Greetings. Welcome to AudioCodes Second Quarter 2025 Earnings Conference Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Roger Chuchen, VP of Investor Relations. You may begin.

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. Statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters are forward-looking statements as 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 factors include, but are not limited to, the effect of global economic conditions, shifts in supply and demand, market acceptance of new products, the impact of competitive products, and possible disruptions from acquisitions. The company assumes no obligation to update this information. Before I turn the call over to management, I'd like to remind everyone that this call is being recorded. An archived webcast will be made available on the Investor Relations section of the company's website at the conclusion of the call. With all that said, I'd like to turn the call over to Shabtai. Shabtai, please go ahead.

Thank you, Roger. Good morning and good afternoon, everybody. I would like to welcome all to our second quarter 2025 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance of AudioCodes. Niran will start off by presenting a financial overview of the quarter. I will then review the business highlights and summary for the quarter and discuss trends and developments in our business and industry. We will then turn it into the Q&A session. Niran?

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 $61.1 million, an increase of 1.3% over the $60.3 million reported in the second quarter of last year. Services revenues for the quarter were $32.6 million, up 1.9% over the year-ago period. Services revenues in the second quarter accounted for 53.3% of total revenues. The amount of deferred revenues as of June 30, 2025, was $82.7 million compared to $80.3 million as of June 30, 2024. Revenues by geographical region for the quarter were split as follows: North America 48%; EMEA 34%; Asia Pacific 14%; and Central and Latin America 4%. Our top 15 customers represented an aggregate of 54% of our revenues in the second quarter, of which 34% was attributed to our 9 largest distributors. In the second quarter of 2025, we experienced increased expenses due to the implementation of new tariffs on U.S. imports accounting for approximately $1 million in additional costs, which impacted both GAAP and non-GAAP results. GAAP results are as follows: Gross margin for the quarter was 64.1% compared to 65.5% in Q2 2024. Operating income for the second quarter was $2.6 million or 4.3% of revenues compared to operating income of $4.9 million or 8.2% of revenues in Q2 2024. EBITDA for the quarter was $3.6 million compared to EBITDA of $6.2 million for Q2 2024. Net income for the quarter was $0.3 million or $0.01 per diluted share compared to net income of $3.8 million or $0.12 per diluted share for Q2 2024. Non-GAAP results are as follows: Non-GAAP gross margin for the quarter was 64.5% compared to 65.8% in Q2 2024. Non-GAAP operating income for the second quarter was $4.4 million or 7.2% of revenues compared to $7.2 million or 11.9% of revenues in Q2 2024. Non-GAAP EBITDA for the quarter was $5.2 million compared to non-GAAP EBITDA of $8.3 million for Q2 2024. Non-GAAP net income for the second quarter was $4.1 million or $0.14 per diluted share compared to $5.5 million or $0.18 per diluted share in Q2 2024. At the end of June 2025, cash, cash equivalents, bank deposits, marketable securities, and financial investment totaled $95.3 million. Net cash provided by operating activities was $7.7 million for the second quarter of 2025. Days sales outstanding as of June 30 were 112 days. During the quarter, we acquired 715,000 of our ordinary shares for a total consideration of approximately $6.6 million. In July 2025, we received court approval in Israel to purchase up to an aggregate amount of $20 million of additional ordinary shares. The court approval also permits us to declare a dividend of any part of this amount. The approval is valid through December 30, 2025. Earlier this morning, we also declared a cash dividend of $0.20 per share. The aggregate amount of the dividend is approximately $5.7 million. The dividend will be paid on August 28 to all of our shareholders of record at the close of trading on August 14. Regarding the direct cost impact from tariffs announced since the beginning of 2025, we continue to expect $3 million to $4 million of cost burden for the full year 2025. As discussed last quarter, we will look to resume the practice of providing annual outlook when we have better visibility on the final tariff rate. I will now turn the call back over to Shabtai.

