Yahoo Finance AudioCodes Ltd. (NASDAQ:AUDC) Q1 2024 Earnings Call Transcript
AudioCodes Ltd. (NASDAQ:AUDC) Q1 2024 Earnings Call Transcript May 7, 2024
AudioCodes Ltd. misses on earnings expectations. Reported EPS is $0.17 EPS, expectations were $0.2. AUDC isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning everyone and welcome to the AudioCodes First Quarter 2024 Earnings Conference Call. At this time all participants have been placed in a listen-only mode and the floor will be open for questions after the presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host Mr. Roger Chuchen, Investor Relations. You may begin, Roger.
Roger Chuchen: Thank you, operator. Hosting the call today are Shabtai Adlersberg, 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, the effect of global economic conditions in general and conditions in AudioCodes' industry and target markets, in particular, shifts in supply and demand, market acceptance of new products and the demand for existing products; the impact of competitive products and pricing on AudioCodes and its customers, products and markets; timely product and technology development, upgrades 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, ability of AudioCodes to successfully integrate with the products and operations of acquired into AudioCodes’ business, possible adverse impact of the Covid-19 pandemic on our business and results of operations.
The effects of the current terrorist attacks by Hamas and the war on 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 reduce 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'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.
Shabtai Adlersberg: Thank you, Roger. Good morning and good afternoon, everybody. I would like to welcome all to our first quarter 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 quarter. I will then review the business highlights and summary for the quarter, and discuss trends and developments in our business and industry. We will then turn it into the Q&A session. Niran?
Niran Baruch: 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 and 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 $60.1 million an increase of 1.5% over the $59.2 million reported in the first quarter of last year. Services revenues for the first quarter were $31.5 million up 3.3% over the year ago period.
Services revenues in the first quarter accounted for 52.5% of total revenues. The amount of deferred revenues as of March 31, 2024, was $80.5 million compared to $77.6 million as of March 31, 2023. Revenues by geographical region for the quarter were split as follows: North America 43%, EMEA 38%, Asia Pacific 14% and Central and Latin America, 5%. Our top 15 customers represented an aggregate of 50% of our revenues in the first quarter, of which 38% was attributed to our 11 largest distributors. GAAP results are as follows. Gross margin for the quarter was 64.4% compared to 61.7% in Q1 2023. Operating income for the first quarter was $33 million or 5.5% of revenues compared to operating loss of $0.8 million or 1.4% of revenues in Q1 2023. Net income for the quarter was $2.1 million or $0.7 per diluted share compared to net loss of $0.2 million or $.0.1 per diluted share for Q1 2023.
Non-GAAP results are as follows. Non-GAAP gross margin for the quarter was 65.2% compared to 62.1% in Q1 2023. Non-GAAP operating income for the first quarter $6.3 million or 10.5% of revenues compared to $2.9 million or 4.9% of revenues in Q1 2023. Non-GAAP net income for the first quarter was $5.2 million or $0.17 per diluted share compared to $2.7 million or $0.08 per diluted share in Q1 2023. At the end of March 2024, cash, cash equivalents, bank deposits, marketable securities and financial investment totaled $106 million. Net cash provided by operating activities was $15 million for the first quarter of 2024. Purchase of property and equipment was $6.8 million in the quarter, significantly higher than historical periods related to leasehold improvements of our new corporate headquarter in Israel.
We expect CapEx to remain elevated in the second quarter after which we expect this line item to return to historical levels. Day sales outstanding as of March 31, 2024, were 100 days. In December 2023, 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. The approval is valid through June 18, 2024. During the quarter, we acquired 302,000 of our ordinary shares for a total consideration of approximately $3.6 million. As of March 31, 2024, we had $10.2 million available under the approval for the repurchase of shares and or declaration of cash dividends. On February 6, 2024, we declared a cash dividend of $0.18 per share.
The dividend in aggregate amount of approximately $5.5 million was paid on March 6, 2024. We have recently embarked on the second phase of cost reduction plans that involves reduction our headcount by approximately 6%. This program is expected to result in $6 million annualized cost saving with full run rate expected in the beginning of Q3 2024. We are updating our guidance for full year 2024 as follows. We now expect revenues in the range of $240 million to $250 million and non-GAAP diluted net income per share of $0.85 to $1. I will now turn the call back over to Shabtai.
