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spk01: Good morning, ladies and gentlemen, and welcome to the Audio Code's third quarter 2022 earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open 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.
spk02: Thank you, Operator. Hosting the call today are Shabtai Allisberg, President and Chief Executive Officer, Nan Baruch, Vice President of Finance and Chief Financial Officer, and Dimitri Nettis, 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 AudioCode's business outlook, future economic performance, product introductions, plans, and objectives related thereto. and statements concerning assumptions made or expectations that to any future events, conditions, performance, or other matters are forward-looking statements, as its 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 audio codes industry and target markets in particular. Shifts in supply and demand. Market acceptance of new products and the demand for existing products. The impact of competitive products and pricing on AudioCodes and its customers' products and markets. Timely product and technology development. Upgrades in 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 businesses. possible adverse impact of the COVID-19 pandemic on our business and results of operations, and other factors detailed in AudioCodes filing with the US 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'd like to remind everyone that this call is being recorded. An archived webcast will be made available on the investor relations section of the company's website at the conclusion of the call. With all that said, I'd like to turn the call over to Shabtai. Shabtai, please go ahead.
spk04: 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 Articodes. 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 return it into the Q&A session. Niran? Niran?
spk03: Thank you, Shabta, 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-GAAP 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 17 cents per diluted share compared to 8.3 million or 24 cents 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 TED quarter was 10.5 million or 32 cents per diluted share compared to 12.9 million or 38 cents 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 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 2nd, 2022, we declared a cash dividend of 18 cents per share. The dividend in aggregate amount of approximately 5.7 million was paid on August 31st, 2022. Regarding ad count on the yields of 112 positions in 2021, 55 positions in the first half of 2022. We had 29 full-time employees in the third quarter of 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.
spk04: Thank you, Niren. Before I start my formal remarks, I would like to remind everyone that in conjunction with our earnings release this morning, we have posted on our investor relations website an earnings supplement deck. So getting to the results, I'm pleased to report solid financial results for the third quarter of 2022, growing revenues 10% year-over-year. As stated in our press release earlier this morning, we see good continued business momentum in the UCAS and the customer experience markets, despite some macro uncertainty. Key drivers of our growth in the third quarter of 2022 came from UCAS, where Microsoft Teams related business grew nearly 20% year-over-year. AdiCode's life for Microsoft Teams managed services continued to grow and reached a level of 28 million ARR, nearly 100% growth over the year-ago period, putting us well on track to achieve our 2022 target of over 30 million. Importantly, Total contract value for our last subscription exceeded $90 million, providing us with an increasing level of revenue visibility. We have also witnessed good momentum in the customer experience market, where our business was down 5% year-over-year after being up over 20% in the prior quarter. The decline was driven mainly by seasonal softness in Europe. We expect this business to return to growth in the fourth quarter, as we continue to see a strong pipeline of opportunities for the core. I would like to emphasize that we have not seen any evidence of competitive pressure or environment changes. Another positive development in the third core was stronger than anticipated activity in the service provider CPE business related to carry all IP transformation and PSN shutdown projects, which have re-emerged post-pandemic. Our service provider business grew for the second consecutive quarter and up over 40% this quarter and contributed to a strong pipeline for the next year. Another growth driver of our business is conversational AI, which grew over 30% in the quarter. We saw increased activity in enterprise voice recording, in compliance recording, and in the meeting space. Additionally, we had record bookings in the conversational IVR, and continued growth in our Voice AI Connect platform, enabling voice capability for the growing world of chatbots. Lastly, I'm glad to report that despite evidence of slowing macro activity, leading in few cases to longer sales cycles, we are pleased to have maintained healthy top-line growth and profitability relative to our UCCX peers, which speaks to the secular growth trends in our strong market position. On the operations front, we saw lower than anticipated growth margin and operating margin as compared to previous course. A non-GAAP growth margin came in at 63.2% influenced by two primary factors. First, higher supply chain costs we incurred $1.2 million of