Greetings. Welcome to the AudioCodes Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Mr.

Roger Chuchen, Vice President of Investor Relations. You may begin..

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.

Before we begin, I'd like to remind you that the information provided during this call may contain forward-looking statements relating to AudioCodes 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.

These risks, uncertainties, and factors include, but are not limited to, the effect of global economic conditions in general and conditions in AudioCodes, industry, and target markets in particular, shifts in supply and demand, market acceptance of new products and the demand for existing products, the impacts of competitive products and pricing on AudioCodes and as 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 AudioCodes to successfully integrate the products and operations of acquired companies into AudioCodes business, 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 in 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.

Any disruption in our operations by the obligations of our personnel to perform military service as a result of current or future military actions involving Israel and other factors detailed in AudioCodes filings with the U.S. Securities and Exchange Commission. 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 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 Invest 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. Shabtai, please go ahead..

Thank you, Roger. Good morning and good afternoon, everybody. I would like to welcome all to our third 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 quarter.

I will then review the business highlights and summary for the quarter and discuss trends and developments in our business and industry. We will then turn it into the Q&A session.

Niran?.

Non-GAAP gross margin for the quarter was 65.6% compared to 65.8% in Q2 2024. Non-GAAP operating income for the third quarter was $7 million or 11.7% of revenues compared to $7.2 million or 11.9% of revenues in Q2 2024. Non-GAAP EBITDA for the quarter was $7.9 million compared to non-GAAP EBITDA of $8.3 million for Q2 2024.

Non-GAAP net income for the third quarter was $4.9 million or $0.16 per diluted share compared to $5.5 million or $0.18 per diluted share in Q2 2024. At the end of September 2024, Cash, cash equivalents, bank deposits, markable securities and financial investments totaled $88.4 million.

Net cash provided by operating activities was $7.9 million for the third quarter of 2024. Days sales outstanding as of September 30 2024 were 112 days. 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 of any part of this amount. The approval is valid through January 1, 2025. On July 30, 2024, we declared a cash dividend of $0.18 per share. The aggregate amount of the dividend was approximately $5.4 million.

The dividend was paid on August 29, 2024 to our shareholders of record at the close of trading of August 15, 2024. During the quarter, we acquired 333,000 of our ordinary shares for a total consideration of approximately $3.6 million.

We reiterate our guidance for revenues for 2024 to be in the range of $240 million to $250 million and non-GAAP EBITDA in the range of $33 million to $39 million. I will now turn the call back over to Shabtai..

Germany, France, Italy and Netherlands. In October, we launched support for Zoom meetings in addition to the support for the Microsoft Teams meetings. We intend to make the application UCaaS agnostic and support all of the major UCaaS applications, including Cisco Webex and Google Meet Now.

More than -- we have now in the -- running more than 100 proof-of-concepts about a third already paying customers and planning to onboard a few more accounts in fourth quarter '24. Just to give you some highlights in the third quarter, we grew -- in terms of number of meetings, we grew 50% sequentially.

So that represents huge growth, mainly due to the fact that we're using generative AI in a major way to provide value to our customers. Same with active users, we have grown substantially in number of users, more than 40% among others.

So, to wrap up my presentation, we have made good progress in the quarter on our long-term objective to transform into a cloud software and services company with increasing mix of recurring revenues through fostering growth of our two primary engines, our Live family of managed services and conversational AI.

With the progress we are making in increasing our recurring revenues and with Live nearing half of Microsoft Teams bookings, we believe we have laid the foundation to support sustainable and healthy top line and margin expansion over the long-term. I'll turn the call now back to the operator. Thank you..

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Your first question for today is from Ryan MacWilliams with Barclays..

This is Damian Cogen [ph] on for Ryan MacWilliams. Thanks for the question.

Just curious how your customers are thinking about AI investments for next year? And are budgets for next year generally getting healthier in your conversations?.

Yeah. Well, as I mentioned in my presentation, we see increased interest and demand. We have now -- actually, we have two go-to-markets, one, which is SaaS application, including Voca CIC, Meeting Insights. We have SmartApp, which is a compliance recorder. We will announce a very interesting new product in coming weeks.

And on the other side, we have projects because in the AI space, when you're talking about implementing a solution, usually you face increasing demand for customization, connectors to our project management, applications, connectors to CRM and a few more. And as such, we definitely see huge uptick in many areas.