Shabtai Adlersberg: Thank you, Niran. Our first quarter 2024 results were highlighted by healthy revenue growth of 1.5% year-over-year and executing on our strategic plan to evolve the company to become a leader in voice services in the UCaaS and CCaaS markets. We continue the transition of our business to a recurring revenue model and transformation from a network equipment vendor to software and services company. On the other end, while growing nicely in strategic business lines such as Microsoft Teams, the customer experience market and conversational AI applications, we saw continued decline in our legacy gateway networking business in the first quarter, similar to trends seen in 2023. As reported by other communication equipment vendors, we believe that the high interest rate environment continues to have an impact on muted business spending, especially when it relates to hardware products.
These two factors transition to a recurring business model and larger and earlier than anticipated decline in legacy gateway business of above 25% year-over-year led to sequential quarterly revenue decline of 5.5%, about 2.5% lower than anticipated earlier in the year. Coming back to discuss the positive developments in the quarter, we enjoyed a very substantial positive cash flow from operations, $15 million and strength in our live managed services operation in which annual recurring revenue grew 45% in the quarter. We have also enjoyed increased services backlog. These developments in the quarter provide us with a conviction about our growth prospects and puts us solidly on a track to successfully transform efforts to focus on software and services in our markets.
In terms of key growth areas, our first quarter Microsoft and Teams business grew 8% and 9.6% respectively year-over-year. Customer experience business grew 15% year-over-year and conversational AI bookings grew around 50% year-over-year. Another sign of continued strength in core areas where we focus is the marked increase in our pipeline or created opportunities. For example, within Microsoft Ecosystem, which makes up close to 60% of our business, our pipeline reached an all-time record, up over 30% year-over-year and over 20% sequentially. We believe the secular trend of unified communication customer experience convergence is cementing our already strong competitive mode in UC Voice and driving additional opportunities in customer experience within the Microsoft Teams ecosystem.
We are now the leading Microsoft Teams phone partner to lead a “complete Microsoft Teams calling and contact center combined offering”. A lot of you already know that we are the number one Microsoft Teams phone partner, enabling a significant share of the current 20 million plus Teams phone PSTN sets. What may be less clear is that Voca CIC our Teams based Contact Center as a service platform is now recognized to be best in class, having recently been awarded the best Microsoft Teams Contact Center solution by CX Today based on majority votes of customer experience industry experts. Our unique Teams based UCCX offering is increasingly getting more market awareness as evidenced by the buzz we receive about our complete Microsoft Teams calling and contact center offering at Enterprise Connect in March 2024, one of the largest UCCX industry trade show events.
Regarding the weakness in top line in the quarter and why we believe it is short term in nature, I'd like to know the following. Ongoing software spending due to macro uncertainty and continued elevated interest rates likely caused enterprises and service provider to underspend in the context of annual budget in the early part of the year. The software spending impacted mainly legacy and hardware portions of our business, where sales of legacy products such as gateways declined above 25% year-over-year. We believe that this is similar phenomenon to what we saw in 2023, in which our first quarter 2023 gateway business was low out of the gate, with stronger spending to come over the course of the year, as customers look to put unallocated annual budget to work.
As discussed, growth in strategic major business such as Microsoft Customer Experience and Conversational AI continue to be healthy. We believe that our growth in software and services and then conversational AI related solution, which grew again above 50% year-over-year should fully offset declines in legacy pieces of the business starting in 2025. I should point out that 2024 is the year in which we are continuing strong growth in our live business for Microsoft Teams which grew around 45% year-over-year in the quarter. In addition, with our new Voca CIC solution enabling us to be the first in the industry to offer a complete Microsoft Teams calling and contact center combined offering, we're looking to proactively cross sell our subscription based Voca CIC team certified CCaaS to already significant Microsoft Teams installed base of customers.
