Audiocodes Ltd Q2 FY2022 Earnings Call

Greetings ladies and gentlemen and welcome to the AudioCodes' Second Quarter 2021 Earnings Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mr. Roger Chuchen, VP of Investor Relations. Roger, the floor is yours.

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; and Dmitry Netis, Chief Strategy Officer and Head of Corporate Development. Before we begin, I would 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 US Federal Securities Laws. 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 demand for existing products, the impact of competitive products and pricing on AudioCodes' and its customers' products and markets, the timing of product, and technology developments, upgrades, and the ability to manage changes in the 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 from the COVID-19 pandemic on our business, and results of operations, and other factors detailed in AudioCodes' filings with the US Securities and Exchange Commission. AudioCodes assumes no obligation to update this information. In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share. AudioCodes has provided a full reconciliation of the non-GAAP net income and net income per share to its net income and net income per share according to GAAP in the press release that is posted on its website. Before I turn the call over to management, I would like to remind everyone that this call is being recorded. 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 would like to turn the call over to Shabtai. Shabtai, please go ahead.

Thank you, Roger. Good morning and good afternoon everybody. I would like to welcome all to our second quarter 2022 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?

Thank you, Shabtai and hello, everyone. As usual, on today's call, we will be referring to both GAAP and non-GAAP financial results. The earnings press release that we issued earlier this morning contains a reconciliation of the supplemental non-GAAP financial information that I will be discussing on this call. Revenues for the second quarter were $68.4 million, an increase of 12.9% over the $60.6 million reported in the second quarter of last year. Services revenues for the second quarter were $27.8 million, up 21.9% over the year ago period. Services revenues in the second quarter accounted for 40.6% of total revenues. The amount of deferred revenues as of June 30, 2022, was $75.2 million, up from $73.4 million as of June 30, 2021. Revenues by geographical region for the quarter were split as follows, North America, 43%; EMEA, 32%; Asia Pacific, 19%; and Central and Latin America, 6%. Our top 15 customers represented an aggregate of 53% of our revenues in the second quarter, of which 44% was attributed to our 12th largest distributors. GAAP results are as follows. Gross margin for the quarter was 65.1% compared to 69.4% in the second quarter of 2021. Operating income for the second quarter was $7.9 million or 11.6% of revenues, compared to $10.1 million or 16.7% of revenues in Q2 2021. Net income for the quarter was $6.9 million or $0.21 per diluted share, compared to $8.2 million or $0.24 per diluted share for Q2 2021. Non-GAAP results are as follows. Non-GAAP gross margin for the quarter was 65.6% compared to 69.7% in Q2 2021. Non-GAAP operating income for the second quarter was $11.9 million or 17.4% of revenues, compared to $13.6 million or 22.4% of revenues in Q2 2021. Non-GAAP net income for the second quarter was $11.3 million or $0.34 per diluted share, compared to $12.7 million or $0.37 per diluted share in Q2 2021. At the end of June 2022, cash, cash equivalents, bank deposits, marketable securities totaled $138.5 million. Net cash provided by operating activities was $4.8 million for the second quarter of 2022. Day sales outstanding as of June 30, 2022, were 75 days. During the quarter, we acquired 374,000 of our ordinary shares for a total consideration of approximately $8.3 million. In June 2022, we received court approval in Israel to purchase up to an aggregate amount of $35 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 December 12, 2022. We declared a cash dividend of $0.18 per share. The aggregate amount of the dividend is approximately $5.7 million. The dividend will be paid on August 31, 2022 to all of our shareholders of record at the close of trading on August 17, 2022. Regarding headcount, on the heels of 112 positions in 2021 and 37 positions in the first quarter 2022, we added 18 full-time employees and 13 outsourced employees, altogether 31 positions in the second quarter of 2022. We adjust our guidance for 2022 as follows. We now expect revenues in the range of $275 million to $282.5 million, down from $277 million to $285 million, and we now guide for non-GAAP diluted net income per share in the range of $1.35 to $1.45 down from our previous prior outlook of $1.40 to $1.60.

