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spk02: Good morning everyone and welcome to the Audio Code second quarter 2024 earnings conference 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 operator assistance during this conference please press star zero on your phone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Roger Tuchin, Investor Relations at AudioCodes. Roger, the floor is yours.
spk03: Thank you, operator. Hosting the call today are Shabtai Atlasberg, 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, 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 from of competitive products and pricing on audio codes 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 audio codes to successfully integrate the products and operations of acquired companies into audio codes 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 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. 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 audio codes filings with the U.S. Securities and Exchange Commission. Audio codes assumes no obligation to update this information. In addition, during the call, audio codes will refer to non-GAAP net income and net income per share. Audio codes 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.
spk01: Shabtai, please go ahead. Thank you, Roger. Good morning and good afternoon, everybody. I would like to welcome all to our second quarter 2024 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance of Audicodes. Niran will start off by presenting a financial overview of the core. I will then review the business highlights and summary for the core and discuss trends and developments in our business and industry. We will then turn it into the Q&A session. Niran?
spk00: Thank you, Shabtai, and hello, everyone. Before I start my formal remarks, I would like to remind everyone that in conjunction with our earnings release this morning, we will post shortly on our investor relations website an earnings supplemental deck. 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 second quarter were $60.3 million, an increase of 0.5 percent over the $60 million reported in the second quarter of last year. Services revenues for the second quarter were $32 million, up 12.3 percent 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%. 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 percent in Q2 2023. Operating income for the quarter was 4.9 million or 8.2 percent of revenues compared to operating income of 2.3 million or 3.8 percent of revenues 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 12 cents per diluted share compared to net income of 1.1 million or 3 cents per diluted share for q2 2023 non-gap results are as follows non-gap gross margin for the quarter was 65.8 percent compared to 64.5 percent in q2 2023 Non-GAAP operating income for the second quarter was $7.2 million or 11.9 percent of revenues compared to $5.7 million or 9.5 percent of revenues in Q2 2023. Non-GAAP EBITDA for the quarter was $8.3 million compared to non-GAAP EBITDA of $6.2 million in Q2 2023. Non-GAAP net income for the second quarter was 5.5 million or 18 cents per diluted share compared to 5.1 million or 16 cents per diluted share in Q2 2023. 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 2024. Purchase of property and equipment was 8.8 million in the quarter, significantly higher than historical periods related to this whole improvement of 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. 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. This approval is valid through January 1, 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 18 cents 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. Business 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-GAAP EBITDA from non-GAAP net income per share. Effective second quarter 2024, 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. Prior to this quarter, our practice was to adjust non-cash deferred tax expenses or income as part of our non-GAAP reconciliation. Specifically, this deferred tax non-GAAP adjustment derived mainly from the tax expenses recognized due to the realization of the company's net operating losses deferred tax asset. We believe this change in tax expense presentation has no notable impact on the true cash generation of the business. 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 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. 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.
