In the second quarter of 2024, AudioCodes (ticker: AUDC) announced modest revenue growth and a consistent dividend, signaling stability in its operations. The company reported revenues of $60.3 million, marking a 0.5% increase from the same period last year. Services revenues, which made up 53% of total revenues, grew by 12.3% year-over-year. The top 15 customers contributed 56% to the total revenues, with the nine largest distributors accounting for 38%. AudioCodes declared a cash dividend of $0.18 per share and reiterated its full-year revenue guidance of $240 million to $250 million. The company adjusted its profitability guidance to non-GAAP EBITDA of $33 million to $39 million and expressed confidence in the growth of its UCaaS, CX, and conversational AI businesses, with a particular emphasis on the expansion of its live managed services.
Key Takeaways
- AudioCodes' Q2 2024 revenue increased slightly to $60.3 million, with services revenues growing by 12.3%.
- The company declared a quarterly cash dividend of $0.18 per share.
- Full-year revenue guidance remains at $240 million to $250 million, with an adjusted non-GAAP EBITDA forecast of $33 million to $39 million.
- Significant growth was seen in the company's live managed services, UCaaS, CX, and conversational AI businesses.
- AudioCodes plans to achieve a managed services exit revenue between $64 million and $70 million by the end of 2024.
Company Outlook
- AudioCodes expects to return to growth in revenue and profits starting in 2025.
- The company is focused on expanding its conversational AI offerings and expects this sector to become their second most important growth engine.
Bearish Highlights
- Revenue from the customer experience business declined by 10% year-over-year in Q2 2024.
Bullish Highlights
- Live managed services grew 35% year-over-year, reaching $56 million in annual recurring revenue.
- Conversational AI revenue grew by 10.5% year-over-year, with bookings increasing over 50% for the quarter.
- The company closed several large deals with banking and financial services organizations.
Misses
- The company reported a slight discrepancy in their non-GAAP gross margin, which was 65.8%, compared to the reported gross margin of 65.5%.
Q&A Highlights
- CEO Shabtai Adlersberg discussed the integration of cloud services and AI capabilities with their existing systems, highlighting various successful projects across sectors.
- The company's strategy includes expanding conversational AI applications and leveraging partnerships with OpenAI, LLM, and others.
AudioCodes' steady performance in Q2 2024 reflects a company in transition, with a focus on growth areas such as managed services and conversational AI. The company's commitment to innovation and adaptation to market trends is evident in its strategic investments and partnerships. Despite some areas of decline, the overall outlook for AudioCodes remains positive as it aims for growth in profitability and revenue in the upcoming years.
InvestingPro Insights
AudioCodes (ticker: AUDC) has shown a commitment to returning value to shareholders and positioning itself for future profitability. According to InvestingPro data, AudioCodes has a market capitalization of $319.57 million, with a P/E ratio (adjusted for the last twelve months as of Q1 2024) of 28.22. This suggests a moderate valuation relative to earnings, which could appeal to investors looking for stable growth opportunities.
In terms of financial health, AudioCodes operates with a moderate level of debt, which is often a sign of prudent financial management. The company's gross profit margin for the last twelve months as of Q1 2024 stood at a robust 65.43%, reflecting efficiency in its operations and a strong ability to generate earnings relative to its revenue.
One of the InvestingPro Tips highlights that management has been aggressively buying back shares, which can be a signal of confidence in the company's future prospects and an attempt to increase shareholder value. Additionally, analysts are predicting that the company will be profitable this year, aligning with the company's own confidence in its growth of UCaaS, CX, and conversational AI businesses.
For readers interested in a more in-depth analysis, there are additional tips available on InvestingPro. For instance, while three analysts have revised their earnings downwards for the upcoming period, it's important to consider this in the context of the company's overall performance and future growth areas. To explore these additional insights, visit https://www.investing.com/pro/AUDC.
For those considering an InvestingPro subscription, use coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. This subscription will give you access to a total of 6 InvestingPro Tips for AudioCodes, which can provide a more granular view of the company's financial outlook and market potential.
Full transcript - AudioCodes Ltd (AUDC) Q2 2024:
Operator: Good morning, everyone, and welcome to the AudioCodes 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. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Roger Chuchen, Investor Relations at AudioCodes. Roger, the floor is yours.