Thank you, Niran. I would like to remind everyone that in conjunction with our earnings release, we have posted on our Investor Relations website an earnings supplement deck. I would like to start by providing an agenda for today's discussion. First, I would like to discuss our strategy and business characteristics that differentiate us in the market. Then I will discuss our financial highlights and outlook for the second half of 2022. Finally, I will provide detailed discussions of our core business segments. On the first topic, I would like to address the macroeconomic uncertainties and remind investors why the strong business foundation we have built so far should enable us to outperform during the uncertain environment. We are leveraged to multiyear secular growth trends in the unified communications market, notably Microsoft Teams and Zoom Phone and in the customer experience space. Customers deploy our software and services to drive greater productivity, which is particularly relevant in the tight labor and inflationary environment. We have a consistent track record of strong profitability and cash flow generation. On a trailing 12 months basis, despite short-term elevated supply chain costs, our non-GAAP operating margin was 19.2%, which is amongst the highest in our industry. Over the same period, we also generated $33.9 million in non-GAAP free cash flow. Our strong financial profile enables us to continue to make prudent investments in our business to further strengthen our competitive mode and differentiate us from competition. We have a rock-solid balance sheet, ending the second quarter with $138.5 million of net cash. We are in a great position to capitalize on any dislocations in the market, and we are actively looking for unique assets to add to our portfolio that can accelerate our long-term growth and transition to recurring revenues. Throughout our history, each time we experienced macro turbulence, we have exerted strong control of our expenses and managed to not only survive the market dislocations, but also strengthen our franchise and leapfrog competition. While it is difficult to ascertain the path of the next potential macro term, this time should not be any different for us. I would like to remind everyone of the strategy that has served us well over the past several years that we will continue to fine-tune and execute. First, expand the reach of our core voice solutions and services in enabling our unified communication and collaboration and customer experience with focus on Microsoft Teams, Zoom, Genesis and other major customer experience vendors. Second, increase customer value by upselling a broad and extended portfolio of voice services and applications. And third, accelerate the transition to software and subscription, both organically and inorganically. Now to the quarter financials. We're pleased to report solid top-line results, growing 12.9% year-over-year. Revenue growth this quarter was mainly driven by ongoing momentum in the Microsoft Teams and Zoom Phone in the customer experience space and the return of strong growth in our Customer Experience segment, which led our enterprise activity. Revenue from Microsoft Teams, Zoom Phone, and the Customer Experience market, grew as a group by 22.1% year-over-year and accounted for 67% of our revenue. Service revenue grew 21.9% year-over-year and accounted for 40.6% of total company revenue. This is the proof of execution on our strategic priority by successfully transforming our company to cloud services and a recurring revenue model with AudioCodes Live managed services, which grew roughly 100% year-over-year. As evidenced by Microsoft Team's momentum, a recent Morgan Stanley CIO report cited by several Microsoft executives, indicates that over 50% of organizations have standardized on Teams, and that's expected to increase to about 60% in the next three years. We believe this dynamic will further fuel our business, particularly in the adoption increases with large enterprises. Quantifying this large market opportunity, third-party firm, Wainhouse Research, forecasts Microsoft Teams to grow at roughly 35% to 40% compound aggregate growth rate through 2025, which supports our confidence in a multiyear runway for our Teams business. There are today over 270 million monthly active Teams users, of which only a low-single-digit percentage based on our analysis have adopted the Teams phone system. This is where we play. Our market share within the Microsoft ecosystem for back routing applications remains strong and is well above 50%. Equally strategic is the strong momentum with Zoom Phone, which continues to grow. In the second quarter of 2020, it grew over 50% year-over-year. Shifting gears to the Customer Experience segment, I'm pleased to report a strong rebound in our CX line, up over 20%, after being down 8.5% in the prior quarter. Strong second quarter results were propelled by the ongoing healthy spending environment in Contact Center and the closing of large deals that had slipped in the prior quarter. We continue to see great progress with our conversational AI business, where Total Contract Value signed during the quarter grew over 100% year-over-year. We are well positioned to grow above 50% in our portfolio in 2022 compared to the previous year. Importantly, AudioCodes Live, our managed services offering for UCC and CX and for the conversational AI segments, continue to see strong momentum. We exited the month of June with a $24 million ARR run rate, putting us on track to achieve our 2022 target of doubling the annual recurring revenues to over $30 million from over $15 million in 2021. Our top line continues to expand across core areas of our business, supported by long-term secular trends of migration of voice infrastructure to the cloud, hybrid work and enhanced customer engagement and experience solutions powered by AI. Shifting to margin discussion and OpEx, our non-GAAP gross margin came in at 65.6% versus 69.7% in the year-ago quarter. This was influenced by several factors, a product