Good morning, ladies and gentlemen, and welcome to the AudioCodes' Third Quarter 2022 Earnings Conference Call. At this time all participants have been placed on a listen-only mode and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mr.

Roger Chuchen, VP of Investor Relations. Roger, over to you..

Thank you, operator. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer; Niran Baruch, Vice President of Finance and Chief Financial Officer; and Dmitry Netis, Chief Strategy Officer and Head of Corporate Development.

Before we begin, I'd like to remind you that the information provided during this call may contain forward-looking statements relating to 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 impact of competitive products and pricing on AudioCodes 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 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 results of operations 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 a full reconciliation of the non-GAAP net income and net income per share to its net income and net income per share according to GAAP in the press release that is posted on its website. Before I turn the call over to management, I would like to remind everyone that this call is being recorded.

An archived webcast will be made available on the Investor Relations section of the company's website at the conclusion of the call. With all that said, I'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 2022 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 return it into the Q&A session.

Niran?.

Thank you, Shabtai, and hello everyone. As usual on today's call, we will be referring to both GAAP and non-GAAP financial results. The earnings press release that we issued earlier this morning contains a reconciliation of the supplemental non-financial information that I will be discussing on this call.

Revenues for the third quarter were $69.7 million, an increase of 10% over the $63.4 million reported in the third quarter of last year. Services revenues for the third quarter were $26.8 million, up 8.2% over the year ago period. Services revenues in the third quarter accounted for 38.5% of total revenues.

The amount of deferred revenues as of September 30, 2022 was $75.8 million up from $72.1 million as of September 30, 2021. Revenues by geographical region for the quarter were split as follows. North America 46%, EMEA 33%, Asia Pacific 15% and Central and Latin America 6%.

Our top 15 customers represented an aggregate of 59% of our revenues in the third quarter of which 45% was attributed to our 11 largest distributors. GAAP results are as follows. Gross margin for the quarter was 62.8% compared to 69.6% in Q3 2021.

Operating income for the third quarter was $7 million or 10.1% of revenues compared to $10 million or 15.8% of revenues in Q3 2021. Net income for the quarter was $5.4 million, or $0.17 per diluted share, compared to $8.3 million, or $0.24 per diluted share for Q3 2021. Non-GAAP results are as follows.

Non-GAAP gross margin for the quarter was 63.2% compared to 69.9% in Q3 2021. Non-GAAP operating income for the third quarter was $10.8 million, or 15.5% of revenues, compared to $13.5 million, or 21.4% of revenues in Q3 2021.

Non-GAAP net income for the third quarter was $10.5 million or $0.32 per diluted share compared to $12.9 million, or $0.38 per diluted share in Q3 2021. At the end of September 2022, cash, cash equivalents, bank deposits, financial investments and marketable securities totaled $126.7 million.

Net cash provided by operating activities was $2.1 million for the third quarter of 2022. Day’s sales outstanding as of September 30, 2022 were 80 days. During the quarter, we acquired 273,000 of our ordinary shares for a total consideration of approximately $6.1 million. On August 2, 2022, we declared a cash dividend of $0.18 per share.

The dividend in aggregate amount of approximately $5.7 million was paid on August 31, 2022. Regarding headcount on the heels of 112 positions in 2021, 55 positions in the first half 2022, we headed 29 full-time employees in the third quarter 2022. We reiterate our guidance for 2022 as follows.

We expect revenues in the range of $275 million to $282.5 million and non-GAAP diluted net income per share of $1.35 to $1.45. I will now turn the call back over to Shabtai..

in year 2000, we saw $72 million; in year 2001 the first year of the crisis we saw $36 million going down 50%, emerging back from the crisis end of 2003 we saw $44 million and then going forward five years to 2008, we then saw $175 million. So from a bottom of $36 million in 2001, we grew to $175 million in 2008. Same by the way, for operating income.