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 impacts of competitive products and pricing on AudioCodes 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 AudioCodes to successfully integrate the products and operations of acquired companies into AudioCodes 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 in 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 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 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 Invest 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 second quarter 2024 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance for 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 an earning supplemental deck. On today's call, we will be referring to both GAAP and non-GAAP financial results. The earning 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% over the $60 million reported in the second quarter of last year. Services revenues for the second quarter were $32 million, up 12.3% 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 regions 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. GAAP results are as follows. Gross margin for the quarter was 65.5% compared to 64.1% in Q2, 2023. Operating income for the quarter was $4.9 million, or 8.2% of revenues, compared to operating income of $2.3 million, or 3.8% 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 $0.12 per diluted share, compared to net income of $1.1 million, or $0.03 per diluted share, for Q2, 2023. Non-GAAP results are as follows, Non-GAAP gross margin for the quarter was 65.8% compared to 64.5% in Q2, 2023. Non-GAAP operating income for the second quarter was $7.2 million, or 11.9% of revenues, compared to $5.7 million, or 9.5% 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 $0.18 per diluted share, compared to $5.1 million, or $0.16 per diluted share in Q2, 2023. At the end of June 2024, cash and 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 leasehold improvements of our new corporate headquarter 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 $0.18 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 million 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 GAAP 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 million 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.
Shabtai Adlersberg: Thank you, Niran. I am pleased to report the solid second quarter 2024 results marked by the second consecutive quarter of positive top-line growth and ongoing momentum in our Microsoft (NASDAQ:MSFT) and conversational AI business with sequential uptick in the legacy gateway business. Within enterprise business, which represents about 90% of our revenue, our UCaaS business continued to perform well, highlighted by Microsoft Teams business up 3.3% year-over-year for the quarter and Microsoft Teams live minute services annual recurring revenues growing 35% year-over-year. In the CX business, Customer Experience business, we made progress as planned and our healthy pipeline continues to support a positive outlook for the second half of the 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-go 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 million to $70 million exit 2024. Our focus on investment made in recent years are paving our growth for a strong recurring business with strong legs deeply rooted in growing markets such as UCaaS, CCaaS, 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 competitive scale and position for Teams voice, which provides us an edge in the communications and collaboration market. The strengths 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 Voca CIC 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, article live and 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, an 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 AI 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 AudioCodes, 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 Gen AI related projects which are fully 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 and 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 UCaaS, CCaaS 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 re-emerging as of 2025 and beyond. With growth in recurring business in UCaaS, CCaaS 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 detail business line discussions, let's quickly shift to second quarter profitability metrics. Our non-GAAP growth 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 a 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 about $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 headcount, we ended the second quarter with headcount of 940 down from 959 in the first quarter and as compared to 946 people in the employees in the second quarter 2023. The year-over-year improvement in non-GAAP gross margin OpEx led to non-GAAP operating income of $7.2 million or 11.9% margin versus year ago of 2.9% or 4.9% 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 $2,040 to $2,050 million. As explained earlier by Niran, we are introducing full-year non-GAAP EBITDA guidance of $33 million to $39 million, which is unchanged as implied from the non-GAAP EPS guidance provided during last quarter earnings 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 managed services, we drew 35%. Second quarter live business growth puts us on track to land within our full year 2024 annual recurring revenue target range of $64 million 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 makes 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 Teams 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, UCaaS 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 last reported in previous quarter was that they are at about 3 million Teams phone ads in the previous three quarters. We believe there's a key driver to further or accelerate the growth of Teams phone is a nowadays Microsoft push on use of co-pilot for meetings and calls analytics, so expect good market lying ahead. On a new area for us, making rooms for Teams, we saw good momentum and growth in revenue from our MTR business, where 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 win in the quarter, we signed a 36-month contract with a multi-national 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 online and expense strategy by leveraging broad portfolio of product and services has 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 quarter, 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. With 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. Live CX is our voice services suite for contact center and now is delivered using our live