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. 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.

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 Investor Relations section of the company's website at the conclusion of the call. With all that said, I'd like to turn the call over to Shabtai. Shabtai, please go ahead.

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

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 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 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 headquarters 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 on August 15, 2024. Business outlook. As it relates to our 2024 financials, we are reaffirming 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.

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 and conversational AI business, with a sequential uptick in the legacy gateway business. Within the 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 our emerging conversational AI business in the second quarter and the first half of 2024, we have strong conviction regarding the potential for future success in this area and position conversational AI as a strong leg and growth engine for the company next to our Microsoft Teams business. Our managed services business continues to evolve to become our key go-to market. Services business grew 12.7% and accounted for 53% of revenue in the second quarter compared to 47% in the year-ago quarter. What has fueled ongoing momentum in services is our live managed services, which grew about 35% year-over-year and ended the second quarter at $56 million in annual recurring revenue, putting us on track to achieve our guidance of $64 million to $70 million by the end of 2024. Our focus on investment made in recent years is 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 the live platform stem 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 we 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 that do not show in our financials and are not part of our balance sheet, our live and managed service backlog, those are managed services that we sold but haven't yet invoiced 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 a 133% year-over-year growth and that speaks to the strength of the Microsoft Teams live business. Secondly, an area emerging in a big way in 2024 is 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 unique position due to the fact that we own one of the most comprehensive sets 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 in 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-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 slight sequential decrease relating to our latest headcount rationalization initiatives. As a reminder, we expect about $1.5 million quarterly expense reduction, of which about $1.2 million is still to be realized in the third quarter of 2024 and thus 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 employees in the second quarter of 2023. The year-over-year improvement in non-GAAP gross margin and OpEx led to non-GAAP operating income of $7.2 million or 11.9% margin versus a 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 $240 million to $250 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's 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 the second quarter year-over-year. With a steady increase in the live managed services, we grew 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, second quarter recurring live bookings 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's 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 the previous quarter that they were at about 3 million Teams phone ads in the previous three quarters. We believe a key driver to further or accelerate the growth of Teams phone is a Microsoft's push on the use of co-pilot for meetings and call analytics, so expect a good market ahead. In 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 you or talk about one key win in the quarter, we signed a 36-month contract with a multinational consumer goods firm providing live essential services to an 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 wins may not be meaningful, so long-term, building trust with customers and executing our online and expense strategy by leveraging a broad portfolio of products and services has proven to be an 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 a 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 centers and is now 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. In terms of revenues, just to give you an 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 bookings in the first half and then we have a very interesting win with a large financial institution in the U.S. We see an increasing number of projects with financial institutions migrating to the cloud. Naturally, these large projects require longer decision cycles that may delay signatures. In the third quarter, we won a project with a U.S. bank that ordered our new call security service, adding an 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, up 10.5% year-over-year. Booking 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. 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 we at AudioCodes shine. We own extensive experience in multiple technology areas including telephony, networking, networking device management, security, cloud infrastructure, 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 function, from headcount of about 350 engineering software developers, we currently employ more than 100% in the voice AI activities, which is close to one-third. The growth of UCaaS and CCaaS is heavily dependent these days on the application of CAI, Gen AI, and 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 is increasing mainly in the verticals of finance, healthcare, and government. Talking about solutions we have now in production three SaaS applications which provide multi-tenant operation over Azure, leading with Voca CIC, our AI-First Azure Native Contact Center for Microsoft Teams. Then we have an interaction recording application called SmartTAP 360 which provides compliance recording and enterprise recording, and then we have meeting insights, an enterprise-grade meeting collaboration tool. We do intend to expand our activity in CAI by providing, going forward, an on-premise 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 the second quarter, already at 75% compared to last year. We expect them to almost 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 increased 35% quarter-over-quarter. We won additional educational accounts 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 to Teams. And then we have Voca CIC's largest deployment to date, now handling 2.5 million calls a month. Meeting Insights is a SaaS application and organizational enterprise solution that captures, analyzes, and organizes all Microsoft Teams meetings within an organization. This allows for company-wide information sharing and significantly improves decision-making for managers and leadership through insights gathered from meetings. At AudioCodes, we have been utilizing Meeting Insights for over two years, currently processing more than 150 meetings daily. As a result, we've noticed a substantial increase in productivity from using the application. Meeting Insights is part of our expanding portfolio of SaaS applications in the conversational AI sector, which harnesses AI capabilities to transform Teams meetings into actionable business insights, facilitating efficient information sharing and boosting productivity in organizational decision-making. I'm pleased to share that last week, a prominent online publication, UC Today, recognized AudioCodes Meeting Insights as a winner in the best use of AI category for its UC awards 2024. The judges acknowledged Meeting Insights' effectiveness in leveraging conversational AI to improve user productivity and enhance communication experiences. To highlight some key metrics, we completed the deployment of the SaaS solution in the first quarter and experienced significant growth of over 30% in the second quarter. We anticipate rapid growth moving forward, with AI usage in Meeting Insights likely to double month-over-month as more organizations adopt LLM technology and insights from the application. Additionally, we plan to extend our Teams solution to include support for Zoom, Google Meet, and Cisco Webex environments, as well as to offer on-premise storage solutions. In the coming month, we aim to expand our language offerings beyond Hebrew and US and UK English to include several more European languages such as German, French, Dutch, Italian, and Spanish. Our growth trajectory is strong, moving from a few thousand in 2024 to potentially millions by 2025. 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.