One area that's very active is the government space. So, yes, there's a lot of interest in a solution for that space..

Got it. Thanks, Shabtai. And then how should we think about growth of product and service revenue in 4Q and fiscal year '25? It seems like AudioCodes is making strides to become a cloud software and services company first. So, just curious how we should think about the revenue breakdown in the near term..

Right. So, I've been speaking mainly about growth in our key lines, which are live services and conversational AI. However, at the same time, we are facing two kind of, I would say, restraining factors. One is as we grow with live services, we witnessed drop in CapEx in perpetual sales of Teams.

So that is kind of impacting or having some layer on top of our growth. So that has caused, I would say, the muted growth you're seeing right now. We believe that Live now is about 44% of revenues and CapEx is about 56%. So, as we move forward with another three, four quarters, all this picture will reverse.

And therefore, Live has grown 20% in the quarter, meaning that as we cross that point in three or four quarters, you'll start to see nice growth. And actually, I expect in 2026 to see double-digit Microsoft business growth. So that's on that.

The other factor that impacts revenues, but less this quarter actually is the decline of the legacy gateway and SBC business, which usually we face a drop mainly from the fourth quarter to the first one in a year. And then -- and this was the phenomenon also in the third quarter. Then during the year, we see slightly uptick in that business.

So, just to give you some idea about moving from '22 to '23, we were hit by $15 million drop. I think we will end up '24 with another, I would say, $10 million, $11 million drop.

I expect this figure again to be visible in '25, but now probably somewhere between $5 million and $10 million, which means that the impact of that decline of legacy will be substantially weaker. So those are the trends.

On one hand, we have nicely growing business in Live and concessional AI, and we're still suffering from declining of some legacy business, both connectivity and Teams CapEx..

Thanks, guys..

Your next question for today is from Ryan Koontz with Needham & Company..

Question here.

With the kind of stall in top line, as you talked about here, this transformation from license to subscription, what KPIs are you using internally to track the continued momentum there in your subscription bookings -- subscription business? Are you looking at bookings? And can you reflect on those, or maybe RPO or ARR? Any other KPIs that you have an eye on that might shed a light on that subscription business? Thanks..

Right. So, yeah, actually, we have a few such KPIs as you have mentioned. The most important for us is the monthly recurring revenue and then the annual recurring revenue, which at the end of the day, translates into the revenue we recognize and report. So that's one KPI.

The other one, by the way, which is, for me, even more important is the bookings, because obviously, if you just take an analogy from, let's say, the semiconductor business, talk about book-to-bill, our book-to-bill on booking versus recognition is substantially higher. So, we definitely track our bookings.

As I've mentioned on the call, backlog now is at $67 million versus $27 million a year ago. So, we have a steady flow of bookings of about $15 million a quarter. And that's what really drives the business. I mean, all of the efforts are really pointing towards increasing bookings.

And even in our compensation for our salesforce, booking is very meaningful side by side, of course, with meeting the revenue targets..

Great.

And the composition of that backlog, is it -- is that dominantly your subscription contracts? Or are there a substantial piece of license maintenance in that backlog?.

Yeah. The majority of it relates to Microsoft Teams Managed Services, which is a very sound business. Actually, we see some acceleration. I mean, we all know that the UCaaS industry has been growing faster in previous years and now seems to take a lighter trend.

But let's not forget that whenever we report about win, we basically -- when you're talking about large companies, thousands of seats or 10 thousands of seats, the usual contract -- initial contract is for hundreds or a few thousands. So, it means, as I've mentioned, right now, the Teams Paces is $320 million. Teams Phone is PSTN is just $20 million.

So, there's a huge runway ahead of us. And therefore, I believe that we have a space that could range 10 and 20 years. It's a gradual move. Let's not forget that the soft spending in '23 and '24 due to the economical crisis.

So, all-in-all, we're very optimistic that just we -- the growing live line outpacing the declining CapEx line, you'll see us growing in revenues..

That's great. One follow-up, if I could, around what you're seeing in the CX market, maybe with renewals.

Are you seeing any seat pressures in these renewals in terms of more productivity from agents around AI for your SBCs there at all?.

No, no. I think we see a fairly stable and steady market for us. No, we don't see any kind of pressure at this stage..