platform which generalizes the way the services are delivered and allows for 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 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 services are omnichannel, omni-voice 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 the call regarding call security and then we can talk about enhanced voice service and analytics. I'll not provide more details so we can definitely provide those details in calls after the call. In terms of revenues, just to tell you give you some idea about the way the Live CX 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 call security service adding additional 30% on top of the voice connectivity revenue. Now, let me move to the conversational AI business. Shifting to that business, revenue was as I've mentioned 10.5% year-over-year. Booking (NASDAQ:BKNG) grew above 50% for the quarter. We expect it to become a second most important growth engine for the company going forward with total contract value expected to grow to 10 million this year. We expect total contract value to grow for this now in 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 solution the ability to compete and be successful in providing full working surface solution to the enterprise base is highly dependent on system and cloud services where we have an edge over competition. This is where our AudioCodes shines. We own extensive experience in 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 Gen AI applied research for this project. I mentioned that out of an R&D fourth, 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, Gen AI, Microsoft co-pilot growth clearly depicts this dependency and thus we believe we have an edge and are building a strong baseline for future business expansion. Key activity increasing in 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 or AI First Azure Native Contact Center for Microsoft Teams. Then we have an interaction recording called application called SmartTAP 360 which provides compliance-recording and enterprise recording and then we have meeting insights and enterprise-grade meeting collaboration tool. We do intend to expand the activity in CAI by providing going forward an on-prem solution for meeting insight and interaction analytics for contact centers, add more automation on top of the meeting insights and more custom projects. Turning a bit to Voca CIC, Voca CIC is our submission AI-First contact center solution for Teams. It plays well into the company overall live business and strategy where we enjoy the benefit of up-sell 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 double this year. Revenues are already 130% above the entire 2023. We expect to almost triple them in 2024. To mention a few more data points, Voca CIC pipeline increase 35% quarter-over-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 (NASDAQ:ZM) to Teams. And then we have a Voca CIC largest deployment to date, now handling 2.5 million calls a month. Turning into 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 AudioCodes, we use Meeting Insights for more than two years now, and processing nowadays, more than 150 meetings a day. Needless to say, we experience very high productivity pick-up based on this, using the application. AudioCodes Meeting Insights is part of a growing portfolio of SaaS application services in the conversational AI domain, which unleashed the power of AI by transforming Teams meetings into business insights, delivering efficient use of information and data exchange throughout a meeting and accelerates business productivity in organizational decision-making intelligence. Glad to inform that at the end of last week, an online publication, leading online publication, UC Today has selected AudioCodes Meeting Insight as a winner of its best use of AI category in its UC awards 2024. The awards judges recognize Meeting Insights 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 the 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 Insight 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 (NASDAQ:GOOGL) Meet and Cisco (NASDAQ:CSCO) 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 UK 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 expand that business that is just few thousands of those 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 we'll move the session to Q&A. Thank you, operator.
Operator: Thank you very much. We will now be conducting our question-and-answer session. [Operator Instructions] Please wait a moment while we poll for questions. Thank you. Your first question is coming from Ryan McWilliams of Barclays (LON:BARC). Ryan, your line is live.
Eamon Coughlin: Hey guys, this is Eamon Coughlin on 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?
Shabtai Adlersberg: Yes, 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, which service is 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, right, 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 CCaaS solutions. So adding those services further strengthen. So our strategy here is lend and expand. So we usually lend with our connectivity services where we consider to be the dominant leader in the market. And then we simply tunnel and sell, do an upsell of voice-related business application to each such account. So using, and Coughlin, we had the last win, very important win with UCF, University of Central Florida, one of the top three universities in the U.S. They've been using our SBCs for a long time. And because they recognize us as a trusted reliable supplier, when we offer them to evaluate our contact center solution, they took on it and last year we signed the contract. So it's, again, it's lend and expand and the addition of more services. And you can expect, right, I was talking about Meeting insight, 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 having this integrative platform, its very high integration to it. I believe that that puts us substantially above any foreseeable 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 fully 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, we bring our 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 comprehensive set of technologies, 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 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 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.
Eamon Coughlin: Got it. Thank you, Shabtai. Great to see the continued improvement in the conversational AI product. Can you just help us understand what kind of customers are adopting that product? And is customer appetite for adopting AI use cases better than your expectations?