Thank you very much. We will now be conducting our question-and-answer session. Please wait a moment while we poll for questions. Thank you. Your first question is coming from Ryan McWilliams of Barclays. Ryan, your line is live.

Hey guys, this is Eamon Coughlin on behalf of 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?

Yes, anyone looking to understand the potential of our business should focus on two main areas. The first is the live and Microsoft Teams, which is our managed services branch that has seen about 53% growth year-over-year. This area is where we invest most of our energy and resources. Our strength comes from years of development on our Live Platform, which is built on our renowned connectivity services, including Gateway and SBC. Over time, we have also incorporated management services that allow us to manage user site additions and deletions. Additionally, we've introduced the contact center Teams application, which offers contact center capabilities, along with recording solutions. Recording, transcription, and inference have become crucial for both UCaaS and CCaaS solutions. Adding these services enhances our strategy of lending and expanding. We generally start with our connectivity services, where we lead the market, and then we upsell voice-related business applications to those accounts. A recent success was with the University of Central Florida, which has long utilized our SBCs. They recognized us as a trusted supplier and agreed to evaluate our contact center solution. This illustrates our strategy of lending and expanding through additional services. We anticipate new offerings like Meeting Insight and interaction analytics for contact centers, showing significant potential for voice-related business applications within the Teams environment. This integrative platform gives us a competitive edge, establishing a solid barrier for the Microsoft Teams phone business. With a promising growth trajectory ahead, we're confident in continued success. The second area, though smaller, is Conversational AI. We leverage our 20-25 years of experience across various technologies. Few organizations possess such a comprehensive set of technologies and resources. Our specialized group is focused on evaluating and optimizing large language models in Gen AI, integrating traditional systems and services with new Gen AI developments. We are collaborating with OpenAI and evaluating others as well. We expect our capacity to provide comprehensive solutions based on these capabilities to be a significant driver of future success. These two elements form the foundation of our business strategy moving forward.

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?

Yes. My strategy has always been to start in Israel near our headquarters, where we have excellent access to many businesses. We already have a few projects that are fully operational in the financial, government, and healthcare sectors. For instance, we completed a project with the Israeli Red Cross Ambulance Service in 2021, which has been running for three years now. We have also delivered two projects for the government sector and worked with Israel's largest medical service organization, Clalit, which serves 4.5 million subscribers. Our solution for call steering is handling about 100,000 calls a day. Currently, we have nearly 10 different applications that are not reliant on our standard products. These projects require connections to contact centers and cellular phone environments, alongside management of various elements, including transcription, extraction, inference, recording, and delivering reports and analytics. There are many areas where we can excel.

Got it. Thank you, Shabtai. I'll hop back into the queue. Appreciate it.

Thank you very much. Your next question is coming from Ryan Koontz of Needham & Company. Ryan, your line is live.

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 digits or maybe double digits?

Yes, I believe that the decline of legacy is moderating. 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 or second quarter 2025, we are definitely going into growth. I believe that now that our business will be primarily based on recurring business and not one-time sales, the chances for decline, such as happened to us in 2023 and this year, will not repeat themselves. So we expect growth to come back in the second quarter of '25 and beyond.

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 in legacy gateway shipments?

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 the fourth quarter of the last year to the first quarter of the year. 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 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 a decline of more than another $10 or $15 million throughout the coming quarters, so all-in-all, I think we already experienced the largest drop, and so it will moderate and will vanish.

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 the 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?

Hi, Ryan. This is Niran. We had very nice cash flow, operating cash flow in the first quarter; it was $15 million. So no dramatic change during this quarter, although we saw a slight increase in our accounts receivables, but there are 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 be back to positive operating cash flow in the third quarter and then after. In regards to the capital expenditures, this relates to our new headquarters. We will have a few more million invested in the third quarter, and then we will be back to the regular levels that we used to have before.

Got it. Thanks, Niran. That's all I've got. Appreciate it.

Thank you very much. Your next question is coming from Samad Samana of Jefferies. Samad, your line is live.

Hey guys, this is Billy Fitzsimmons on behalf of 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.

Overall, I believe that contact center activity remains strong. If you recall Enterprise Connect in March, it was fully engaged with all contact center applications, which are continuing to grow. The global economy does not seem to be affecting this segment significantly. While UCaaS growth has slowed somewhat, it remains quite robust. We have observed some impact from the economic climate on enterprises' investments in modernizing their networks, but I anticipate improvements when the economic situation stabilizes, hopefully next year. Furthermore, the emergence of Gen AI technologies, particularly co-pilots, is likely to enhance the UCaaS use case. These advancements provide excellent technology for analyzing meetings and calls, which has previously been an underutilized source of valuable intelligence. As we shift our focus from emails and digital files to the wealth of information generated in meetings, we expect that Gen AI, along with some chatbot technologies, will boost UCaaS usage. Overall, we are optimistic about improved performance in 2025.

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.

Yes, very simply. I mean, let's talk about a corporation that needs to be highly operationally 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 of action items that can be distributed and sent over immediately. 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, an employee leaving your organization and knowledge retention. If you have a talent that has left your organization, you're at a loss. It will take you four months to recruit a replacement. All the experience and knowledge that the previous employees had 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 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 summarizations and insights in text from this person's experience. So all of a sudden, he can become fully productive and effective within a matter of a week or two.

Super helpful. Thank you very much.

Thank you very much. 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.

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 underlying market growth trends in the UCaaS, CCaaS, and CAI, we believe we are transitioning the business towards growth and growing profitability in the coming years. We look forward to your participation in our next quarterly conference call. Thank you all, have a nice day.

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.