spk01: Thank you, Niran. I'm pleased to report solid 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. Within enterprise business, which represents about 90% of full revenue, our UCaaS 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. 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 and full year 2024. 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, provides 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. Our managed services business continues to evolve to become our key go-to market. Services business grew 12.7% and accounted to 53% of revenue in the second quarter, compared to 47% in the year-ago quarter. What has fueled ongoing momentum in services is our live managed services, which grew about 35% year-over-year and ended second quarter at 56 million annual recurring revenue, putting us on track to achieve our guidance of 64 to 70 million exit 2024. 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 have contributed the most to the ongoing growing booking trends. First and foremost, our live business. 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 platform stems from the comprehensive large scale of services delivery supports. Among these are connectivity services, where we hold about 70% market share, contact center services which were added last year based on our Evoca CAC AI-first contact center for Teams, recording, analytics, and inference services, and nowadays conversational AI services. We are thus well-positioned to win a large portion of the Microsoft Teams value-add services. 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, articles live in managed service backlog. Those are managed services that we sold but haven't yet invoiced in or delivered in full, was at the end of the second quarter, 67 million compared to just 29 million at the end of second quarter 2023. This represents 133% year-over-year growth, and that speaks for the strength of the Microsoft Teams live business. 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 above 50% growth in bookings in 2024, and we aim to end up above 10 million this year. As we all know, Gen-I technology is fueling much modernization and innovation in the modern workplace applications in the enterprise space due to its unique ability to support creation and new advanced services while cutting substantial costs and time to market. At Hodecodes, 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, services practice, 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. 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. 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. Declining our legacy business relating to the service provider business during 2023 The first half of 2024, coupled with our revenue model shift from capex sales into recurring business, were the main factors that drove a halt in our growth story during the years 2020 to 2022. However, these were also the years where we have worked hard to build our live platform and business in UCAS, CCAS, and invested in building our conversational AI business. As legacy business decline starts to moderate in 2024 and beyond, laying 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 through emerging as of 2025 and beyond. With growth in recurring business in UCAS, 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 2025 and beyond. Before turning to the TLB's discussions, let's quickly shift to second quarter profitability metrics. Our non-GAAP gross margin in the quarter came at 65.8% within our 65 to 68 long-term range. and compares to 65.2% 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 quarter non-GAAP 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 1.5 million quarterly expense initial reduction, of which about 1.2 million is still to be realized in the third quarter 2024, and thus to contribute to further reduction in the OPEX in third quarter 2024 and beyond. 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 employees in the second quarter of 2023. The year-over-year improvement in non-GAAP gross margin and OPEX led to non-GAAP operating income of $7.2 million, or $11.9 percent margin versus a year ago of 2.9 or 4.9 percent margin. On a guidance front, with steady performance in the second quarter and pipeline opportunities for strategic area of business remaining healthy, we are reiterating our 2024 revenue guidance of 2040 to 2050 million. As explained earlier by Niran, we are introducing full year non-GAAP EBITDA guidance of 33 to 39 million, which is unchanged as implied from the non-GAAP EPS guidance provided during last quarter earning call. In 2023, non-GAAP EBITDA was 31 million. Now let's move to some of the business lines. 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 management live managed services withdrew 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 approximately annual growth of 35 to 40% compared to 2023. Revenue was led again by steady growth in the North American region. 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 revenue was accordingly 57% compared to 61% in the year-ago quarter. As a reminder, And with Microsoft 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, UKS 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's last report in previous quarter was that they are at about 3 million Teams Phone ads in the previous three quarters. We believe that the key driver to further or accelerated growth of Teams Phone is the nowadays Microsoft push on use of Copilot for meetings and calls analytics. So expect good market lying ahead. On a new area for us, meeting rooms with teams, we saw good momentum and growth in revenue from our MTR business. Well, we are at the end of the second quarter, already at the same level of the entire revenue for the MTR business throughout 2023. Just to remind or talk about one key point, Winning the core, we signed a 36-month contract with a multinational consumer goods firm, providing live essential services to initial 20,000 Teams users, 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 with complex requirements takes time. Also, initial contract win may not be meaningful. So long-term, building trust with customers and executing on our land and expense strategy by leveraging broad portfolio of product and services have proven to be effective recipe to 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 core, impacted by push-out of a large deal owing to customer-specific circumstances, and that's related to material changes in the market environment. 