higher component costs in the third quarter versus the year-ago period. I'm glad to report that we now forecast the extra components costs to be around $500,000 only for the fourth quarter, which is a major relief compared to the third quarter just ended. Actually, it's a relief also against each of the previous quarters of 2022, which were all in the range of $1.5 to $1.2 million. If such, gross margin is expected to be higher in the full score by about 100 basis points just on that category. Product mix accounted for the balance of the gross margin difference. Strength in the service provider CP and increase in sales associated with IP phone and meeting rooms collectively accounted for a greater percentage of our sales score. These products are hardware-based and typically carry lower than corporate average margin. Non-GAAP operating margin was 15.5% and was largely impacted by lower gross margins and by higher operating expenses. Referring to FX, third quarter 2022 represents our lowest edged rate of the U.S. dollars to Israeli shekels. which contributed roughly 100 basis points to the non-GAAP margin decline on a year-by-year basis. EDCON grew year-by-year by 13.5 percent as a result of our increased investment. We'll talk more about it in a minute. These two factors were offset by tightening of discretionary expenses that led to our non-GAAP OPEX growing 8.1 percent year-over-year while our revenues grew 10% year-over-year. On the heels of this development, our non-GAAP earnings per share came in at 32 cents, which compares to 38 cents in the third quarter of 2021. In early 2021, we announced a planned two-year increased investment cycle in R&D, sales and marketing, and services in order to better capitalize on secular growth opportunities in our end markets. Attending much of these objectives for the increased spending, we are now determined to balance our expenses for the balance of this year and into 2023. Over the coming course, we expect to show improved operating leverage in the following areas. One, tightening of spending as we approach the end of the planned investment cycle in 2023. Two, reduction of above 80 percent of the 2022 costs associated with component supply chain related purchases. We estimate 2022 extra costs to be around 4.4 million, so we're talking here about a saving of more than 3.5 million in 2023 bottom line. And then more favorable FX edging, in 2023 as those rates were fixed now and we do expect a gain in 2023. Now let's dive into some of our most important core business engine, which is the Microsoft business. As discussed previously, Microsoft business grew nearly 20% year over year and makes up over 50% of our business. Teams grew 30% year over year while Skype for Business declined roughly 40% year-over-year and accounted for less than 10% of the quarterly Microsoft business. Teams' newly created opportunities total amount have grown consistently over the last three quarters and up over 25% year-over-year in the third quarter, which provides a strong basis for further growth in coming quarters. We had another strong quarter for Microsoft Teams account additions, we added 298 accounts versus 248 in the year ago period, which speaks to the ongoing healthy adoption of Teams in our growing pipeline. To that end, we expect Microsoft Windows to be up nearly 20% in 2022 to a run rate of between 140 and 145 million. We're really excited about the multi-year growth to upsell voice services to that Microsoft Teams environment. As a reminder, there are over 270 million monthly active Teams users, and Microsoft recently disclosed only about 12 million Teams PSTN users, implying only low single-digit percentage penetration, suggesting significant multi-year runway for growth. Importantly, Our market share within Microsoft ecosystem for direct routing application remains strong and is well above 50%. AdiCode's life for Teams managed services subscription increased nearly 100% year-over-year in the quarter and reached a level of 28 million annual recurring revenues, nearly 100% growth year-over-year, and putting us well on track to achieve our 2022 target of crossing the 30 million bar. Total contract value for our live subscription exceeded $90 million, providing us with an increasing level of revenue visibility. Now to our next emerging business, which is the contact center or customer experience. Third quarter revenues were down 5% year over year after being up 20% in the prior quarter. Decline was driven seasonally I'm sorry, decline was driven mainly by seasonal software in EMEA. We expect a return to growth in the customer experience market in the full score. Backlook for the full score supports this expectation at this stage. On an annual basis, year-to-date customer experience business was $31 million, growth of about 6.5% compared with the same period, 2021-2021. Looking out to 2023, we see growing adoption of new products and services launched during the past 12 months based on the increased investment cycle in 2021 and 2022. These products and services should help boost revenue growth among them, and I'll count the various areas in which we have growing activity. It's activity related to web RTC solutions, applications such as click-to-call application, allowing people to call over the Internet to their target companies and contact centers. Conversational IVR solution. Voice AI Connect, which enables voice connectivity to voice-enabled CRM, chatbots, and IVAs. And finally, recording solutions, which are very in need these days with the