We entered year 2000 with – we closed 2000 with $90 million. At the end of 2001, we lost $19 million. Year 2003 we lost $10 million. But then in year 2008, we earned $13 million. Obviously, these numbers tell the whole story. We do believe that similar such strategy these days will take us far in two to five years from now.

Now heading into potentially deep or mild recession, we are in even better position as we have a similarly pristine balance sheet today, but now with very strong profitability that can further fuel our innovation and help us leapfrog the competition whenever we merge out of this economic downturn.

And with that, I have basically completed my presentation for today. And I would like to turn the session to Q&A.

Operator?.

Thank you very much Shabtai. Ladies and gentlemen the floor is now open for questions. [Operator Instructions] Thank you. Your first question is coming from Ryan MacWilliams from Barclays. Ryan, your line is live..

Thanks for taking the questions. Shabtai, I feel like you've seen it all in this industry.

How do you think about how the next 12 months plays out for cloud communications? Like, do you think you will see any difference in strength between cloud voice versus customer experience during that time period? And how do you think AudioCodes can best help customers during these macro difficulties?.

Right. Ryan, I'm glad to say that we haven't seen any change in terms of the trends in both the UCaaS and the CX markets. And we've not seen almost any change also in the adoption of Microsoft Teams and Customer Experience solutions. So, we believe that trends will be well.

Should we suffer from longer cycles of sales and/or longer project? Yes, that could be the case, but I don't think that will affect us by more than few percentage. At least this is the experience we have..

Perfect. And then one for Niran.

Nice to hear about improving operating leverage from here; maybe how should we think about the magnitude of that? Should you think about maybe EBITDA margins in like 2020 or 2021 as kind of like the target for what AudioCodes' trying to get back to here?.

Hi, Ryan. As Shabtai mentioned earlier, just a second sorry for that. Ryan, as Shabtai mentioned earlier we had two years of investments mainly at adding more personnel. And as I mentioned, we added 112th position in 2021 and more than 80 positions so far in 2022. And by that we are planning to stop the two years investment in more adding personnel.

We believe and due to the two reasons that Shabtai mentioned also during the call. The FX which this quarter was the worst hedging rate that we had and the component, extra price that we paid, we believe that effective the fourth quarter we will start to see an improvement in the – getting back to operating leverage.

Of course for 2022 we will update and say the guidance for 2022 when we release our fourth quarter results..

Okay. Thank you so much. Your next question is coming from Greg Burns of Sidoti & Company. Greg, your line is live..

Good morning.

Could you just discuss the sequential decline in servicer's revenues? What's driving that and maybe we could just start there?.

Yes. It's mainly timing. The best way to refer to services especially maintenance contract is to refer to a whole year simply because there are deviations in the timing of this.

Usually those are three-year contracts which are assigned, there's no time pressure on sending them, so it may move from one quarter to another, but that's on an annual basis, I think the mix is such that the total [ph] contracts are usually in the range of 8% to 10% annually.

However as we continue to mention professional services and managed services grow most of 20%, so the combination of the two lies somewhere between 10% and 15%..

Okay. And then maybe we could just give a little more color about the types of customers that are signing up for Live's.

Is that mostly SMBs or is it SMBs to enterprise? The size of the customers signing up and when you look at the mix of sales and to the team's environment, can you just kind of break-out what is – what percent of that business or new business is coming from recurring services like live versus traditional CapEx sales?.

Right. So yes, the optimal customers for Live would usually be the mid-market – mid-market companies. Basically smaller companies do not have the breadth and the mean for those type of services. A company that's 1,000, 3,000, 7,000 or so will be served oftenly by Live. They would focus on their core competence.

No need and actually going to be difficult to obtain those talents and resources that can help them run teams mostly. So a sweet spot is mid-market. We happen also to gain some larger enterprises and that's a process as time goes on, I think the percentage of larger company’s growth. Okay.

I'm sorry, what was the second question?.