mix, as where accounted for a greater percentage of our sales this quarter versus the year-ago quarter, and they typically carry lower than corporate average margins. Second, our supply chain costs accounted for the balance of the gross margin difference. Specifically, we incurred $1.2 million of higher component costs in the second quarter versus the year-ago quarter, which was lower than the $1.4 million we mentioned in the previous quarter. We estimate the higher supply chain cost impact on our non-GAAP gross margin at about 170 basis points. Excluding this impact, which we believe is temporary, our margin should have been 67.3%. We now believe in a substantially lower impact in the third quarter. While we continue to invest in our strategic areas in our business, we have slowed down this investment in the second quarter in view of the global macroeconomic slowdown. The non-GAAP OpEx growth slowed to 15% year-over-year, still growth, compared to 20% in the previous quarter. The OpEx growth was primarily driven by adding positions. We have added 119 positions year-over-year. Non-GAAP operating margin was 17.4% versus 22.4% in the year-ago period, which was impacted by increased investments in new product and technology development, product mix, our supply chain costs, and increased hiring activity. On the heels of this development, our non-GAAP earnings per share came in at $0.34, in line with our internal budget. This compares to $0.37 in the second quarter of 2021. With regard to headcount, as Niran mentioned, we have added 18 full-time employees and 13 outsourced employees, altogether, 31 positions in the second quarter of 2022. That speaks for itself in terms of our confidence in our ability to continue to grow and prosper. On the heels of 112 positions added in 2021 and 37 positions added in the first quarter of 2022, as we continue to invest in strategic areas of our business while prudently managing OpEx in light of the uncertain macro environment. We expect continued growth in headcount in the third quarter of 2022. Now to our updated guidance. While we continue to see strong business momentum and fundamentals, we believe it is prudent to update our guidance in view of the macroeconomic headwinds and the short-term elevated supply chain costs in 2022. As Niran has already stated, we adjusted our guidance as follows. On the revenue side, we now lower our revenue range by $2.5 million, about 1% of our annual plan for the year, to be in the range of $275 million to $282.5 million, down from the original guidance provided in January. As to earnings, we now guide for non-GAAP EPS to be in the range of $1.35 to $1.45 million, down from the original guidance of $1.40 to $1.60. Touching on sales in the quarter, this has been a very good quarter. We have met our targets in sales in North America, and we have a strong channel that continues to develop and exceed our plans by 20%. There are a few regions and territories that have surpassed the original plan. Overall, I would say that we performed well in North America, in EMEA, and in some areas. Now let's dive into our core business engines. First and foremost, Microsoft, as mentioned previously, Microsoft business grew over 20% year-over-year with the activity in Teams, up 45% year-over-year. Skype for Business continued to decline above 50% this quarter, and now it's down to only about 4% of our overall company quarterly business. No question that in coming quarters, the impact of the decline in Skype for Business will be negligible and we will see the full par of the growth in Teams, which is set to be 45% year-over-year. We had another record quarter for Microsoft Teams account additions; we added 317 accounts compared to 209 million in the year-ago period and versus 260 million in the prior quarter, which speaks to the accelerating adoption of Teams in our growing pipeline. Also, Teams' new readability here, we look at the new business that's being created every quarter has grown 25% year-over-year, which provides a strong basis for further growth in coming quarters. Another point to note is that while our overall Microsoft business in 2021 was about 120, when we combine our revenues year-to-date, with the above 80% probability opportunity that we have on hand, we are now at a similar level already at the end of July 2022, which again speaks and shows the strength of our growth. And thus, we have high confidence in our ability to grow Microsoft business in 2022 by 20% to 25% compared to 2021. To mention some of the key developments in the Microsoft space, we have seen substantial growth in drive in our devices activity. We've seen IP phone business growing nicely. We've seen demand substantially growing and continuing after the return to work with a decline of the COVID-19 pandemic. We saw continued increase in IP phone business across several cores now. This is the third quarter of growth, and we plan for about 20% annual growth. I should mention though that if we were able to deliver all of the purchase orders that we received, we would probably end up with the IP phone business growing even more in the future. We had shortage and that has really limited our ability to deliver. Also, great service by Microsoft on increasing efforts, equipment, and delivery and installation of meeting rooms. That becomes a major topic with Microsoft. We are acting to build a new product to offer new services, and we expect those to deliver and launch this product and services in this meeting space in the second half of 2022. Just to mention two or three accounts that we have in that space. Working with a Tier 1 service provider, we have signed a 36-month contract with a large international investment firm, selling AudioCodes Live Services for a total contract value of $1.5 million. This deal covers the migration from Alcatel to Teams Voice for 7,000 employees in APAC and EMEA as part of the expansion. Another win we had in Europe, working with another Tier 1 service provider, we signed a 48-month contract with a multinational European