The other factor contributing to muted growth at this stage is the shift in our revenue model, which trends increasingly towards recurring revenue in layer of historical CapEx model. This obviously impacts our near-term revenue growth and creates headwinds. I should mention though that this shift is clearly accretive to our long-term top line growth. Shifting gears to services, services revenue overall accounted for 52.5% of revenues and grew 2% year-over-year on top of strong services revenue generation in the year ago period. Importantly, our professional services booking remains strong and up 24% year-over-year, which potent reacceleration of services growth over the balance of the year. While it's fueled our ongoing momentum in services is headlined by our live subscription business, which ended first quarter at $53 million annual recurring revenue, putting us on track to achieve our guidance for the year of $64 million to $70 million exiting 2024.
Another positive development on the life services front is the emergence of new live CX services for the CaaS II, III course. This new area of activity for us in the CX market seems to represent growing potential connected to the continued shift of enterprises to CCaaS in the CX industry. Other positive developments in the quarter were continued strength in our SBC product line, which grew 15% year-over-year and where we kept our top leading position with more than 25% market share in enterprise space. Most notably, growth came mainly from increasing our SBC managed services, which should further cement our strength in this market. And then we saw very nice progress in the Conversational AI business, live bookings grew about 50% and basically, we see that growth in the future.
Reference our profitability metrics, our first quarter 2024 non-GAAP EPS was $0.17 which was below our internal budget, primarily on lower revenues. Our non-GAAP gross margin in the quarter came at 65.2%, lower than the 65% to 68% long term range and compared to 67.6% in the fourth quarter of 2023 and 62.1% in first quarter of 2023. The sequential margin decline is primarily attributable to less favorable product mix. First quarter non-GAAP OpEx was $32 million in line with our planning and expectation. Net cash provided by operating activities was $15 million dollars We ended the quarter with headcount of 959 employees, up from 950 employees in the fourth quarter and compares to 978 employed in the first quarter of 2023. We expect our headcount figures to come down from current levels.
So, our second phase of cost reduction initiative takes effect in second and third 2024. Now to budget streaming. Let me discuss steps we have already initiated and are taking as part of our long-term commitment to drive significant margin expansion and operating leverage. In the first quarter of 2024, operating expenses were in line with the original budget for the year. Anticipating now further industry muted business spending in 2024 and continued transition in our revenue model from CapEx into recurring business model, we took budget cut steps to adjust our operational expenses to lower forecast of revenues in 2024. We have recently initiated the second phase of the cost reduction measures that we previously communicated a few quarters ago.
This current phase in CapEx headcount resolution of more than 6%, primarily related to R&D functions dedicated to legacy areas such as gateways and multicellular administrators. Once fully implemented, which is expected to occur by mid third quarter 2024, this program is expected to yield $1.5 million of quarterly run rate savings or $6 million annually. This action does not impact R&D spending on core strategic areas of our business such as Microsoft Teams, CX and Conversational AI, which continue to be robust. In fact, while reducing position in legacy related R&D, we kept hiring and growing our R&D, product management, marketing and sales resources in our live and conversational AI operations. On the guidance front, as Niran suggested, in view of the continued decline in our legacy gateway revenue and market outlook for the rest of 2024 in our market segments, we are updating our 2024 guidance as earlier stated by Niran.
We believe that the continued shift to software and services coupled with cost cutting measures we took already in first quarter 2024 should allow us to continue to expand our margins and grow earnings by about 15% compared to 2023. The top line outlook assumes continued success in our UCaaS, CCaaS and conversational AI operations in line with the growth that we have demonstrated already throughout the whole 2023 and during the first quarter of 2024. In terms of our key business line, I'll touch a few areas. Microsoft, as discussed previously, Microsoft business increased 8% year-over-year in the first quarter. Microsoft Teams business grew higher, reaching 9.6% growth year-over-year. Skype for Business continued to decline close to 20% to a rather very low level of about $1 million a quarter.