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. Live6 is our voice services suite for contact center, and now is delivered using our live platform, which generalizes services the way the services are delivered and allow us to offer additional services to complete our value proposition to partners and large customers. Just to mention some of the customer experience live services, I'll mention just four. The first one is our bring your carrier solution or SIP connection. This is our core competency, which is tied up 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 have migrated, so 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. Second service is our omnichannel, omnivoic channel solution, or as we call it, click-to-call. 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 going forward. Then we can talk about a call regarding call security. and then we can talk about an answer or service analytics. I'll not provide more details. We can definitely provide those details in calls after the call. In terms of revenues, just to give you some idea about the way the 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 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. Naturally, these large projects require longer decision cycles that may delay signature. In third quarter, we won a project with U.S. Bank that ordered our new core security service, adding additional 30% on top of the voice connectivity revenue. Now let me move to the conversation I had business. Shifting to that business, revenue was, as I've mentioned, 10.5% year-over-year. Booking grew. above 50% for the core. We expect it to become a second most important growth engine for the company going forward, with total contract value expected to cross the 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 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 Gen AI plays a critical role. However, most of the value lies in the integrated solution. While Gen AI and conventional AI are key to the delivery of solution, the ability to compete and be successful in providing full working social solution to the enterprise base is highly dependent on system and cloud services where we have an edge over competition. This is where our decodes shine. We own extensive experience in a multitude of technology areas, including telephony, networking, networking device management, security, cloud infra, cognitive services, services practice, and more. At the same time, we invest in fine-tuning GenAI applied research for this project. I'll mention that out of and R&D force headcount of about 350 engineering software developers. We currently employ more than 100% in the voice AI activities, which is close to one-third of it. Growth of UCaaS and CCaaS is heavily dependent these days on the application of CAI, GenAI, Microsoft Co-Pilot growth clearly depicts this dependency. And thus, we believe we have and edge, and are building a strong baseline for future business expansion. Key activity increasing mainly in the verticals of finance, health care, and government. Talking about solutions, we have now in production three SaaS applications, which provide multi-tenant operation over Azure. Leading is VOCA CIC, our AI-first Azure native contact center for Microsoft Teams. Then we have an interaction recording application called Smart App 360, which provides compliance recording and enterprise recording. 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 the meeting insights, and more custom projects. Turning a bit to vocal CIC vocal CIC is our submission at first contact center solution for teams. It plays well into the company overall live business and strategy where we enjoy the benefit of upsell to existing 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 close to double this year. Revenues are already 130 percent above the entire 2023. We expect to almost triple them in 2024. To mention a few more data points, VOCA CIC pipeline increased 35 percent quarter over the quarter, sequential quarter. We won additional education account in North America, now serving five educational customers in the U.S. in total. We have continued momentum with channel partners in education. We signed 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 run a large migration project of more than 200 IVRs. Again, this is in EMEA, moving a customer from Zoom to TIMSS. And then we have a Vocacys, the largest deployment to date, now handling 2.5 million calls a month. Turning it to Meeting Insights, Meeting Insights is a SaaS application and an organizational enterprise solution that captures, analyzes, and organizes every Microsoft Teams meeting in organization, allowing company-wide information sharing and enabling substantial better decision-making for managers and company managements. using information delivered in meetings across the organization. At RD codes, we use meeting inside for more than two years now and processing nowadays more than 150 meetings a day. Needless to say, we experience very high productivity pickup based on this using the application. RD codes meeting inside is part of a growing portfolio of SaaS application services in the conversation AI domain, which unleash the power of AI by transforming Teams meeting into business insights, delivering efficient use of information and data exchange throughout a meeting, and accelerates business productivity and organizational decision-making intelligence. Glad to inform that at the end of last week, an online publication, leading online publication, UC Today, has selected Audicode Meeting Eastside as a winner of its best use of AI category in its UC Awards 2024. The awards judges recognized 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 a completed the deployment of a SaaS solution throughout the first quarter. We've seen tremendous growth in second quarter, more than 30%. We now expect to grow very fast. The use of AI in Meeting Insights 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 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. 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. So we expand rapid growth. We expanded that business that is just a few thousands of dollars in 2024 to deliver millions, few millions, in 2025. Just to, again, mention that we're working to expand the solution in many areas I mentioned. We'll add automation on top of it, very unique features that will allow to improve productivity such as, you know, prepare me for my next meeting. You'll get a message on your mobile and you'll be ready to meet to deal with anyone that you add meeting with and action item with. We'll add more integration into CRMs and meeting notification. And with that, I'll wrap up. So we have 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 long-term while driving significant margin expansion in 2024 and beyond. And with that, I have concluded my presentation and will move the session to Q&A. Thank you, operator.