energy company, selling AudioCodes Live Services for close to $1 million of total contract value. The live services cover migration of 15,000 employees from Alcatel to Teams Voice by the end of 2022. We are hopeful of potential expansion in this project and upselling additional solutions in our portfolio. Third, working alongside the system integrator, we signed a 42-month contract with an international energy company, selling AudioCodes Live Services for about $1.5 million in total contract value. The deal provides managed SBC services plus various operations such as addition, changing the leading services part of the migration from Cisco to Teams Voice for 7,000 employees in the US and APAC. Now let's dive into the most important business line we have at AudioCodes, which is AudioCodes Live. AudioCodes Live stands for our managed services portfolio in the Microsoft Teams space. We had excellent execution in our live subscription services portfolio. We ended the second quarter at a $24 million run rate, up from $20 million last quarter, and keeping us on track to achieve our 2022 target of over $30 million. Importantly, we benefit from multiyear visibility from this revenue stream as live customers often sign 36, sometimes 48 and sometimes 60-month contracts. We ended the June quarter with over $60 million in total contract value, up over 100% year-over-year. Actually, in each of the last three quarters, we have added more than $10 million in total contract value in Microsoft Teams. AudioCodes Live's success stems from the fact that it removes complexity from the process of integration with legacy enterprise telephony and provides a seamless, rapid, and cost-effective migration to Microsoft Teams for enterprises. Regarding live Teams' total contract value, as I've mentioned before, just to repeat the information. In each of the last three quarters, we have signed contracts for a total value of more than $10 million each quarter. And at the end of the second quarter, our total amount of contributed total contract value is now above $160 million. Let's move to our success in the Zoom space. In the second quarter, revenues from activity in the Zoom Phone space grew above 50%. We expect to grow this year close to 100% compared to the previous year, still within the range of $5 million to $10 million. Second quarter 2020 was also a record quarter in which new opportunities were created. New opportunity creation really grew by north of 200% in the quarter, which tells you about the big potential that's developing for our solution in the Zoom Phone arena. We know that Zoom is focusing more and more on the Zoom Phone and as stated, it has strategic importance publicly. And we know that a report from October 2021 indicated Zoom is expected to gain market share from about 11% this year in the US market to 15% by 2026. Just to remind everybody, we're talking about a $400 million US market. We are cooperating with Zoom on projects targeted to increase the number of products and solutions in the Zoom Phone environment. We invest in coming up with solutions for built-in resiliency, several phones, connectivity devices, MSBR and gateways, some conference devices and more. So all in all, we believe that we are making nice progress also with Zoom in the US market. The next strategic business segment is customer experience. We are pleased to see the return of strong growth, up over 20% in the second quarter, after being down 8.5% in the prior quarter. Growth was fueled by continued healthy adoption of connectivity services and the closing of a large deal in EMEA this quarter that was carried over from the prior quarter. In that particular large deal, we are working with a global system integrator to provide SBC infrastructure to a large European financial institution, which has embarked on a digital transformation initiative. This is a 48-month deal worth roughly $1 million in contract value. As you can see, during the past two years, we are increasingly growing the number of long-term high contract values for two, three, and sometimes even five years, which indicates that we are building and paving the future going forward. Also, we see growing adoption of new products and services launched during the past 12 months that we expect to boost revenue growth. Among them, web and CC solutions and various Voice.AI related products and solutions, including conversational IVR solutions, Voice.AI Connect, which enables voice connectivity to chat box and intelligent voice agents and assistants. I'll just mention original success in the customer experience. In addition to North America, where we have traditionally had a strong activity related to our long-term relationship with Genesis, we've seen nice pickup in activity, both in EMEA and APAC. And this time, we have activity that enrolled directly end users. Lastly, let me talk about our Global Services. Global Services, as we have mentioned, is a growing pillar for our business. In the second quarter of '22, services grew to become 40% of our revenues. Specifically, we grew 12% in the second quarter year-over-year. And if we combine the first quarter, altogether, we grew 13% in the first half. Growth in support and maintenance contracts was mild at 4.3% in the second quarter and then about 8.1%, and this is a good result from moving from selling in a CapEx mode to selling in a recurring mode since then support services have become more constant transactions. Our professional services grew substantially, over 35% in the second quarter year-over-year, coming mainly from North America and EMEA. In fact, professional services have reached the highest in recent quarters on record globally and in North America. North America professional services have a first-half year-over-year growth of above 35%, and we won in North America 45 new AudioCodes Live managed services customers. So, all in all, bringing the federal contracted Americas managed services customer count to above 200. And with that, I have concluded my introduction, and I will now turn to questions.