Shabtai Adlersberg: Yes. So we have -- well, my strategy was always to start up here in Israel next to headquarter [ph], where we have got great access to a lot of businesses. So we have 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 delivered already the Israeli largest medical service organization is called Clalit. It has 4.5 million subscribers. We have a solution for call Steering [ph], and now we have for setting calls it's running like 100,000 calls a day. So at this stage, I would say that we have close to 10 different applications, which are not based on the sense of products, right? It's not a Vocal CIC and it's not Meeting Insight. It's projects where you need to connect to a contact center, you need to connect to a cellular 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.
Eamon Coughlin: Got it. Thank you, Shabtai. I'll hop back into the queue. Appreciate it.
Shabtai Adlersberg: Sure. Thank you, Ryan.
Operator: Thank you very much. Your next question is coming from Ryan Koontz of Needham & Company. Ryan, your line is live.
Ryan Koontz: Great, thanks. I wanted to take a different cut at the last question about the transition from license over subscription. And if 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 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?
Shabtai Adlersberg: Yes, I believe that the decline of legacy is moderating. And at the same time, we see many services picking up and CAI services at the same time. Based on visibility, we should talk about two to three quarters going forward. So I expect that actually either first quarter, 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 a second quarter of '25 and beyond.
Ryan Koontz: That's really helpful, thank you for that. On the recovery and the legacy gateways, anything going on there, and 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?
Shabtai Adlersberg: Yes. 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 fourth quarter to 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 just give you a quick think all-in-all, if I'll sum up the totals, 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 million. So throughout the coming quarter, so all-in-all, I think we already experienced the largest drop and so it will moderate and will vanish.
Ryan Koontz: 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? Yes, I did see that the accounts 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?
Niran Baruch: Hi, Ryan. This is Niran. So we had a very nice cash flow, operating cash flow in the first quarter, it was a $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 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. And with regards to the capital expenditures here, it relates to our new headquarter. 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.
Ryan Koontz: Got it. Thanks, Niran. That's all I've got. Appreciate it.
Operator: Thank you very much. Your next question is coming from Samad Samana of Jefferies. Samad, your line is live.
Billy Fitzsimmons: 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 UCaaS and CCaaS vendors. We'd be curious if you guys have seen any material changes in either UCaaS or CCaaS spending from a macro backdrop perspective, quarter-for-quarter, or as you look out to the third quarter? Thank you.
Shabtai Adlersberg: Okay. Well, all-in-all, I believe, and we also review information provided by analysts in the space. Contact center activity doesn't seem to stop. Actually, it continues. If you'll take Enterprise Connect back in March of this year, it was fully active and intensive on all contact center application. That's growing. No impact from the global economy. UCaaS is growing less, however, it still very strong. We've not seen -- well, there's definitely an impact of the economic situation on enterprises, investing in modernizing their networks. I believe that that will come back when that situation ends, hopefully next year. Just say that, again, as I've mentioned, that the appearance of Gen AI technology copilot and likes will definitely give a push to the UCaaS 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 have 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, we sit on meetings all day, so there's a huge amount of new information that has not been captured so far, it has not been used to generate good intelligence. So, we do expect that Gen AI copilot and few more chatbots technology will definitely help to increase the use of UCaaS. So all-in-all, we are optimistic that in 2025 we'll see better behavior.
Billy Fitzsimmons: Got it. And then conversational AI grew 50% year-over-year. And Shabtai, 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.
Shabtai Adlersberg: Yes, very simply. I mean, let's talk about a corporation that needs to be highly operational and effective in running its operation and diverse location and sites. One organization that we work with was usually recording its meetings, but however, it 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 was working. However, management and analysts had no idea about what was going on in all those calls. Now we have tools such as summarization and insights extraction that allows analysts and data scientists to inform managers where the focus is, what application and operation is hot and which is not, and where management should invest its resources. So many such, I can tell you that we have plenty of use cases all around. 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 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. Now that 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 summarization and insight in text from this person experience. So all of a sudden it 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 our organization would spend a lot of money to take advantage of the use of AI.
Billy Fitzsimmons: Super helpful. Thank you very much.
Operator: Thank you very much. [Operator Instructions]. 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.
Shabtai Adlersberg: 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 underlining market growth trends in the UCaasS, CcaaS 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.
Operator: 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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