Got it. All right, thanks. That's all I've got..

Sure..

Your next question for today is from Samad Samana with Jefferies..

This is actually Billy Fitzsimmons on for Samad. Shabtai, you expressed confidence in the Microsoft business returning to double-digit growth next year.

Just to double-click on that, can you expand on what gives you confidence there and kind of what you're seeing in your pipeline? It sounds like the pipeline there for kind of the biggest opportunities, if I'm understanding correctly, is up 12% sequentially and 19% year-over-year.

Can you just break down who those customers are, maybe how we should think about pipeline versus maybe what occurred in the third quarter?.

Yeah. So well, we actually -- in the live business, we really to the U.S. largest enterprises. We cannot quote names. Some are public. I mean, I've mentioned for the CX space, I've mentioned University of Florida that was close to $1 million value contract. We have several such -- the thing is as follows, and maybe I should repeat the numbers.

Live is now 44% of business, but growing 21%. CapEx is now 56%, but declining 12%. So those trends will continue. And we'll just cross over and growing Live will take over. That is the source of confidence in our ability to come back to double-digit growth.

I'm not sure that that's going to be seen already in '25, but A, you'll see the continued improvement. And I'm confident that in '26, we definitely will see double-digit growth in Microsoft business..

Got it. That's helpful. And then if I can ask another one. We talked about this a little bit during the prepared remarks.

But can you just give us some anecdotes of customer wins with conversational AI? What do customers like about your product? And for what reason are they purchasing your product there over competitors?.

Okay. Well, great. So, our solution is quite unique in the sense that it is an organizational solution. Now there are a few note takers in the market. You know names. You can take Author [ph], you can take Avama [ph], you can take Firefly, a few more names, all are personal productivity note takers.

So, a person would use the application for himself, but that's about it. Our product really touches an enterprise. Let me give you AudioCodes as an example. We have close to 1,000 employees. We have daily 400 of those employees using Meeting Insights for meetings. And the use is for various reasons. Take Fomo [ph].

We all heard about fear of missing out, right? But with Meeting Insight, there's no Fomo anymore because any meeting that you have missed, you have full access to it. You can listen to the call. You can identify exactly what was said, who said what, it's being summarized.

It can be shared, okay? I just give you an example, last week, Thursday, I had a call with a large European system integrator and with just one salesperson on the line. As we completed the call in order to get -- and person I talked to was interested in moving on in the discussion.

I did forward that meeting to five of my colleagues, in the sales department, one in the business, one in the partners. And they all now could understand exactly what was the essence of my discussion with that system integrator manager. So that's just one example. Think about knowledge retention.

One of your best employees unfortunately tells you he's living. Now in order to replace him in order to get somebody into his shoes, that's hard. Not if you would have had Meeting Insights as a tool that use daily. And all of this guy calls and meetings were recorded throughout the past two, three years.

So, any new guy coming on the job is capable of fully get up quickly to the knowledge and experience that the other guy had before him. And I can give you now a list of 20 different applications. So, it's being used in municipalities. It's being used in health organization. It's being used in defense organization.

Our belief that in two years from today, most of the companies we know will use it. I mean, it's just like -- just as you use Outlook for messages and you don't read them all, but you get to that message you need when you need it. The same would be with the customer and a project and a product, okay? Yes, all those meetings are going to be recorded.

They're going to be placed into a repository within the company. And whenever you -- I suppose we have now a new project with, let's say, Siemens.

So, all I need to do is, we have a natural language read an application, which will allow us to identify those meetings in the past three or six months or 12 months that occurred with Siemens being mentioned.

And the group of managers that have to deal with the subject and provide a solution, they will immediately be able to query using either Copilot or any other chatbot and get responses. So, plenty of use cases. And we are, at this stage, probably one of the best organizational. That's the main difference between us and the other guys.

And even when you compare it to Cisco -- I'm sorry -- to Microsoft Teams freemium, that's exactly the case. We all -- they all do code summarization, but not much beyond that. We do all of the organizational work that helps you get the most relevant information..

Helpful. Thank you very much..

Sure..

We have reached the end of the question-and-answer session, and I will now turn the call over to Shabtai for closing remarks..

End of Q&A:.

Okay. 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 trend in UCaaS, CCaaS and CI, 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..

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation..