AudioCodes Ltd.

Greetings and welcome to the Audio Coach fourth quarter 2024 earnings conference call. At this time all participants are on a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host Mr. Roger Chu Chen, Vice President of Investor Relations. Sir, you may begin.

Thank you, Operator. Hosting the call today are Shabtai Atlasberg, President and Chief Executive Officer, and Naran 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 AudioCode's 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 effects 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 audio codes 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 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 results and results 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 operations and may limit our ability to produce and sell our solutions. Any disruption in our operations by the obligations of our personnel to perform military service as a result of current or future military actions involving Israel and other factors detailed in AudioCodes' filings with the U.S. Securities and Exchange Commission. AudioCodes assumes no obligation to update this information. In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share. AudioCodes has provided 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, 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 would 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 fourth quarter and year-end 2024 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance of Audiocodes. Niran will start off by presenting a financial overview of the 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 turn it into the Q&A session.

Niran. Thank you, Shabta, 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. We will be comparing our fourth quarter 2024 result to the prior quarter as we believe it provides a better gauge of our financial performance. Revenues for the fourth quarter were $61.6 million, an increase of 2.2 percent over the $60.2 million reported in the third quarter of the current year. Full year 2024 revenues were $242.2 million a decrease of 0.9% over the $244.4 million reported in 2023. Services revenues for the fourth quarter were $34.2 million, an increase of 5.4% over the $32.5 million reported in the third quarter of the current year. Services revenues in the fourth quarter accounted for 55.6% of total revenues, On an annual basis, service revenues were $130.2 million, an increase of 8.2% over the $120.4 million reported in 2023. The amount of deferred revenues as of December 31, 2024 was $84.4 million compared to $78.6 million as of September 30, 2024. Revenues by geographical region for the quarter were split as follows. North America, 47%, EMEA, 34%, Asia Pacific, 14%, and Central and Latin America, 5%. Our top 15 customers represented an aggregate of 64% of our revenues in the fourth quarter, of which 48% was attributed to our 10 largest distributors. Gap results are as follows. Gross margins for the quarter was 66.2% compared to 65.2% in Q3 2024. Operating income for the fourth quarter was 4.1 million or 6.7% of revenues compared to operating income of 4.9 million or 8.1% of revenues in Q3 2024. Full year 2024 operating income was $17.2 million compared to operating income of $14.4 million in 2023. EBITDA for the quarter was $5.2 million compared to EBITDA of $5.9 million for Q3 2024. Full year 2024 EBITDA was $21.1 million compared to EBITDA of $17 million in 2023. Net income for the quarter was $6.8 million or $0.22 per diluted share compared to net income of $2.7 million or $0.09 per diluted share for Q3 2024. Full year 2024 net income was $15.3 million or $0.50 per diluted share compared to $8.8 million or $0.28 per diluted share in 2023. Non-GAAP results are as follows. Non-GAAP gross margin for the quarter was 66.5 percent compared to 65.6 percent in Q3 2024. Non-GAAP operating income for the fourth quarter was 7.5 million or 12.2 percent of revenues compared to 7 million or 11.7 percent of revenues in Q3 2024. Full year 2024 non-GAAP operating income was $28.1 million compared to operating income of $28.9 million in 2023. Non-GAAP EBITDA for the quarter was $8.5 million compared to non-GAAP EBITDA of $7.9 million for Q3 2024. Full year 2024 non-GAAP EBITDA was $31.4 million compared to non-GAAP EBITDA of 31 million in 2023. Non-GAAP net income for the fourth quarter was 11.6 million, or 37 cents per diluted share, compared to 4.9 million, or 16 cents, per diluted share in Q3 2024. Full year 2024 non-GAAP net income was 27.3 million, or 87 per cents per diluted share compared to 25 million or 77 cents per diluted shares in 2023 at the end of december 2024 cash cash equivalents bank deposits marketable securities and financial investments total 93.9 million net cash provided by operating activities was 15.3 million for the fourth quarter of 2024 and $35.3 million for the year 2024. Day sales outstanding as of December 31, 2024, were 106 days. During the quarter, we acquired 635,000 of our ordinary shares for a total consideration of approximately $6 million. In December, 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 permit us to declare a dividend of any part of this amount. The approval is valid through June 14, 2025. Earlier this morning, we also declared the cash dividend of 18 cents per share. The aggregate amount of the dividend is approximately $5.3 million. The dividend will be paid on March 6, 2025 to all of our shareholders of record at the close of trading of February 20, 2025. Our guidance for the full year 2025 is as follows. We expect revenues in the range of $246 million to $254 million and non-GAAP EBITDA in the range of 34 million to 38 million. I will now turn the call back over to Shabtai.

Thank you, Niran. I'm pleased to report solid fourth quarter performance with healthy growth in key business lines. Now, before I delve into reporting the fourth quarter financial and business, I would like to start off by offering and perspective on our journey over the recent years, reflecting on our past, current position, and our future direction. First, let's take a moment to acknowledge the achievements of 2022. It was an exceptional year for us, with revenue reaching a record level of $275 million and profits at $45 million non-GAAP EPS. However, in 2023, our business experienced a slowdown, The challenging economic, environmental and global crisis had a significant impact on sales of our hardware products, primarily due to the high interest rates environment in our transition from perpetual sales to a recurring business model driven by shift towards cloud services. This has resulted in 11% decrease in revenue and notable decline in earnings in 2023. Then turning to 2024, While we anticipated similar trends continuing, I'm pleased to report that year 2024 has signified a stabilization in comparison to the drop-off phase in 2023, with a minimum revenue decline of about 1% and a comparable effect on earnings. 35% of net cash flow from operation further underlines our success in 2024. Furthermore, in 2024, we began a new journey driven by combining the power of AI and business voice application to explore new opportunities for the company. As you will hear shortly, we are embarking on a new direction, gradually shifting our focus from connectivity business to a new AI and generative AI-powered value-added services business. This area appears to hold significant potential for our growth. Consequently, We are optimistic that 2025 will mark a year of reversal, with plans in place for renewed revenue growth and increased profits. More importantly, we aim to establish a leading position in the emerging market, focused on AI-driven value-added services within the UCaaS and CX segments. Now to post-quarter results. Our enterprise UCaaS and CX business is very well in the quarter. Related revenue accounted for 92% of revenues in the first quarter, highlighted by Microsoft Business at 13%, up 30% in the quarter. This represents the highest quality growth rate this year. Full year, Microsoft Business increased 6%. In the customer experience business, we made progress as planned. Our growth in our CX Live business and healthy pipeline for CX Live services supports positive outlook for 2025. We also did very well in our services business. Overall services grew 10.9% year-over-year and accounted for 54.5% of revenues. Professional managed services grew 23.1% year-over-year. With the UCAS market continued growth of above 15% CAGR for coming years, we expect our live managed services growth to continue at such rates in coming years. Going back to enterprise, live teams grew 30% in the core and accounted for 47% of the overall Microsoft business. Full year 2024 live teams increased 33% and represented 47% of Microsoft business. This growth, coupled with 30% growth in voice AI business for the full year 2024, contributed to us ending 2024 with an annual recurring revenue at $65 million, representing 35% year-over-year growth. It is important to note that at this stage, the majority of revenue from the UCAS and CX markets are associated with our connectivity year. What's been developing already in 2024, and we should see more of it growing in the years ahead, is a shift in the market demand to focus on complementary value-added services for the same UCAS and CX markets. Just to name a few such services, these include among others, call analytics, contact center solutions, recording solution, meeting room solutions, CRM connectivity, and more. As such, with a shift in our focus to offer business voice applications coupled with value-added services, we expect to see a rise in demand for our voice AI applications. We are preparing to launch services based on Live Services Platform, a SAS unified service delivery platform that has been in development in our company for the past three years. This platform integrates connectivity, management, and value-add services into a single ID code solution, which we believe positions SAS with a competitive market advantage. As previously mentioned, Our land and expense strategy, supported by our leading SBC connectivity solution and complemented by additional solution and services, has consistently demonstrated our potential for growth. We are now moving into the second phase of this strategy, utilizing our strong network of enterprise customers to cross-sell value-added services, specifically within the realm of voice application that we classify broadly as conversational AI. To provide some context, our investment in conversational AI began back in 2018 with the establishment of our voice AI business unit, well before the rise of GenAI. With the introduction of GenAI, we've observed a notable increase in customer interest and expansion of use cases, which has justified a significant portion, approximately one-third of our R&D budget dedicated to this area. We believe that our voice AI portfolio has reached a level of maturity and is now receiving increased market recognition for our solution, leading us to expect accelerated revenue growth starting in 2025 and continuing thereafter. Consequently, as we approach 2025, we will concentrate our internal operation on managing two distinct business units, connectivity and value add services. Now, I will provide an overview and outline some financial characteristics of these two business units to enhance investors' understanding of the Audiocode's current operations. Starting with our connectivity business. This business encompasses our traditional voice infrastructure solution and service operations, which are designed for large enterprises in the UC and CX markets. In 2024, This segment has generated approximately 95% of the company revenue. Operating for the past 15 years, this is a well-established operation that holds a strong market position, particularly within the Microsoft Teams and Genesys ecosystems, and achieving attractive known gap operating margins that are between 16% and 18%. Fully mature and solid business, which continues to grow roughly at above 10% annually. As a leading player in this area, we anticipate consistent long-term growth in years ahead. With the advancement of cloud services, we have adapted our voice infrastructure solution, shifting from hardware-focused products to software solutions and services. Transitioning from traditional capital expenditures or perpetual sales, The recurring managed services model is expected to improve both revenue visibility and stability while supporting sustained long-term growth. Consequently, we view this business as highly profitable with promising growth potential and significant cash flow from operation, which will allow us to invest and fund the evolution for our value-added services and voice AI. Now let's discuss our voice AI business. we initiated investment in this area back in 2018. From an operational standpoint, we are still in investment phase as the number of voice AI applications we support is rapidly increasing in value-added services sector, largely due to the emergence of GenAI technology launched by OpenAI back in November 2022. In 2023 and 2024, we allocated around 8 to 10 million of investment each year which has influenced the company's overall financial performance and bottom line. The voice AI business saw growth of approximately 30% in 2024 and contributing about 5% to total revenue. We expect that this continuous annual investment will further facilitate annual growth rate of 30 to 50% for the voice AI business in coming years. As the voice AI business offers its voice application and SaaS solution, we foresee an increase in gross margins that will exceed the current company average, resulting in enhanced gross margin over the next few years. Over the last year, our voice AI business clients have garnered multiple industry accolades, including a Vocal CIC winning the award for the best Microsoft Teams contact center solution from CX Today in February 2024, recognition for best use of AI by the Meeting Insights solution by UC Today in July 2024, and just yesterday, an award for Meeting Insights from Frost and Sullivan for competitive strategy leadership in the AI business meetings market. Why do we believe we will emerge a leader in the conversational AI field among established players and startups? We are uniquely positioned to succeed due to several key factors. First, we possess extensive domain expertise in VoIP telephone and networking built over the past 20 years. Also, since 2018, we have made significant investment in cognitive services technology and AI. Our team has vast experience in developing and delivering SaaS cloud and on-premises services. We have proven record in UCaaS and CCaaS managed services, and we have extensive experience in deploying a solution further that will further strengthen our position. Moreover, the brand trust that we have established with major enterprises is noteworthy. Our voice solution is deployed in mission-critical UCCX voice infrastructure of 65 out of the Fortune 100 companies and four out of the top 10 multinational banks. We believe this strength collectively positions us favorably within the competitive landscape of conversational AI for business voice application. Now, before turning into more detailed business line discussion, let me quickly shift into the fourth quarter profitability metrics. Our non-GAAP gross margin for the quarter was 66.5%, falling within our long-term target range of 65 to 68, and an improvement from the previous quarter of 65.6%. In the first quarter, non-GAAP operating expenses rose to $33.4 million, up from $32.5 million in the third quarter. This increase is mainly attributed to increased investment in marketing, travel, and cloud services aimed at bolstering business growth as we move towards 2025. The hike in expenses can be primarily linked to enhanced participation in marketing events, an expanded sales team, in hard travel costs, all focused on driving revenue growth, especially in live managed services and voice AI. In terms of workforce, we concluded 2024 with 946 employees, an increase from 935 in the third quarter, but a slight decline from 950 in the fourth quarter of 2023. Adjusted EBITDA for the fourth quarter was $8.5 million, reflecting a 13% compared to $7.9 million or 13.1% in the previous quarter. For the entire year, adjusted EBITDA reached $31.4 million. Lastly, in a positive development, net cash from operation activities was $53 million for the quarter and $35.3 million for the full year 2024. Clearly, this robust cash flow generated supports a positive outlook regarding our capacity to keep investing in and expanding our business moving forward. Now to the guidance front. Concerning our growth strategies for connectivity and value-add services sector in 2025, we aim to sustain growth of 20% to 26% in the connectivity sector with a target annual recurring revenue of $78 million to $82 million. In the value-added services sector, we anticipate booking will increase by over 40% year-over-year to exceed $17 million. In light of this planning, along with operational momentum and strong pipeline in our live managed services and voice AI, we are setting our guidance, as Niran mentioned earlier, to revenue guidance of $246 million 154 million for 2025, with full year non-GAAP EBITDA guidance of 34 million to 38 million. These projections take into account continuing strong growth in the conversational AI space and stable connectivity outlook, assuming no significant changes in the macroeconomic landscape. Let me move a bit to give more background on Microsoft's business. Regarding strategic business segments, as previously noted, Microsoft Teams experienced 13% increase year-over-year in the full score, marking the highest score growth of the year. The full year growth for Microsoft Business was 6%. Looking at the recurring versus capital expenditure aspects, our live booking in full score surged by 30% year-over-year, with live booking constituting 47% and increased from 40% in the same year last year. Consequently, this time capex segment of the teams accounted for 53% down from 60% in the previous year quarter. The activity regarding new live teams contracts remained robust in fourth quarter. with total contract value booking exceeding $20 million. For the entirety of 2024, we observed annual contract value growth surpassing 25% compared to prior year. A significant factor in success within this domain is the live services platform, which combines connectivity management and value-added services. This platform facilitates faster development for large enterprises large enterprise accounts on one end, and then enables quick onboarding for small and medium-sized businesses. As we look ahead to 2025 and beyond, market forecasts indicated the U.K.' 's market will likely continue to expand its rates, exceeding 20% throughout 2027. The Microsoft Teams phone ecosystem has shown robust growth, adding over 3 million new seats in the past year, reaching a total of about 22 million, which is a small fraction of the estimated 300 million potential for Teams seats. Also, I'm pleased to share that we have recently been focusing on creating a valuable opportunity for ourselves as we prepare to offer a comparable successful connectivity solution for the Cisco WebEx Calling program. With an estimated 16 million seats and an additional 3 million seats in the past year, We view this new market segment as an excellent chance to expand our market presence. In a previous discussion, we highlighted the ongoing strengths of the Microsoft ecosystem, especially within the education sector. I'm happy to report that this momentum has not only persisted, but has also intensified. Here are a few significant achievements from the core. The first success involves a major state university system comprising of over 50 campuses. Recently, we finalized a master agreement with the IT administration, which designates us as the preferred communication partner as the campuses aim to enhance their UCCX infrastructure in coming years. In the fourth quarter alone, we secured contracts value in the low single-digit million which includes live pro-managed services, professional services, and capital expenditures for high performance. Notably, this figure represents the initial commitment from nine campuses only out of the 50, and is just a small part of the total number of universities available. We anticipate that more campuses will join us in upcoming months. Getting to our CX business, in fourth quarter, CX revenue increased by 12% compared to the third quarter. Throughout the fourth quarter, we successfully finalized several significant agreements with partners and clients across North America, Cali, and India. Despite the challenges associated with getting call center voice infrastructure to the cloud, many customers are choosing our live CX service. During fourth quarter, we secured a contract exceeding $1 million for LiveCX in Brazil with a banking institution to assist in their network migration to the cloud. In North America, we established multiple LiveCX agreements in Q4 with leading banking and financial organizations. By the beginning of fourth quarter, we established a CX partnership with an Indian BPO to transition their multi-region voice infrastructure to the cloud. They went live within a few weeks using our live service delivery platform. which typically takes months with traditional deployment methods. Our efforts to encourage partners to adopt our live platform resulted in a new contract with the North American T01SI system integrator that has major Genesis and Cisco CX practices. We will continue working to onboard more partners onto our platform to expand the reach of our live CX service. Now moving of details about voice AI business. Voice AI business, as mentioned before, grew 30% in 24, contributing nicely to the overall company revenue growth. Development of Gen AI technologies and increasing customer demand for AI-driven business voice application plays a significant role in adoption of voice AI application. With new opportunities emerging in this sector and booking nearly reaching 15 million in 24, it is anticipated that demand will remain steady and this segment is projected to grow by 40% to 50% in 2025. Let me make a quick run through two or three businesses in the voice AI area. The first is the Voice AI Connect, a primary target or large enterprise in North America and Europe that develop and deploy multiple custom voice boats and agent-assisted solution to serve contact center solutions. Following over three, four years of developments, the solution, which is SBC-based, has reached a mature stage and is highly appealing to large corporations. Additionally, we've created a derivative product, a cloud sales service application named LiveHub. This platform enables both developers to rapidly test or onboard both applications within minutes, making it highly attractive to developers of both solutions. Another exciting development is our recent soft launch of our real-time translation capability in mid-November. We have seen strong market interest, resulting in multiple proof of concepts with existing and new customers. In 2024, sales grew by over 30%, and we anticipate maintaining the same growth rate in 2025. Turning to VocalCIC, this is our AI-first Azure-based contact center solution for Microsoft Teams. When combined with our calling solution for Microsoft Teams Phone, ROCCA CAC offers a comprehensive and advanced calling and contact center solution. In 2024, we successfully delivered an expanded deployment with large enterprises in North America, EMEA, and APAC. In some of these deployments, we were successfully displacing and winning against key competitors. In its third year of operation, this business booking grew by approximately 35%. We're now planning for a growth of 50% in 2025. Now turning into meeting insights, this has been an eventful past few months for meeting insights on all fronts. First, we are thrilled to have Frost and Sullivan present us with Best Practices Competitive Strategy Leadership Award in the AI for Business Meetings Market. The announcement was made yesterday and will make it public in a couple of days. We believe this validates the vision of serving a centralized organizational knowledge hub, breaking down silos by unlocking valuable insights from meetings across major UC platforms. Even before this recognition, we already saw step function increase in customer interest in meeting insights across all geos, with full-core proof-of-concept trials at nearly 2.5 times the level from the previous quarter. January proof-of-concepts off to a new good start, and so would expect another record-full proof-of-concept in the first quarter of 2025. In terms of product development and professional updates, I'll name a few. We recently unveiled intelligent room solution by powering, populating our own video conference devices with meeting insights such that all meeting participants will automatically receive auto-generated AI meeting summaries. This move enhances value proposition to users by bringing to bear the full capabilities of our portfolio and can spare further interest in adoption of meeting insights. We're also adding bring your own storage option which expands the addressable market to customers who are required to have the recording storage on their preferred or private cloud. Since the announcement of Zoom meetings support in late October, we've seen a good number of meetings conducted in Zoom environment validating our vision and value proposition of centralized knowledge repository. In the next few weeks, we will look to offer integrated major CRM platforms, starting with Salesforce to Meeting Insight. We believe this will be a very important functionality meeting high demand in the market. We have announced a week ago a new and quite exciting solution in Israel. We're talking about operating Meeting Insight on-prem This is a meeting solution for organizations seeking highly secured environment for meeting solution and complete disconnect from the Internet. It is in first stages of evolution, already selling nice in the government application area in Israel, and we intend to offer it in international markets in coming months. Very unique offering. We have seen high demand for the solution. It touches the most sensitive areas for management in the government, defense, finance, and healthcare markets. To wrap up my presentation, we exited 2024 with good operational momentum, particularly with the continuous strong growth in our two primary engines, our live family of managed services and voice AI. With the progress we are making in increasing our recurring revenues and that live currently nearing half of Microsoft Teams bookings, We believe we have laid the foundation to support sustainable energy top line and margin expansion in 2025 and beyond. And with that, I've concluded my presentation. I'd like to move over to the Q&A session.

Thank you. Ladies and gentlemen, at this time we will be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question is coming from Ryan McWilliams with Barclays. Your line is live.

Hey, guys. This is Damian Cobb, and I'm from Ryan McWilliams. Thanks for taking the question. Great to see solid growth in services revenue in the quarter. Can you help us understand what is driving your confidence for improved top-line growth in 2025 and beyond? Are customers more optimistic about their spend in 2025, or... Is this being driven by AudioCode's AI opportunity? Thanks.

As I've mentioned in my previous presentation, we have seen a pickup in the full score in new projects and bookings. And I believe in the full score, we saw a record backlog of, you know, total contract value signed for more than $20 million that compares roughly to an average of 15 million throughout the year. So we have seen nice pickup in the full score. Again, we believe that with the advent of Gen AI and co-pilot technology, there will be more reason for enterprises to adopt AI and Gen AI to deal with Teams meetings and Teams calls, and therefore, we believe that there will be more deployments of Microsoft Teams soon in the market.

Great. Thanks, Aptai. And then for the CCaaS demand in the quarter, how did that fare compared to 3Q? And then are you seeing increased attention from buyers on voice AI?

So the answer is, again, Yes. First, we are substantially increasing the capacity of the live CX services we're offering. Prior to moving to cloud, enterprises were usually aided by partners who really took care of most of the installation and operations day two and on. With the move to cloud, much of these partners were left with no ability to support the enterprises. And therefore, you know, that support needs to come from the vendors themselves, which created kind of a gap in the market. We have identified that mid-2024. Now we have a substantially fuller portfolio of LiveCX services. And I think we just had a very substantial win, I think I've mentioned it, It is one of the largest North American system integrator that deals with CX projects, mainly in the Genesis and Cisco environment. So that offering really represents substantially faster deployments of voice networks within the move, the migration from on-prem to cloud. And this is where we find a lot of Also, as you have mentioned, there's a trend of applying AI to contact center recordings. Gen AI technology allows analysis and analytics of all those calls just to find out more information. So analysts that will be analyzing agent calls we'll be able to hand over to management trends and more important insights into what's going on. And we're not talking about single sessions, but also when you talk about, you know, multitude of sessions. You can talk about tens and hundreds of sessions where Gen AI helps you to identify patterns and trends.

Great. Thanks, guys.

Sure.

Thank you. Our next question is coming from Ryan Kuntz with Needham & Company. Your line is live.

Great. Thanks for the question. We hear the traction on Microsoft picking up there around Teams, and what kind of trend you're seeing relative to operator voice connections into Teams? Are you seeing a trend over toward this new operator connect capability? or still a lot of direct routing, and how does that impact your attach rate for teams? Thank you.

Right. Well, we've seen a shift in the encouragement of using operator connect over a direct route. So we do see organization, small organization mainly, interested more. Is it an overwhelming trend? We've not been exposed to such trends. So yes, the movie, you know, the trend is moving from, you know, SBC, their crowd to operator connect. But at this stage, we still do not see a big increase in usage in the market.

Got it. Great. And just, um, at a high level, you know, you talked about some big customer wins here in Brazil and the Systems Integrator North America. I wonder if you're seeing a trend toward larger, you know, fewer, larger customer wins, or are you seeing more activity down market where you maybe have, you know, a higher number of smaller customer opportunities in the pipeline? Thanks.

Okay. Thanks for the question because that really allows me to elaborate a bit about segmenting the market into two key areas. On the enterprise space, we see here a continued trend of large enterprises adopting teams year by year. And as I've mentioned before, we believe that the advent of AI and co-pilot solution will drive more enterprise seats towards using teams meetings and calls. But in this space we are generally a very dominant leader and we do not see much competition. So here the growth is well. Now touching the SMB space, as you allude to it, there's definitely competition over there, right? We know that Cisco is leading the space with, you know, it's, you know, our relationship with the world's largest service providers. And then you have Zoom playing in that area and Microsoft Teams also trying. There, I believe it's going to be more, you know, more competition. However, we believe that the platform we will be introducing second core, you know, the live platform delivering, you know, value-add services, with so many unique AI-driven applications such as contact center, recording, meeting solution, analytics, CRM connection, and stuff, we believe that being very strong technologically, we do have an advantage with coming up with one of the best platforms you'll see in the market. And therefore, we believe that we will be a strong player in that. So all in all, I mean, we have you know, a two-pronged strategy, and we believe we will be successful in both.

Great. Thanks, Shata. Thank you.

Thank you. Our next question is coming from Samad Samana with Jefferies. Your line is live.

Hey, guys. This is Billy Fitzsimmons on for Samad. Maybe to start, a couple of months back, you announced support for audio codes meeting insights for Zoom meetings. Obviously, Zoom also has their internal AI companion. Shabtai, can you just talk about differentiation between your solution and Zoom's in-house solution and maybe traction you're seeing since launch with customers?

Right. Meeting ESAT is targeting to become a UC-agnostic solution, meaning that our solution is an enterprise-level solution. And in every enterprise, no matter what type of UC solution that enterprise has adopted, it takes us as an example. We're using Microsoft Teams. We have often a lot of Zoom calls. We are called in. and or sometimes when we need to talk to the government here in Israel, you know, it's a Google Meet session. So you want one centralized solution, enterprise solution, that should be able to basically contain all of the different sessions from both Microsoft Teams, Cisco WebEx calling, Zoom meetings, and Google Meet meetings. And therefore, our solution will allow that. Anyone using just zoom, you know, we'll simply not be able to add to it, you know, calls coming from different environments. So that is a major, you know, strategy in our solution of becoming use agnostic. And also, we believe that the fact that we are dealing with larger enterprises, which have a finer requirements, and you know, they can find, you know, executives with different you know research and and market uh and business driven um questions that we can answer within meeting inside because we use uh custom prompts uh we believe that we will see that less in in in other uh solution one of them could be zoom um ai companion so we believe that the fact that we're dealing with large enterprises will make our solution substantially you know, more extensive and providing more detailed solutions.

And then more broadly, obviously the business has been going through this kind of subscription transition shift to more recurring, radical revenue. Can you just help us think a little bit more next year about kind of the revenue mix? In the longer term, is there a point where the product revenue and some of the legacy stuff in there should start at the bottom? Or should we expect perennial declines there for the services support side to make up for that in terms of growth?

Right. So, as I mentioned earlier in the call, we learned that in 2024, we saw the drop in legacy business drop stabilizing. meaning contrary to the 11% drop in 23, we went down only 1% in 24. We believe that the trend will continue in 25, meaning we'll have less and less drop in legacy gear such as gateways and hardware-based routers and SBCs. So on that front, the business will stabilize. We then see increased use of services, And, and as I mentioned before, it's, I think we stepping into a new era of, you know, um, business voice application, which is all, you know, software and cloud services, SAS solutions. And, and w for example, we ended 2024 with voice AI revenues. It's about, um, I believe it was 12 million and we targeting 18 million. So we targeting 50% and, and quite frankly, I believe that we or not yet in a phase where those solutions are mature enough. So as those solutions get more and more mature, I believe that, you know, the growth rate will intensify. So we're building much upon our ability to drive voice AI business revenue. So combining the two, you know, halt of the drop, decline in legacy, and emerging of voice AI. And obviously, as we said before, you know, the live business, which is growing 35% a year. I think we set for a good year in 25.

And then if I could sneak in one final question, you guys obviously got it to EBITDA for next year, but could you maybe go a step further and just help us think even high level about kind of the individual OPEX lines next year? Where are you making kind of incremental headcount investments and maybe where are you kind of paring back spending to Obviously, there have been a lot of AI products, but R&D spend is actually down over the past couple of years. Could we expect that line, for example, to pick up a little bit next year in terms of OPEX spending?

Yeah, in terms of OPEX, we are planning to invest more only at the area of sales and marketing, definitely not at the G&A and the R&D. And all in all... OPEX, you know, at 2024, we ended the $131 million. We believe for 2025, and that's how we budgeted it, the growth at OPEX will be 1%, maybe 2%, not more. And it's mainly will be at the sales and marketing area.

Awesome, super helpful. Thank you, Shantay and Niran. Appreciate the answers.

Thank you. As we have no further questions at this time, I would like to turn the call back over to Mr. Adlersberg for any closing remarks.

Thank you, Operator. I would like to thank everyone who attended our conference call today. With continued good business momentum in our enterprise operations and good underlying market growth trends in the UCAS CX and Voice AI, 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.

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