Thank you very much, Shabtai. Your first question is from Greg Burns of Sidoti & Company. Please go ahead and ask your question.

Good morning. So just first on the revised guidance. In terms of the EPS, the decrease in EPS guidance, what are your assumptions in terms of margins for the back half of the year? Are you expecting any improvement from the second quarter, or should we expect the gross margins to remain under pressure?

Yes. Generally, I believe that we will see the additional cost for components going down. We've seen it going down a bit in the second quarter. We expect a higher decline in the third quarter. So, all in all, I think we hope to return as I have mentioned to a gross margin that's about 67%.

Okay. I'm thinking about our operational margin.

Yes, right.

Okay. Microsoft mentioned they have 12 million PSTN users on Teams. Are those the users your services are reaching? If they are reporting that number, is it a good indicator of voice adoption in Teams? What are you seeing regarding their efforts to boost that adoption rate?

Okay. Good point. We announced 270 million Teams users. It's important to note that these users do not include phone users. For those interested in Teams phone users, Microsoft reports 80 million. Among the 80 million Teams phone users, not everyone is communicating externally. Recently, they highlighted that they now have 12 million PSTN users, which is a significant increase from 6 million a year ago. This growth is linked to the SBC functionality that was acquired. Every organization using Teams can work internally without any specific solution, but to communicate with the PSTN for receiving calls or dialing out, the SBC functionality is needed. Currently, there are 12 million users utilizing this feature. In the field, we control more than 50% of these users and are seeing substantial growth. This is a crucial data point for forecasting our future potential.

Okay. Great. Thank you.

Thank you. Your next question is coming from Samad Samana of Jefferies. Samad, please ask your question.

Hi. Great. Good morning. I wanted to follow up on the guidance question, but on the top line. I guess just as I think about the implied numbers, it kind of suggested back half deceleration to, let's call it, about from 13% in the first half of the year. And the comps are easier in the back half of 2020 versus the back half of 2021. So I guess I'm just trying to maybe understand what you're seeing specifically that led to the guidance reduction? I know you said macro, but are you seeing deal cycles get longer? Are you seeing people do smaller scale projects? What is driving the top line dollar revision?

Initially, I want to emphasize that the update was prompted by our earnings revision. If we hadn't aimed to update that, I likely wouldn't have altered my revenue update. As we shared our update, we decided to lower the growth forecast from an initial estimate of 13% per year to 12% per year. We don't consider this a significant change. In response to your question, we are indeed experiencing some projects taking longer to complete due to delays in decision-making. The global situation has raised questions in recent months about how the crisis is evolving. While the latest estimates seem more optimistic, we want to be cautious and not simply assume everything will proceed as planned. There are challenges we're facing, which include extended project timelines and delays, but we anticipate the overall impact on income to be around 1%.

Okay. That's helpful. And then maybe just in terms of what you're seeing with – when you're doing Microsoft conversions from Skype for Business to Teams, or as customers move over to Zoom Phone – are you seeing any change in behavior in terms of the footprint? Like are they moving over the entire base at once? Are they being more methodical about how quickly they're moving over to the cloud environment? I guess, what are you seeing as customers that you're helping convert over to the cloud? Like, how are you seeing in terms of trends there?

Yeah. We definitely see a very strong trend of all Skype for Business and Skype for Business online accounts moving to Teams. That just to talk numbers, right, a year ago or Skype for Business was at 10 million. In the second quarter, I think it was down to about 2.7% versus what it was a quarter ago, which was about 4%. So the decline is fairly rapid. I know that it's costly for Microsoft to maintain three different infrastructure applications solutions such as Skype for Business, Skype for Business Online and then Teams. So it is Microsoft interest to speed up that process. And we are aware of that fact; customers are aware of that fact – and I think it will not take more than a year before the amount of Skype for Business really goes to almost nothing. But again, as I've mentioned because it's that low this time, $2.7 million a quarter, less than even 5%. And the expected growth in Teams will substantially dwarf that decline of Skype for Business.

Great. Thank you for taking my question.

Thank you. Your next question is coming from Ryan Koontz of Needham & Company. Ryan, please ask your question.

Thanks for the question. On the strong services growth here with the AudioCodes Live $24 million ARR, what inning would you characterize Niran in terms of this transition of your new sales from product over to subscription? Where are we in that migration today on new sales? Thanks.

It's a great question because we are still selling products. Currently, I believe that products make up over 50% of our core revenue. I estimate that around 25% to 30% have transitioned to recurring services from our CapEx transaction items. This is a rapid shift. So far, we've demonstrated the ability to grow at 100% year-over-year due to AudioCodes Live moving to recurring. This transition is well-received in the market, given the ongoing shortage of professionals and talent in this field, along with the challenges large companies face in modernizing their solutions. Many are realizing that this isn't their core competence and are open to utilizing various services. Managed services are clearly accepted since they help mitigate many of the challenges associated with deploying new solutions in our system. Therefore, we expect continued growth. While it may not always be 100% annually, I believe we will realize between 50% and 100% growth each year over the next three years.

Super helpful. And can you remind us of the gross margin difference in your managed services versus your corporate average?

Actually, the live because it's more services and the margin there is higher than one-time CapEx deals.

Got it. And just a quick follow-up if I could. Any update on the competitive environment there, particularly as it relates to Microsoft's own internal solutions for SBCs?

Yes. I think I mentioned before, everything we discussed so far relates to enterprise business. Microsoft acquired SBC from the Metaswitch deal is not in this space at all. They tried the operator connect. And there actually has been a substantial ramp-up of sales really in that last quarter. So we do not see at this stage an impact on our business from that.