As such, solutions for Microsoft Teams consist now 97% of Microsoft quarterly revenue. Exit first quarter, Live of Teams annual recurring revenues reached a level of $53 million in line with our plans. We are thus confident that we are on track to achieve our stated goal of achieving live annual recurring revenue of $64 million to $70 million for the whole year. Live managed services for Teams represent now nearly 45% of Microsoft Teams business compared to just 25% in the year ago quarter. And thus, we believe that the impact of the shift to recurring revenue model should ease in coming quarters. We have also enjoyed growth in total contract value of Live Services, which grew above 45% year-over-year. From geo perspective, EMEA bookings registered modest growth for the first time in multiple course, while North America experienced steady growth.
Given the robust growth in our pipeline of credit opportunities, we remain optimistic about the long-term growth potential for our Microsoft business. In addition to the multiyear opportunity of Teams fund connectivity, we can see clear signs of growing potential for a new source of revenue based on voice related business application. Among this, they include components such as Voca CIC as a contact center solution for the Teams environment, SmartTAP 360 as a compliance recording solution for the Teams environment and Meeting Insight as a central hub solution for capturing and sharing meeting information across the organization. Moving to CX and conversational AI, first quarter contact center business grew 15% year-over-year, led by North America and the Asia Pacific regions.
Conversational AI, as I've mentioned before, conversational AI bookings grew over 50% year-over-year. Voice Services for Enterprise CCaaS deployments continue to be the center of our activity. With the integration of our live platform into these opportunities, we see a steady rise of revenues associated with our live CX activity. We now see strength in the CX CAI on all fronts, emanating from sales of our solution in support of enterprise customers and leading vendors of Customer Experience Platform and cross sell for own AI first Voca CIC contact center platform to the Teams phone installed base. Staying on the topic of Voca CIC, over the past 12 months, we have significantly set up our product development resources and investment into the Teams contact center solution, highlighted by our recent addition of the omnichannel capabilities.
We are thrilled that the industry analysts and markets alike are starting to notice, as evidenced by us, having recently been awarded by CX Today, the best Microsoft Teams contact center solution based on the evaluation of 16 top industry experts. While still a small portion -- still small percentage of our overall business, we expect Voca CIC to be a major growth catalyst, a growth pillar for CX and overall long-term future, arising from both direct revenue contribution and pull through of the rest of the conversational AI business lines such as SmartTAP Compliance, Recoding and Call Summarization. Now let's quickly go through highlights of other conversational AI Business Segments. First on Meeting Insights, just to remind us all, Meeting Insights for Teams is an enterprise grade, software as a service solution that enables organization to capture, analyze and share business meeting information across the company.
It provides a comprehensive set of tools and conversational AI technologies for recording, transcribing, indexing and analysis, making it easy to search and retrieve information from past meetings. With Meeting Insights users can quickly find and review key points and decision from previous meetings for improving collaboration and decision making across the organization. In the first quarter of 2024, we have achieved a key development milestone, where the solution was upgraded to become a cloud-based true SaaS solution providing multitenant service to enterprises. Roadmap for the solution in 2024 includes among others additions of automation capabilities, more languages, European languages, enhanced mobile operation and extending the function of Meeting Insights to more UCaaS solutions.
As for sales, we have seen nice growth in new accounts in the U.K. and U.S. adopting the tool for their ongoing daily operations. On SmartTAP, in second quarter 2024, we plan to launch SmartTAP also as a SaaS solution for enterprises, a platform that will expand our go to market opportunities, enabling service provider and resellers to offer their own branded recording services powered by AudioCodes. This new platform shares the same infrastructure as Meeting Insights, and we have plans to unify the services in 2024, given growing synergies between these two business lines. To wrap up our discussion, relying on the nice progress we see in our strategic clients around Microsoft Teams, CX and conversational AI and despite the slower than expected start of the year due to legacy decline, we have strong conviction about our long-term business fundamentals and have made significant progress in our transformation to a software and services company with strong profitability.
This optimism is supported by record pipeline of greater opportunity in the first quarter of 2024, particularly in the Microsoft and contact center environments growing momentum of Voca CIC as a major long term growth driver for the company and ongoing strong annual recurring revenue growth for the Live Minutes Services for the company. And with that, I've concluded my section of the call and I'd like to move the call to the operator.
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