 2025, we'll see better. Behavior, I got it.
Speaker Change: However, it's still very strong.
Speaker Change: We've not seen, well, there's definitely an impact of.
Speaker Change: economic situation on enterprises, you know, investing in modernizing their networks. I believe that that will come back, you know, when that situation ends hopefully next year.
Speaker Change: I'll just say that, again, as I've mentioned, that the appearance of Gen-AI technology, Copilot and LYKES, will definitely...
Speaker Change: [inaudible]
Speaker Change: from analyzing meetings and calls in the enterprise. So while we've been using data, you know, messages...
Speaker Change: Email messages and or files, digital files.
Speaker Change: to derive our...
Speaker Change: [inaudible]
Speaker Change: Now, there's that information exchange in meetings, which is, you know, we sit in meetings all day, so there's a huge amount of new information that has not been captured so far, has not been used to generate, you know, good intelligence. So we do expect that.
Speaker Change: Jen Eyrie, Co-pilot
Speaker Change: and a few more chatbots. Technology will definitely help to increase the use of UCAS. All in all, we are optimistic that in 2025 we'll see better.
Shabtai Adlersberg: And then Conversational AI grew 50% year over year, and Shabtai, you provided some customer conversational AI adopters. Maybe digging a little deeper there, can you just relay some anecdotes from customers on the kind of sales motion and initial feedback on the product? How are customers justifying the cost increase? What are getting those deals over the finish line? Okay. Any color there?
Speaker Change: Behavior.
Speaker Change: Got it. And then conversational AI grew 50% year over year, and Shabtai, you provided some customer examples of conversational AI adopters. Maybe digging a little deeper there, can you just relay some anecdotes from customers on kind of the sales motion and what initial feedback on the product has been like?
Speaker Change: How are customers justifying the cost increase? What are getting those deals over the finish line? Any color there would be helpful.
Shabtai Adlersberg: Yeah, very simply. I mean, let's talk about a corporation that needs to be highly operational and effective in running its operations in diverse locations and sites. One organization that we worked with usually recorded its meetings, but they had a turnaround time of about three weeks before they got back the transcription and then were able to distribute it. Nowadays, if you have some time pressure to solve issues, at the end of the meeting, you get a full transcribed summary action items that can be distributed and sent over immediately over the communication line. So, it takes an operation that was really non-efficient, very slow, and makes it a fully real-time operation. That's a big, big plus.
Shabtai Adlersberg: Yeah, very simply, I mean, let's talk about a corporation that needs to be highly operational and effective in running its operation in diverse, you know, locations and sites.
Speaker Change: You know, one organization that we work with.
Speaker Change: was usually recording its meetings, but however, he had a turnaround time of about three weeks.
Speaker Change: before they got back the transcription and then were able to distribute it.
Speaker Change: Nowadays, if you have some time pressure...
Speaker Change: to solve issues. At the end of the meeting, you're getting a full.
Speaker Change: Transcribed Summary Action Items that can be distributed and sent over immediately over the communication line. It takes an operation that was really non-efficient, very slow.
Speaker Change: to an operation that's fully real-time operated.
Shabtai Adlersberg: Think also about a contact center that was working; however, management and analysts had no idea about what was going on in all those calls. Now we have tools such as summarization and insights extraction that allow analysts and data scientists to inform managers where the focus is, what application and operation is hot, and which is not, and where management should invest its resources. Many such as, I can tell you that we have plenty of use cases all around.
Speaker Change: And that's a big, big plus. Think also about the contact center.
Speaker Change: that was working. However, management and analysts had no idea about what was going on in all those calls. Now we have tools such as summarization and insights extraction that allows analysts and data scientists.
Speaker Change: to inform managers, you know, what the focus is.
Speaker Change: What application and operation is...
Speaker Change: You know, HOT.
Speaker Change: and which is not, and where management should invest its resources.
Speaker Change: So many such, I can tell you that we have plenty of use cases all around. I'll give you an example, employee leaving your organization, knowledge retention. If you have a talent, that's…
Shabtai Adlersberg: Give you an example of an employee leaving your organization, knowledge retention. You know, it has left your organization. You're at a loss. It will take you four months to recruit a replacement. All the experience and knowledge that previous employees had are usually gone, and it's a blow. We, you know, many years ago, we lost several design engineers. We made a calculation that the departure of each cost us about $70,000 in total.
Speaker Change: you know, has left your organization.
Speaker Change: [inaudible]
Speaker Change: It will take you four months.
Speaker Change: to recruit, you know, a replacement, all the experience and knowledge that the...
Speaker Change: [inaudible]
Speaker Change: The departure of each cost us about $70,000 in total. Nowadays, if you use a meeting summary...
Shabtai Adlersberg: Nowadays, if you use a meeting summary and an Insights tool for each meeting, all you need to do is, you know, tell your employees to include that capability in each of their meetings. Now, when somebody leaves, you know, the new employee that comes and replaces him, all of a sudden, he has got, you know, tens and hundreds of recordings and summarizations and insights intact from this person's experience.
Speaker Change: and Insights tool for each meeting. All you need to do is, you know, you tell your employees to include that capability in each of their meetings. Now, when somebody leaves.
Speaker Change: You know, the new employee that comes and replaces him, all of a sudden he has got, you know, tens and hundreds of, you know, recordings and summarizations and insights in text.
Shabtai Adlersberg: So all of a sudden, it can become fully productive and effective within a matter of, you know, a week or two. So that's definitely three different examples that tell you why our organization would spend a lot of money to take advantage of the use of AI.
Speaker Change: from this person, you know, experience. So all of a sudden it can become fully productive and effective within a matter of, you know, a week or two.
Speaker Change: So that's definitely three different examples which tells you why an organization would spend a lot of money to take advantage of the use of AI.
Shabtai Adlersberg: Super helpful. Thank you very much. Sure, just a reminder if anyone has any. Okay, we appear to have reached the end of our question and answer session. I will now hand it back over to you.
Speaker Change: Super helpful. Thank you very much.
Speaker Change: Thank you very much. Just a reminder, if anyone has any remaining questions you can press star 1 on your phone keypad now.
Speaker Change: Okay, we appear to have reached the end of our question and answer session. I will now hand back over to Shabtai for any closing remarks.
Shabtai Adlersberg: Thank you, operator. I would like to thank everyone who attended our conference call today. With continued good business momentum in our enterprise operation and good underlying market growth trends in the U.K., CKS, and CAI, we believe we are transitioning the business toward growth and growing profitability in the coming years.
Shabtai Adlersberg: Thank you, operator. I would like to thank everyone who attended our conference call today. With continued good business momentum in our enterprise operation and good underlying market growth trends in U.K., CKS, and CAI,
Shabtai Adlersberg: We believe we are transitioning the business towards growth and growing profitability in coming years. We look forward to your participation in our next quarterly conference call. Thank you all. Have a nice day.
Operator: 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 webinar. You may disconnect your phone lines at this time.
Speaker Change: Thank you very much. This does conclude today's conference. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.