spk02: 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. A confirmation tone 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. Thank you. Your first question is coming from Ryan McWilliams of Barclays. Ryan, your line is live.
spk04: Hey, guys. This is Damon Coghlan. I'm from Ryan McWilliams. 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?
spk01: Yeah, actually, again, anyone who wants to understand the prospects of our business should pay attention to two key lines, business lines. One is the live and Microsoft live teams, which is the managed services business. Services now about 53% growing nicely year over year. 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. The platform is called Live Platform, and it's based on connectivity services for which we are known, both Gateway and SBC. But then throughout the years, we have added more services, first and foremost management services, so we can manage addition, deletion of user sites, We then added on top of that the contact center Teams application, which provides for contact center applications. We've added recording solutions. Nowadays, recording and transcription and inference become key in the evolution of both UCaaS and CKS solutions, so adding those services further strengthens. Our strategy here is lend and expand. So we usually lend with our connectivity services, what we consider to be the dominant leader in the market. And then we simply tunnel and do an upsell of voice-related business application to each such account. So using, and customer, you know, we had the last, a win, a very important win with UCF, University of Central Florida, right? One of the top three universities in the US. They've 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 on it. And, you know, last year we, you know, signed the contract. So it's, it's a, you know, again, it's land and expand and the addition of more services. And you can expect, right, I was talking about, you know, meeting inside. I was talking about new coming solution. Let's talk about interaction analytics for contact center, et cetera. So we see a long runway for voice-related business application in the live Teams environment. This is why we believe that, you know, having this integrated platform, you know, it's very high integration to 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, we're fairly confident that that growth will continue. So that's one leg. The other one, which is just a new, substantially smaller leg, which is the CAI, conversational AI, Here again, you know, we bring our, you know, many years, 20, 25 years experience in multitude of technologies as I've mentioned. We believe not too many organizations may have this type of, you know, comprehensive set of technologies, you know, 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 large language models in Gen AI. So we are basically marrying, you know, the old system and software and cloud services abilities with the new Gen AI activity that the internal group is handling, right? We're working with OpenAI LLM and with, you know, cloud and evaluating several more. So we definitely expect that our ability to deliver end-to-end full solution 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 base our business going forward.
spk04: Got it. Thank you, Sabtai. 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?
spk01: Yes. So we have, well, my strategy was always to set up here in Israel next to EdCore, where we had 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, 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. We are delivering already, you know, the Israeli largest medical service organization is called Clalit. It has 4.5 million subscribers. We have, you know, a solution for call steering. And now we have for, you know, setting calls. 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 standard products, right? It's not VOCA CAC and it's not Meeting Insights. It's projects where you need to connect to a contact center, you need to connect to a cell phone environment, you need to do management of elements, you need to transcribe, to extract, to infer, record, deliver reports, analytics, so A lot of areas where we can shine.
spk04: Thank you, Shabtai. I'll hide back in the queue. Appreciate it. Sure. Thank you, Ryan.
spk02: Thank you very much. Your next question is coming from Ryan Kuntz of Niedermann Company. Ryan, your line is live.
spk05: Great, 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, 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? Can you set any kind of goalposts out there when you think you might see this return to revenue recognition growth again, approaching high single-digit or maybe double-digit?
spk01: I believe that the decline of legacy is moderating. At the same time, we see many services picking up and CAI services at the same time. Based on our visibility, we should talk about two to three cores going forward. I expect that actually either first quarter or second quarter 2025, we are definitely going into growth. And 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. So we expect growth to come back you know, a second core of 25 and beyond. That's really helpful.