I was just asking what the percentage; the mix of like the team's revenue is coming from traditional CapEx sales – new sales coming from traditional versus the live recurring?.

Yes. Okay. So the way it looks now live at this stage is about 20% of overall teams. So to breakdown teams into CapEx sales and live 80% or less than 75% to 80% at this stage are CapEx sales, and about 20% to 25% is recurring revenues live stream..

Okay.

And then could you just quantify the FX impact this quarter? Like how much did that impact the top line and the margins?.

Yes. So basically this was our worst quarter ever in terms of the edge we had and comparing to a year ago quarter we declined almost 5%. So the impact was around 100 basis points. Going forward, we know and we have actually we have an edge that runs well over into 2023 and into 2024.

We already know that doing an annual calculation will benefit from the edge compared to 2022 in a major way that will contribute. So already in Q4 will have a better rate almost 50% over the third quarter and this will continue in grow further into 2020..

Okay.

And did the FX impact the top line at all this quarter?.

Let me run that [indiscernible]..

Hi, Greg. Actually, yes, we have some revenues nominated in Euro. So about, let's say 10% to 20% of our total quarterly revenues are in Euro and due to the weakness of the Euro against the U.S. dollar this quarter we suffer also at the top line, and you can do the math..

Okay. All right. Thank you..

Thank you very much. Your next question is coming from Ryan Koontz of Needham & Company. Ryan, your line is live..

Good morning. Thanks for the question.

I wanted to double click if we could on the Microsoft Teams environment, which obviously is a big growth driver for the company and specifically the phenomenon of Direct Routing versus Operator Connect, it seems to me we're starting to see these larger service provider partners begin to move to this Operator Connect model, which my understanding is that simplifies some of the onboarding for the enterprise by integrating into the administration of teams itself.

So my question is, how does that change impact, affect your business selling it to Direct Routing versus Operator Connect? Are you seeing Operator Connects begin to happen yet and in your current Direct Routing business how is your exposure spread across traditional service provider operators versus kind of next generation cloud voice providers? Thanks..

Sure. Well actually one needs to make a big distinction between Direct Routing and Operator Connect. Direct Routing usually targets enterprise companies, and that is an ongoing activity for the past two years already, so very active growing strongly. Operator Connect is a new offering for service providers that has naturally kicked in yet.

Service providers do and evaluate and make preparations to deploy service, this level will probably be more applicable to SMB and so it's another area, but right now that has not started yet.

As for us, obviously we keep currently on working diligently on the enterprise side with Direct Routing and we have done everything necessary to compete well on Operator Connect when it starts. We'll see, I mean we may see starting to take off second half of 2023, but it's not known yet. So but again we tend to be fairly competitive.

We'll talk more about it that we – one key different strategic advantage we believe we'll have in and all that is that we usually try to marry, combine connectivity with business applications and that is something that none of our competitors does, and that will become – we believe substantially more important for us and be served by service providers.

So we're waiting for that too often..

As well. Okay that's super helpful. Shabtai, thanks. One quick follow-on. A discussion, some of the cloud providers like 8x8 agent and RingCentral with their own Direct Routing offerings.

They claim that there's an improved level of contact center integration with Direct Routing versus Operator Connect; is that true from your perspective?.

Yes. That is very logical. We definitely see that Direct Routing is basically a connectivity solution. However, if you talk about the needs of a business for voice services, they also need all of the different voice business application, take recording, take contact center, take other areas.

And in that regard, yes, it definitely makes sense that contact center will grow on the yields around that closing..

Helpful. Thanks a lot. I'll pass it on..

Good..

Thank you very much. There appears to be no further questions in the queue. I will now hand back over to the management for any closing remarks..

Well, thank you, operator. I would like to thank everyone for attending our conference call today with continued good business momentum in 2022 and strong underlying market trends in our industry. We believe we are on-track to another year of growth in 2022. We look forward to your participation in our next quarterly conference call. Thank you all.

Have a nice day..

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation..