AudioCodes Ltd.

Thank you for holding and please remain on the line. The audio codes conference call will begin momentarily. Thank you for your patience. Thank you. Greetings. Welcome to the Audio Code's first quarter 2026 earnings conference call. At this time, all participants are in 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, Roger Chuchin, Vice President of Investor Relations, you may begin.

Thank you, Operator. Hosting your call today are Shabtai Atlasberg, President and Chief Executive Officer, and Niran Bru, 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 forelooking 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, 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 following. the effect of global economic conditions in general and conditions in audio codes industry and target markets in particular, including governmental undertakings to address such conditions, 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, the advent of artificial intelligence, and the ability to manage changes in market conditions and evolving regulatory regimes as applicable. Possible need for additional financing, the ability to satisfy covenants and audio codes financing agreements, possible impacts and disruptions from audio codes acquisitions, including the ability of audio codes to successfully integrate the products and operations of acquired companies into audio codes business. Possible adverse impacts attributable to any pandemic or other public health crisis on our business and results of operations, the effects of the current and any future hostilities involving Israel, including in the regions in which we or our counterparties operate, which 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 hostilities, military actions involving Israel, and any other factors described in AudioCodes filings made with the U.S. Securities and Exchange Commission from time to time. AudioCodes assumes no obligation to update the 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 his website. Before I turn the call over to management, I'd like to remind everyone that this call is being recorded. An archived webcast will be made available on the Investor Relations section of the company's website at the conclusion of the call. With all that said, I'd like to turn the call over to Shabtai. Shabtai, please go ahead.

Thank you, Roger. Good morning and good afternoon, everybody. I would like to welcome all to our first quarter 2026 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 core. I will then review the business highlights and the summary and discuss trends and developments in our business and industry. We will then turn it into the Q&A session. Niran?

Thank you, Shabtai. 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 relation 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 first quarter were $62.1 million, an increase of 2.9 percent over the $60.4 million reported in the first quarter of last year. Services revenues for the first quarter were $34 million, an increase of 4.3 percent over the year-ago period. Services revenues in the first quarter accounted for 54.7 percent of total revenues. Revenues by geographical region for the quarter were split as follows. North America 49%, EMEA 34%, Asia Pacific 13%, and Central and Latin America 4%. Our top 15 customers represented an aggregate of 53% of our revenues in the first quarter, of which 34% was attributed to our eight largest distributors. GAAP results are as follows. Gross margin for the quarter was 66.2% compared to 64.8% in Q1, 2025. Operating income for the first quarter was 3.4 million or 5.4% of revenues compared to operating income of 3.6 million or 6% of revenues in Q1, 2025. Net income for the quarter was 2 million or 7 cents per diluted share. compared to net income of 4 million or 13 cents per diluted share for Q1 2025. Non-GAAP results are as follows. Non-GAAP gross margin for the quarter was 66.3 percent compared to 65.2 percent in Q1 2025. Non-GAAP operating income for the first quarter was 4.8 million or 7.7 percent of revenues compared to 5.4 million or 8.9 percent of revenues in Q1 2025. And non-GAAP net income for the first quarter was 3.8 million, or 14 cents per diluted share, compared to 4.7 million, or 15 cents per diluted share in Q1 2025. At the end of March 2026, cash, cash equivalents, short-term bank deposit, short-term marketable securities, and long-term financial investment totaled $68.1 million. Net cash provided by operating activities was $12.8 million for the first quarter of 2026. Day sales outstanding as of March 31, 2026, were 104 days. On February 3, 2026, we declared a cash dividend of $0.20 per share. The dividend in aggregate amount of approximately $5.3 million was paid on March 6, 2026. During the quarter, we acquired $1.7 million of our ordinary shares for a total consideration of approximately $13.7 million. We reiterate our guidance for revenues for 2026 to be in the range of $247 million to $255 million and non-GAAP earning pair diluted share of $0.60 to $0.75. I will now turn the call over to Shabtai.

Thank you, Niran. I'm pleased to report solid first quarter results reflecting continued effective execution against our strategic priorities. As we continue our transformation into a voice AI-driven platform, hybrid cloud software and services company. Our top-line growth accelerated during the quarter, driven by ongoing momentum in our two primary growth engines, our live managed services and voice AI. Combined, these two units contributed to 80 million annual recurring revenue exit first quarter 26, growing nearly 20% year over year, and highlighting the increasing contribution of recurring high-quality revenue to our model. By segment, our connectivity business sustained well in the core, while conversational AI business grew above 50% and accounted in the first quarter for roughly 8% of revenue, underscoring the rapid uptake of our voice AI offerings. As discussed previously, over the past several quarters, and more so in the first quarter of 2016, we have reallocated and increased investments in voice AI in both R&D and sales and marketing in order to scale our channel presence and better leverage our enterprise install base through cross-selling of value-added services. These initiatives are clearly delivering tangible results and returns, and our strong thought of the year on the voice AI puts us on track to achieve our target of 40 to 50% growth for this segment in 26 and to ultimately reach roughly 80 million of business in 2028. First quarter growth improved to 2.9% year over year. Enterprise revenues accounted for over 90% of revenues in the core, highlighted by ongoing strength in the Microsoft business, which grew 6% year over year. Overall, First quarter product revenues were about flat while services grew 4.3% and accounted now for 55% of total revenues. Within services, the strength was driven by strong traction in our dual growth engines, namely the live family of UCC, NCX, connectivity services, and conversational business. We are... growing ever more optimistic about the continued strong annual recurring revenue momentum and growth prospects for the overall company, fueled by a recent next-gen live platform wins and meaningful pipeline of opportunities, and second, growing demand for productivity-enhancing Gen-AI value-added services. This conviction is further reinforced by the growing backlog of live and managed services that will convert to revenues in coming quarters. We exited first quarter 26 backlog with backlog at $79 million compared to $67 million from the year-ago period, growth of close to 15%. Now to our business strategy. Modern enterprise communications are highly fragmented with organizations relying on a mix of telephony, networking, security, cloud and edge computing architectures, collaboration tools like Microsoft Teams and Zoom, and emerging AI-driven technologies. As voice remains the main channel for real-time interactions, ensuring seamless, reliable, secure, and compliant, integration across these diverse environments is increasingly challenging. This highlights the growing need for a unified strategy to orchestrate voice, cloud, and AI application effectively, and this is where Audicode is focused. Audicode utilizes a three-layer architecture comprising infrastructure, platforms, and applications to address modern voice communication and collaboration challenges. The infrastructure layer delivers secure and reliable voice communication through SBCs, gateways, and devices. The platform layer enables integration and orchestration of telephone and networking, cloud communication platform, and AI systems supporting environments of market leaders such as Microsoft Teams, Zoom Phone, Cisco WebEx, and Genesis Cloud. The application layer provides AI-driven solutions for business outcomes, including contact center functionality, compliance analytics, recording and meeting intelligence. As such, AdiCode is transforming from a traditional voice infrastructure provider into a leader in AI-driven voice communication by integrating advanced voice and conversational AI technologies. This approach enables enterprises to adopt AI solutions without disrupting existing systems, reducing complexity, and accelerating voice adoption. This position is the forefront of the evolving enterprise voice communication landscape, where voice and AI are becoming increasingly interconnected. Now to edge computing. Lately, cloud computing has captured most of the work moving from premises computing. And so, while cloud remains an important deployment modality, there's a growing consensus that not all workloads belong in the cloud, particularly when considering data sovereignty, security, latency, and cost. This becomes even more critical as we move towards an enterprise-centric AI environment where complex multi-step workflows are autonomously executed by AI systems and latency directly impacts performance and reliability. This shift from a cloud-first, or cloud-only philosophy towards a hybrid architecture optimized by use case is well articulated in a recent report published by a leading industry analyst firm called Aragon Research. In its report titled 2026 Edge Computing Pivot, Privacy, Control, and Latency, Aragon provides in-depth analysis of edge computing as a fundamental and trends shaping the future of enterprise software. The report further highlights key verticals such as government, defense, health care, and financial services as early adopters, areas that are also core targets for meeting a set on-prem solution. We were early in the game addressing this market need, having launched MIA-OP service in Israel over 18 months ago. Today, we are a leading provider of organizational meeting intelligence for edge-based deployments. Customer interest has accelerated meaningfully with a notable expansion in pipeline opportunities initially in Israel and increasingly across other geographies. In summary, our on-prem Gen AI capabilities combined with a broad and mature portfolio of cloud-based and offering uniquely position us to capture the AI opportunity regardless of if our customers choose to consume our services, cloud or edge. Before turning to some of our business slides, let me quickly shift to our profitability metrics. As mentioned earlier, first core revenue total 62.1 million and grew 2.9% year-over-year. Non-GAAP gross margin for the core of 66.3%, is within our long-term target range of 65 to 68 percent compared to 65.2 in the first quarter, 25 and 65.9 percent in the previous quarter. First quarter non-GAAP operating expenses of 36.4 million compared to 35.2 million in the first quarter, fourth quarter, 25 and 34 million from the year-ago period. On a year-by-year basis, the higher expenses are suitable mainly to target as investment plan to support long-term growth in the conversational AI business or main growth engine for coming years. In terms of workforce, we have concluded first quarter with 1,000 full-time employees, representing an increase of 2% from the 920 employees in the previous quarter and 960 employees in the year-ago quarter. Adjusted EBITDA for the core was $5.8 million, reflecting a 9.4% margin compared to $6.2 million or 10.2% in the year-ago core. Non-GAAP EPS was $0.14 compared to $0.15 in the year-ago core and in line with our plans for the year. Net cash provided from operating activities was $12.8 million for the core. As you can see, we have a long list of core behind us, each generating positive cash flow. Let's go to Microsoft highlights. First core, Microsoft business increased 6%. Business was driven by ongoing health of our live business and connectivity franchise, coupled with increasing attach rate of Voca CIC, or team certified contact center solution. Representative wins in the core include the following. We signed a 48-month contract with a tier one system integrator to deliver SBCs and gateways on a recurring revenue basis. The solution supports a global teams to voice deployment of a European multinational company. Important to know that following an architectural review of the required solution, the end customer determined that its existing approach is no longer meeting its operational requirements and goals. Based on our assessment and recommendation, the customer transitioned to a direct routing architecture to better align with its global voice strategy. Turning to our live platform during first quarter, we signed a multi-year low single digit million dollar agreement with an existing tier one global care customer. The transition of their on-premise deployment of our services to our cloud-based service. This managed service deployment will enable this carrier to seamlessly provision connectivity service for its enterprise clients. Finally, in First World 26, we recognized bookings for our initial phase of migration covering 20,000 users to the on-premise Live Pro platform for Teams Voice, supporting high-security prison facilities in major countries. Upon full completion of the migration, we expect the platform to support at least 70,000 users alongside gateways, SBCs, and incremental IP phone sales. Our sales team will also be looking to cross-sale our conversational AI services on top of the existing platform. Now to conversational AI. First, Core 26 was very successful in growing our voice AI business. Quarterly business grew about 50% compared to the year-ago quarter. We believe we are creating a strong growth ending for years to come. Just to remind everybody that the revenue trend in that business, the voice ad business was about $12 million in 2024, grew 40% to $16.7 million last year in 2025, and we now plan to grow by 50% and achieve $25 million at the end of this year. Ultimately, we aim to achieve business revenue of $50 million by 2028, with strengths in telephony, networking, security, cloud and edge computing, collaboration tools, and ad-driven technologies. We believe we are well positioned for growth and success in this market. Let's now shift to detailed discussion of each of those major business lines in the conversational AI business. Let's start first with VoiceAI Connect and LiveHub. We delivered another strong core led by continued growth in our VoiceAI Connect service and our LiveHub self-service platform. Momentum remained broad-based with steady new logo wins across the US, Europe, and APAC, alongside meaningful expansion within our existing customer base. Main highlights of the first core on the opportunities side were substantial increases of bookings, more than 80% year-over-year, and steep growth in new credit opportunities of about 100% compared to the year-ago core. So very strong uptake in bookings and newly created opportunities. Let me mention a few notable wins. This quarter, we secured a T1 win with a major North American retail conglomerate adopting Voicia Connect to power its virtual agent customer experience. We also see a clear path to expanding this use case into additional division. On the live hub front, we continue to see encouraging traction, including traditional purchases from a multinational insurance carrier that has now tested and deployed our full suite of conversational AI capabilities, namely virtual agent, agent assist, IVR, and call summarization. More broadly, Seeing Tier 1 enterprises adopt LiveHub underscores the strength, scalability, and appeal of our all-in-one platform. LiveHub's financial performance reflects this, with annual recurring revenues growing more than 20% sequentially and more than 100% year-over-year. Overall, our Voice AI Connect and LiveHub offerings are scaling rapidly, and we are well-positioned to build on this momentum as the voice agents market keeps growing. and continues expanding substantially in coming years. Now to our VOCA CIC. We reported record invoicing in first quarter 26, growing more than 60% year-over-year. Key highlights include, first, a new contact center as a service entry in Europe, a Swiss banking institution selected VOCA CIC as its exclusive platform for customer service engagement on top of Microsoft Teams. replacing its legacy contact center system. We beat out a major Swiss contact center as a service competitor to secure this win. The selection underscores the maturity of our platform and validates its ability to meet the stringent security and data protection requirements demanded by leading banking institutions. Extending our momentum in higher education in the U.S. was another challenge. point to mention. We further extended our leadership in North American higher education segment with the addition of another U.S. university customer who selected VOCA CIC omnichannel CKS solution as part of a broader Microsoft Teams deployment. This marks our 10th university customer in the region, reinforcing VOCA CIC position as a trusted CKS provider for complex multi-stakeholder environments where Microsoft Teams is the leading ecosystem. On the new product front, following the recent launch of Agent Insights in FullScore 25, our AI-driven summarization and sentiment analysis service, we successfully deployed the solution across multiple existing enterprise customers. Early customer feedback has been highly positive, particularly around the value of customer feedback AI-generated summaries, and in surfacing actionable insight and triggering downstream CRM workflows that improve end-customer outcomes. Importantly, agent insight represents a meaningful upsell opportunity, with this service accounting for more than 50% of agencies' value. Agent insight has been deployed with some large enterprises, including universities, airports, and manufacturing companies. facilities. Feedback so far has been extremely positive, particularly around the customer AI summary capability, which allows contact center managers to tailor and surface specific insights from customer interaction using this new generated add-on. We identified a hot entry-level AI use case for the SMB market. We have created a standalone offering purely focused on the AI receptionist use case, namely providing support for automatic call routing, Q&A-based documents and web-based scroll, CRM integration, appointment scheduling, and outbound SMS. Moving on to Meeting Insights Cloud Edition. Meeting Insights Cloud Edition maintains strong momentum this core with continued growth across key metrics. Both the number of meetings and active users again reached record levels, contributing to strong year-over-year monthly recurring revenue growth exiting March 2026. This operational momentum was supported by ongoing product innovation. Following the extension of support with Google Meet in the fourth core, we expanded the platform this core by integrating Cisco WebEx. With this milestone, Meeting Insights is now positioned as the go-to meeting intelligence service across all the four top leading UCAS systems. We have launched new features to boost enterprise efficiency and productivity, including pre-built templates for specific roles and personas and customizable tools for business verticals. Positive customer feedback is driving increased adoption. These value-added features, combined with our continued focus on customer workflow solutions for verticals such as higher education, municipalities, local governments, HR, and finance, position us well to sustain momentum in the foreseeable future. Moving on to MIA-OP. In third quarter, we experienced a significant pickup in business opportunities in both Israel and international markets, with the recent geopolitical environment acting as a further catalyst to already emerging demand for edge computing. In Israel, we signed several new customers across diverse public sector organizations, each with meaningful expansion potential. We executed an agreement with one of Israel's largest healthcare service organizations to provide transcription services for both meetings as well as customer conversations within its contact center. We also inked an initial purchase order with the Israel National Regulatory and Centralized Purchasing Entity for municipalities. Assuming successful implementation, this customer is expected to recommend MiAOP and make it broadly available to municipal organizations via its internal procurement marketplace, creating a scalable distribution channel across 200 municipalities. Additionally, we signed a contract with a regional IDF command responsible for civilian protection during emergencies. Under this engagement, MIAOP will deliver transcription and summarization services for all incoming citizen interactions, further validating our solution in mission-critical environments. Outside of Israel, direct sales efforts complemented by strategic channel relationships are gaining traction and driving awareness of MEOP as a differentiated, innovative solution. As an example, we are working closely with a prominent system integrator in North America that operates a proprietary UC system serving major U.S. government agencies. We recently initiated the MEOP proof-of-concept trial to provide meeting transcription and summarization. Subject to successful results, we expect this relationship to serve as an entry point into broader adoption of service across large US government agencies. And with that, I'd like to wrap up my portion of the call. We had good operational momentum in the first quarter of 2026, particularly with the continued strong growth Our two primary engines are Live Family of Managed Services and Voice AI. With the progress we are making in increasing our recurring revenue, we are on track with our target of delivering improved healthy top-line growth in 2026 and beyond. And I would like to turn now the call into operator. Thank you.

Certainly. At this time, we will be conducting a 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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star 1 to ask a question. One moment, please, while we poll for questions.

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We've reached the end of the question and answer session, and I will now turn the call over to Shabtai for closing remarks.

Thank you, operator. I would like to thank everyone who attended our conference call today. With continued good business momentum in our UCAS and CCAS operation and continued growth in our emerging voice AI business, we believe we are on track to continue growth in next coming years. We look forward to your participation in our next quarterly conference call. Thank you all. Have a nice day.

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