spk05: Thank you for that. 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 shipments.
spk01: Yeah. When we looked into the history of gateway sales, we saw that back in 23 first quarter and this first quarter of 24, 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. So we do expect that gateway business will not continue to decline, or it will definitely moderate its decline throughout 24. 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. At the end of this quarter, I think we got somewhere to like 60 million. I don't believe we will see decline of more than another 10 or 15 minutes. So throughout the coming course, so all in all, I think we already experienced the largest drop. And so it will moderate and you know, will will vanish.
spk05: 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 third quarter. Any other puts and takes on the cash use in the quarter? I did see that the cash 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?
spk00: This is Nira. So, you know, we had a very nice cash flow, operating cash flow in the first quarter. It was $15 million. So no dramatic change during this quarter, although we saw a slight increase in our accounts receivables. But there is no issues with the collection or a doubtful allowance with regards to the accounts receivables. 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. With regards to the capital expenditures, yes, it relates to our new headquarters. We will have a few more millions invested at the third quarter, and then we will back to the regular level that we used to have before.
spk05: Got it. Thanks, Naranda. That's all I've got. Appreciate it.
spk02: Thank you very much. Your next question is coming from Samad Samana of Jefferies. Samad, your line is live.
spk06: Hey, guys. This is Billy Fitzsimmons on for Samad. 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. We'd be curious if you guys have seen any material changes in either UCAS or CCAS spending from a macro backdrop perspective, quarter over quarter, or as you look out to the third quarter. Thank you.
spk01: Okay, well, all in all, I believe, and we also, you know, you know, review information provided by analysts in the space. Contact center activity doesn't seem to stop. Actually, it continues. You know, if you take Enterprise Connect back in March of this year, it was, you know, fairly active and intensive on all contact center applications. That's growing. No impact from the global economy. UCAS is growing less. However, it's still very strong. We have not seen, well, there's definitely an impact of the 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. I'll just say that, again, as I've mentioned, that the appearance of Gen AI technology, co-pilot and likes, will definitely give a push to the use case simply because now there's ample, actually excellent technology that allows 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, there's the information exchange in meetings, which is, you know, we sit on 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 good intelligence. So we do expect that GenAI co-pilots and a few more chatbots technology will definitely help to increase the use of viewcast. So all in all, we are optimistic that in 2025, we'll see better behavior.
spk06: Got it. And then conversational AI grew 50% year over year. And Shum, now 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? How are customers justifying the cost increase? What are getting those deals over the finish line? Any color there would be helpful.
spk01: 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 locations and sites. One organization that we work with was usually recording its meetings, but however, he 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're getting 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, to an operation that's fully real-time operated. And that's a big, big plus. Think also about a contact center that, you know, was working. However, you know, management and analysts had no idea about, you know, what was going on in all those calls. Now we have tools such as, you know, summarization and insights extraction that allows analysts and data scientists to inform managers, you know, where the focus is what application and operation is hot and which is not, and where management should invest its resources. 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 has left your organization, you're at loss. It will take you four months. to recruit a replacement. All the experience and knowledge that the previous employees were gone usually. And it's a blow. Many years ago, we lost several design engineers. We made a calculation that the departure of each cost us about $70,000 in total. Nowadays, if you use a meeting summary and insights tool for each meeting, All you need to do is you tell your employees to include that capability in each of their meetings. Now when somebody leaves, the new employee that comes and replaces him, all of a sudden he has got tens and hundreds of recordings and summarizations and insights in text from this person's experience. So all of a sudden he can become fully productive and effective within a matter of a week or two. 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.
spk05: Super helpful. Thank you very much.
spk02: Thank you very much. Just a reminder, if anyone has any remaining questions, you can press star 1 on your phone keypad now. 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.
spk01: 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 UCAS, CKS, and CAI, 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.
spk02: 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.
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