evolution and progress of UCaaS, among them we count SmartTab, Compliance Recording, and Meeting Insights for meeting space. Now let's shift gear to another very important pillar of our business, which is the services segment. So during driving growth in services, which consists of maintenance support, professional services, and recurring live subscription, is key to our success in executing on multi-year transformation to software and service revenue stream. Services revenue grew 8.2% year over year in the core and accounted for 38.5% of revenues. While service revenues growth was lower than usual, largely attributed to timing, we saw strong invoicing activity in services. And invoicing activity grew close to 15% year-over-year. With regards to invoicing, I should mention too that professional and managed services were up 23% year-over-year. We had excellent execution again in all our subscriptions, as I've mentioned before. Overall, we ended third quarter at $28 million, as mentioned earlier. Importantly, we benefit from multi-year visibility From this revenue stream, the live customers often sign for 36-month-plus contracts. We ended September quarter with over $90 million total contract value. Long-term, we expect services revenue growth to outpace debt of product. Now to something that usually is not part of our presentation, but it's important. I think before I'll turn the call over to the operator for the Q&A session, I'd like to talk about our strategy of how we navigate through the current economic slowdown. This is partially based on our own past experience in the dot-com crisis of 2001 to 2003, a year ago. So we entered the 2001-2003 dot-com crisis with a rock-solid balance sheet, around 140 million on our balance sheet, 190 employees, and R&D expense of 10.6 million quarterly. During that period and up to the end of 2003, during the dot-com crisis, R&D ad count grew from 190 to 330, and R&D expense grew 50% as we increased investments in innovative products, which allowed us to emerge winner from this crisis. We took this position as we had the money, the power, the manpower, the technology base, and our customers to rely upon in a market that we were confident in its return to normal growth once the crisis is over. Obviously, we suffered from heavy losses during that period. Our competitors did the opposite. They had to either cut back on investments, exit the business, or ultimately, fell by the wayside. This ongoing innovation fueled new product launches that helped us to gain market share and drives outsized revenue growth. To give you an idea of how we went through that crisis, so revenue numbers for the period were as follows. In the year 2000, we sold 72 million. In the year 2001, the first step of the crisis, we sold 36, going down 50%. Emerging back from the crisis end of 2003, we sold 44 million. And then going forward five years to 2008, we then sold 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 the year 2000 with, you know, 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 strategies these days will take us higher in two to five years from now. Now, heading into... potentially another deep or mild recession, we are in an 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 let us leapfrog the competition whenever we emerge out of this economic downturn. And with that, I've basically completed my presentation for today, and I'd like to turn the session to Q&A. Operator?
spk01: Thank you very much, Shabtai. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone. We ask that while posing your question, you please pick up your handset, if listening on a speakerphone, to provide optimum sound quality. Please hold while we poll for questions. Thank you. Your first question is coming from Ryan McWilliams from Barclays. Ryan, your line is live.
spk05: Thanks for taking the question. 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? Do you think you'll see any difference in strength between cloud voice versus customer experience during that time period? And how do you think audio codes can best help customers during these macro difficulties?
spk04: Right. Ryan, I'm glad to say that we haven't seen any change in terms of the trends in both the UCAS and the CX markets. And we have not seen almost any change also in the the adoption of Microsoft Teams and customer experience solutions. So we believe that transfer will be well. Should we suffer from longer cycles of sales or longer projects? Yes, that could be the case, but I don't think that will affect us by more than a few percentage. At least this is the experience we have.
spk05: Perfect. And then one for Neuron. Nice to hear about improving operating leverage from here. Maybe how should we think about the magnitude of that? Should we think about maybe either the margins in like 2020 or 2021 as kind of like a target for what, you know, AudioCode is trying to get back to here?
spk03: Hi, Ryan. As Shabtai mentioned, just a second. Sorry for that. Ryan, as I mentioned earlier, we had two years of investments, mainly at adding more personnel. And as I mentioned, we added 112 positions 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 heading personnel. We believe and due to the two reasons that Shabtai mentioned also during the cold, 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 and 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. 2023, I meant.
spk01: Okay, thank you so much. Your next question is coming from Greg Burns of Sudoti and Company. Greg, your line is live.