Good to hear. That’s all I had. Thank you.

Thank you.

Okay. Your next question is coming from Tal Liani of the Bank of America. Tal, over to you.

Hi. Thank you. Good morning. Good afternoon. Shabtai, I didn't quite understand your answer to the previous question, so I'll rephrase it. You reduced the revenue guidance for the upcoming two quarters. Is this due to concerns, or has there been a decline in orders from customers? If there has been a decline, can you specify where it is happening? Are there particular product lines or customers involved? Could you provide more detail regarding the revenue? Additionally, on the margins, why are they being highlighted now? We've experienced supply constraints for at least the last four quarters, and while many companies indicate that those constraints have stabilized, they haven't improved. So why are you emphasizing this more than before?

On the revenue side, there haven't been any order cuts or specific issues with particular customers. We are just acknowledging that the momentum we had two years ago in delivering products and services and achieving revenues has changed. The second quarter presented more challenges, and we all faced headwinds globally. Therefore, we are approaching things with more caution. As I've mentioned, we have revenue close to 70 million a quarter. Given the tough environment, I think it's reasonable to expect some fluctuations. This isn't linked to any one area or customer, including Microsoft or our contact center segment. Overall, considering the current environment, I would estimate that it will be more challenging to meet revenue targets compared to the beginning of 2022, which is why we've made this adjustment.

And I know you don't provide guidance for 2023, but from your discussions with your customers and the projects you're involved in, do you already see some cautiousness from customers about project pushouts or anything that could suggest that we shouldn't be cautious on the following year?

Not really. I can tell you that we discussed this in the second quarter and July is already behind us. The increase in projects in July has been very strong. We haven't heard of any projections for 2023 going down. Microsoft continues to grow. If we look at Microsoft's recent announcement, they are adopting a more cautious approach by limiting hiring trends. There was also an announcement in May where they indicated intentions to reduce the rate of hiring in specific areas, including our Phase 2. Considering that, I believe our situation is similar to Microsoft's.

Got it. Last question, Shabtai, about your own hiring and your own kind of workforce, what are your plans? And how do you adjust to the environment?

So, we keep hiring. I mean, we have stated that this quarter, we did 31 positions, about 18 full-time employees and 13 in outsourced positions. We continue to hire. I can tell you that I'm sitting daily and weekly with new requests. Our services business approach, we need to add people. We have more positions. We would like to increase our business in Asia-Pacific because it's growing very nicely, and we will have twelve positions. So, all in all, we simply need to be in control of how we grow, but we will continue to hire.

Great. Thank you.

Sure.

Thank you very much. Your next question is coming from Brian McWilliams from Barclays. Brian, please ask your question.

Hi, this is Jack on for Brian. Thanks for taking the question. So, you hit a strong inflection point in the CX business coming off the first quarter's year-over-year decline. After this return to growth versus the first quarter, should we expect this momentum to continue into the third? Thanks.

Yes. Well, I can tell you that from what we see already in the third quarter, we are in a good position to continue to grow in the third quarter. And all in all, I will tell you that the disruption in that market and the whole fast growth of call automation and conversational solutions, yes, we will see contact centers growing.

Great. Thanks. And then in the first quarter, you discussed bringing on covers, so virtual agent of the global market in the second half of the year. Is there any sort of update here?

We're discussing progress, but I can't mention any significant contracts at this time. However, I can share that a new solution we introduced in the second quarter for IVR conversations has received excellent feedback. Currently, the product is being trialed with five to ten new accounts, as there appears to be a gap in the market that we can address with this new offering.

All right. That's it for me. Thanks.

Thank you.

Okay. We appear to have no further questions in the queue. Would you like me to hand back over for closing?

Well, thank you, operator. I would like to thank everyone who attended our conference call today. This continued good business momentum in the second quarter of 2022 and strong underlying market trends in our industry. We believe we are on track for another year of growth in 2022. We look forward to your participation in our next quarterly conference call. Thank you all. Have a nice day.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.