AudioCodes Ltd.

as customers continue to consolidate to primary vendor platforms to drive cost-effectiveness while doing more with less. However, we believe there are three potential reasons for the disconnect in our results. The first one, potential lag in activation of phone licenses as customers optimize networking budgets. Second, headwinds from the ongoing ad count regionalizations. And third, migration from historical license and maintenance model, which is CAPEX, to recurring or amended services model. All in all, I will point out that any CAPEX deal in the past is now transformed into roughly 20% of value on an OPEX basis, which means that we do miss some of those recurring revenues due to the fact that the overall sale is now extended over several years. Leading growth in UCAS and CX areas were services, which have demonstrated growth of 10.8% year-over-year, with professional and managed services growing 11.8% year-over-year. Service revenues or service business now represents 51.5% of our quarterly sales. With increased focus on moving to recurring business sales, our managed services business, Live and Live Cloud, entered the quarter at $35 million annual recurring revenues, up over 60% year-over-year, with total contract value now at above $110 million. We now expect live managed services to continue to grow at above 50% growth rate throughout 2023, and we target annual revenues recurring revenues to reach between $46 and $50 million by the end of this year. We don't see any reason for that growth rate to not continue in the following years. So we're talking about a really growing business, very large. In the customer experience market, we saw healthy customer activity during the quarter. These are direct enterprise customer experience business, roughly flat year over year. Now to the reduction in force and updated operating expenses budget for 2023. Given customer spending remains pressured by macroeconomic uncertainty new term, we have taken steps to adjust our cost structure and reduce our ad count and operating expenses. We plan for a reduction in force by approximately 8 to 10 percent over the next 6 to 12 months. with 6% of that effective immediately, roughly talking about 60-plus positions in our workforce worldwide. This reduction in force should provide OPEX relief starting in the beginning of the third quarter of 2023. The reduction in force was concentrated in R&D and sales functions globally, yielding $8 million of annualized OPEX savings. with full run rate expected to be realized in the beginning of third quarter. This step will allow us to stabilize our operation and financials for the rest of 2023 as it helps to balance our need to maintain investment in strategic areas of our business while meaningfully improving new profitability. We do expect that this reduction in force plan will help substantially improve 2024 financial results where we plan to see a return to revenue growth coupled with reduced OPEX to improve earnings for 2024 by more than 50% as compared to this year. We will continue to evaluate additional cost-cutting initiatives based on changes in our business environment. Now to some of our key business lines. Let's talk about Microsoft. Microsoft business declined 3% year-over-year in the quarter, with teams up 5%, while Skype for Business down over 50%. Skype for Business is now to a very not meaningful level of between 1 to 1.5 million a quarter. The same factors that influenced our total revenue impacted our Microsoft business, namely cautious enterprise customer spending behavior leading to other push-outs, and downsizing of scope and contracts are signed, with the weakness particularly acute in the EMEA region. Importantly, we have not seen any project cancellations as existing projects already in motion or continuing as planned. I should also mention that we really do not see any competitive pressure in this area, which is our key business area. We added above 250 new Teams accounts in the core, up from 256 added in the year-ago period, which is an indication that despite difficult macro conditions, customers continue to migrate from legacy telephony systems to next-generation Teams platform, albeit at a more rigid pace. Our long-term opportunity with Microsoft Teams remains unchanged. Teams remains the leading collaboration platform with Microsoft, having recently disclosed over 300 million monthly active users, up from over 280 million plus square. Teams, phone, PST, and attach rate at the low single-digit percentage of overall monthly active users provide us ample multi-year runway to drive ongoing penetration gains. While live annual recurring revenue primarily consists of managed services sold to large enterprises and customers, I would like to call out increasing momentum from our live cloud on white-labeled voice connectivity and application platform. This self-service SaaS platform is available for multi-vendor UC and CX environments such as Teams, WebEx, Zoom, and target service providers and system integrators worldwide. We have scored some notable wins globally. We now have over 50 customers on the platform. highlighting by a number of tier one carriers. This ramp up is continuing and we believe as we add on functions to live cloud, this platform automated solution for connecting businesses to teams and other UK solutions will pick steam and will drive much of our revenues in the future. Overall, we expect strong momentum in live services to continue in 2023. Now to the