spk07: Morning. Could you just discuss the sequential decline in services revenues? What's driving that? And maybe we could just start there.
spk04: Yeah, it's mainly timing. You know, the best way to refer to services especially maintenance contracts, is referred to a whole year simply because there are deviations in the timing of this. Usually, those are three-year contracts which are signed. There's no time pressure on signing them, so it may move from one quarter to another. On an annual basis, I think the mix is such that support 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%.
spk07: Okay. And then maybe we could just give a little more color about the types of customers that are signing up for live. Is that mostly SMBs, or is it? SMBs to enterprise you know the size of the customer signing up and when you look at the mix of sales and the to the team's environment you just kind of break out you know what is what percent of that business or new business is coming from recurring services like live versus traditional capex sales right so yeah the optimal customer for live
spk04: would usually be the mid-market, you know, mid-market companies. Basically, smaller companies do not have the breadth and the means for those type of services. A company that's 1,000, 3,000, 7,000 or so will be served optimally by live. They would focus on their core competence, you know, no need And actually, it's going to be difficult to attain those talents and resources that can help them, you know, run teams, you know, mostly. So our sweet spot is mid-market. We happen also to gain some larger enterprises. And that's a process, you know, as time goes on, seeing the percentage of larger companies grow. Okay. I'm sorry. What was the second question?
spk07: I was just asking what the percentage, the mix of the team's revenues coming from traditional CapEx sales, new sales coming from traditional versus the live recurring.
spk04: Yeah. Okay. So the way it looks now, live at this stage is above 20% of overall teams. So if you break down teams into CapEx sales and live, 80 percent or less than a 75 to 80 percent at this stage or capex sales and about 20 to 25 percent is recurring revenues live team okay and then um can you just um quantify the the fx impact this quarter like how much did that impact the top line and and um the other margins yeah so basically this was our worst core ever in terms of the edge we had and you know comparing to a year ago core we declined almost five percent so the impact was around 100 basis points going forward we know and we have actually we have an edge that runs well over 23 and into 24, we already know that doing an annual calculation will benefit from the edge compared to 22 in a major way that will contribute. So already in Q4, we'll have a better rate, almost 2% over the third quarter, and this will continue
spk03: grow further into 2023 okay and the did the fx impact the top line at all this quarter let me let me let me run there hi greg actually yes we have some revenues nominated in euros so about let's say 10 to 20 percent of our total quarterly revenues are in Euro, and due to the weakness of the Euro against the US dollar this quarter, we suffer also at the top line. And you can do the math. Okay.
spk07: All right, thank you.
spk01: Thank you very much. Your next question is coming from Ryan Kuntz of Needham and Company. Ryan, your line is live.
spk06: Hi, 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, 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 affect your business, selling it to direct routing versus Operator Connect? Are you seeing Operator Connect 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.
spk04: Sure. Well, actually, one needs to make a big distinction between DAX routing and Operator Connect. DAX 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 not really kicked in yet. service providers do evaluate and make preparations to deploy the service, the service will probably be more applicable to SMBs. And so it's another area. But right now, that has not started yet. As for us, obviously, we keep currently on uh working diligently on the enterprise side with direct routing and we have done everything necessary to to uh compete um uh well on uh operator connect uh when it starts um we'll see i mean uh we may see starting to take off second half of 23 but it's not known yet so um but again um we tend to be fairly competitive with, we'll talk more about it that we, you know, what one key different strategic advantage we believe we'll have in that. And you know, that is that, you know, we usually try to marry, combine our connectivity with business applications. And that is something that none of our competitors does. And that will become, we believe substantially more important for SMBs served by service providers. So we're waiting for that to happen as well.
spk06: Okay, that's super helpful, Shabjai. Thanks. One quick follow-on. You know, in discussing some of the cloud providers like 8x8 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?
spk04: Yeah, that is very logical. We definitely see that, you know, dark 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, you know, voice business applications. Take recording, take contact center, take, you know, other areas. And in that regard, yes, it definitely makes sense that contact center will grow on the use of cloud direct closing.
spk06: Helpful. Thanks a lot. I'll pass it on.
spk01: 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.
spk04: Well, thank you, operator. I would like to thank everyone who attended 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.
spk01: 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
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