global services business. Invoicing was pretty strong. We saw healthy new service opportunity created worldwide. While total invoicing for the first quarter for total services was about 8.4% growth year over year, we saw 12.5% growth in the professional services year by year. Audiocode's live and managed service backlog at this at the end of the first quarter 23 was 52 million. That's compared to 26 million at the end of the first quarter 2022. This represents roughly 96% year over year growth, which tells a lot about the strength and the appeal for our live maintenance services with teams customers. Now let me move to the voice AI business. This is becoming a more important business in our future. Actually, I would say that while we keep strong on the networking business, we invest a lot in terms of budget in the voice AI business. The business was up 5% year over year on the back of ongoing momentum seen in voice AI connect and CIC products. We are projecting strong growth in this business over the long haul. Among the leading solutions and products in that business are the voice AI connect, connectivity solution, meeting insights, and our intelligent virtual agent solutions. Let me go one by one. Voice AI Connect was pretty successful in the first quarter. Invoicing grew 75% year over year. Booking was strong. Actually, we saw here more than 10% growth year over year. We could have grown further. Unfortunately, we had some delays in projects of some of our major customers. And then newly created opportunities grew above 30% in the core. So all in all, a very successful product. We don't see any competition to it. The product allows SIP telephony to be connected to cognitive services and, if you will, chat GPT type solutions. So a very successful product. Then let's move to VOCA CAC. VOCA CAC is our entry-level Microsoft Teams native AI-first contact center application for the CX market, and it has generated growing interest over 2022, and we plan to step up our efforts in this area. VOCA is a modern lightweight contact center solution designed to provide the lightest integration with Microsoft Teams Voice, allowing companies to effectively deliver a top-notch service experience for callers over their existing Teams Voice infrastructure. Using powerful automation capability, Loca allows easy no-code configuration of self-service IVR flows that combine built-in conversational AI with CRM and database dips, together with smart routing to queues, agents, departments, and company contracts, empowering employee experience. experience using CX capability. The VOCA solution integrates the Microsoft Teams using with power model, the latest and newest integration method powered by Azure communication services. Q1 2023 marked another peak of performance period for the VOCA solution with booking of above half a million, which is equivalent to the overall booking level of 2022. New opportunity creation was at 92, newly created opportunities in the first quarter. That is three times as big when compared to the first quarter 2022 creation of opportunities. As of today, VOCA CAC has 47 accounts worldwide, out of which 37 were acquired in the past year alone. Now to meeting insights. Meetings are the lifeblood of every organization, where valuable company information is shared among participants. Audicode's Meeting Insight is an enterprise meeting management solution designed to unlock this mountain of information treasure, summarize and analyze information relating to these meetings, and share it across the organization to substantially improve productivity and information sharing among managers and employees. Leveraging Audicode's vast voice capabilities a state-of-the-art voice AI technology, together with integrating it with LLM technologies, large language models, and technologies such as ChatGPT and other advanced cognitive services. Meeting Insight easily captures and organizes all meaning-generating content from team collaboration and training session to sales and recruitment calls. It generates automatic meeting summaries and insights, creates organizational data repository, and makes important organizational information searchable and accessible like never before using notification and mobile client technology. We already have taken steps to adopt ChatGPT and LLM models in our meeting insight solution to enable advanced AI summarization and speech analytics. We plan to deploy in coming weeks, the first such implementation. We expect Voice AI is now actually running in alpha, and we do plan to ship it to beta customers in less than a month from today. We expect Voice AI to achieve acceleration in the rest of 2022 and beyond to further expand our success in the U.S. and CX markets. And with that, I'm coming to the end of my introduction. While results work, impacted in the core by difficult market conditions causing a change in customers' spending decision and behavior and expanded sales cycles, we are confident that our secular growth drives and competitive position remain intact. We continue to see ample opportunity for innovation in the conversational AI business and transition to live services at customers undergoing digital transformation to cloud with our core UCSCX segment. And with that, I would like to turn the call back to the operator for the Q&A session.

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One moment while we poll for questions. Your first question for today is coming from Greg Burns at Sidodian Company.