Thank you, Niran. I'm pleased to report our second consecutive quarter of top-line growth in the second quarter. We are executing our strategic objectives and making progress towards our long-term transformation to an AI-driven hybrid cloud software and services company. Our second quarter 2025 performance demonstrates our success in navigating a dynamic market environment while continuing to build strength in our connectivity franchise, which accounts for over 90% of our revenues. We continue to drive traction in our portfolio of fast-growing AI-powered business applications and voice services. Second quarter '25 is the second quarter in a row where we saw stabilization in the connectivity space compared to the decline we witnessed during the years 2023 and 2024. Our enterprise UC and CX revenue again accounted for over 90% of revenues in the quarter, highlighted by ongoing strength in our Microsoft Teams business, which grew 6.5% year-over-year. A key development in the quarter is the official certification as a Cisco WebEx Cloud Connect enablement provider. With this milestone, we now enable connectivity services for all major UC platforms, including Microsoft Teams, Zoom, and Webex. More on the significance of this development later. In the CX business, we made progress as planned. Our healthy pipeline continues to support a positive outlook for the second half and full year 2025. On the conversational AI practice, we are seeing substantial robust demand, which supports our plan for 40% to 50% growth outlook for this segment in 2025. Noteworthy is the success we experienced with the newly launched Meeting Insights On-Prem service, targeting regulated industries and enterprises seeking utmost privacy and security. Overall, services accounted for 53% of revenues and grew 1.9% year-over-year. First half 2025 services invoicing was in line with our budget plans. Based on services bookings and inherent visibility in this line item, we expect second half 2025 services revenue growth to further improve. Within services, our live managed services year-over-year growth remained robust, up 25% year-over-year to exit the quarter at $70 million in annual recurring revenues. The backlog of live managed services at the end of the second quarter of 2025 was $73 million compared to $67 million at the end of the year-ago quarter. As previewed last quarter, we officially launched our next-generation live platform, a major milestone in our managed services strategy. With the recent addition of Cisco WebEx Calling Certification, the platform now fully integrates our comprehensive set of unified communication and customer success capabilities. What sets this platform apart is its ability to empower our channel partners, service providers, and system integrators to seamlessly layer GenAI-powered business voice applications and third-party solutions on top of their core connectivity offering. The live platform is a cloud-native, fully automated platform for launching and scaling voice services, particularly around Microsoft Teams and Operator Connect deployments. The platform also supports Zoom Phone and Cisco WebEx Calling. It enables zero-touch automation, session border control as a service, routing, billing, reporting, and provisioning workflows, all integrated into one system to reduce deployment time and operational complexity. Feedback from partners of all sizes has been overwhelmingly positive. Since showcasing the platform, we have seen a measurable uptick in our pipeline and a noticeable acceleration in sales cycles, including with several Tier 1 service providers. Amidst the new product momentum, we continue to enhance the value proposition and stickiness of our platform with new innovations. For example, we are developing a new AI-powered real-time analytics system that offers strategic insights into the CX Business Manager. While it may take time for these Live platform wins to be material revenue contributors, we are excited about its potential to drive a stronger footprint in the market, recurring revenue growth, and improve our overall revenue mix. A great example is AT&T North America, one of our earliest live platform partners, which uses our solution to onboard end customers to Microsoft Teams. Our secure and scalable solution has provided AT&T North America with significant operational flexibility and resulted in multimillion dollars of annual recurring revenue over the past few years. On the conversational AI front, we have experienced increased interest all around our activity. Progress has been made in most of the leading product categories such as the Voca Customer Interaction Center for the Microsoft Teams environment, Meeting Insights serving as an enterprise meeting intelligence platform, and the newly developed AI agent technology for voice bots. Recently, we introduced Meeting Insights On-Prem, extending the GenAI-enabled meeting productivity and intelligence benefits to regulated and security-sensitive environments and industries. This industry-first solution has already garnered important customer interest as evidenced by a robust pipeline. We expect the number of proof-of-concept opportunities to further scale over the rest of the year. Two weeks ago, we introduced Meeting Insights On-Prem internationally in the APAC region. The audience feedback was better than our elevated expectation. Common takeaways from these meetings were that the service is precisely what security-sensitive management and customers, such as government banks, are looking for, unleashing the power of GenAI without compromising on security. This viewpoint mirrors customer feedback in Israel, our initial market launched several months ago. Before turning to detailed business line discussion, let's quickly shift to second-quarter profitability metrics. On the top line, we performed as planned with revenue growing 1.3% year-over-year. Our non-GAAP gross margin, as Niran mentioned, for the quarter was 64.5%, slightly below our long-term target range of 65% to 68% and compares to 65.8% in the year-ago quarter. Our second-quarter non-GAAP gross margin absorbed approximately $1 million of tariff-related cost headwinds. We continue to expect close to $4 million of tariff-related cost burdens for the full year. Assuming tariff rates for various countries settle shortly, which we hope will happen in the summer, we will be working to reduce the heat in the first quarter of 2025. Additionally, we incurred several hundred thousand of those headwinds from a weaker U.S. dollar against the euro in the second quarter. Second-quarter non-GAAP operating expenses rose to $35 million, up from $32.5 million in the year-ago period. The higher expenses are primarily attributable to increased investments in marketing and sales resources as part of our conversational AI investment. In terms of headcount, we ended the quarter with 963 employees, roughly flat from the prior quarter and compared to 940 in the year-ago period. Adjusted EBITDA for the second quarter was $5.2 million. We continue to generate a healthy amount of cash flow with net cash from operating activity at $7.7 million for the quarter. This robust cash flow generation provides a strong backing to our ability to keep investing and expanding our business moving forward. As for the guidance, as mentioned in our previous quarter's discussion, we will postpone issuing a financial outlook until we have a better and clear understanding of the resolution regarding tariff rates. The key takeaways from these financial results at the bottom is that our business remains solid and is on an upward trajectory. It has been several years since we experienced nice growth in our highly profitable connectivity segment, particularly in the UCaaS and CX market. In parallel, we are successfully expanding our promising voice-centric AI and GenAI-powered business applications. As for the general market, despite the presumable recent volatile business landscape stemming from the tariff challenges, we have not observed any shift in customer purchasing behavior. The pipeline for opportunities remains strong as we approach the latter part of 2025. Now to the Microsoft business. Market surveys and partner inputs continue to support the growth story for Teams Phone, where adoption in the market continues well at over 20% annual growth. Teams Phone usage is also strongly supported by Microsoft's efforts to drive Copilot as a central capable chatbot for Teams Phone meetings and calls. Key to continued Teams phone growth is facilitating connectivity for large enterprises and networks. In this regard, with Microsoft Operator Connect getting more mature and growing, in addition to the already successful direct route connectivity, this provides further stimulus to Teams phone growth. All this points to a strong market today and for coming years and further supports business expansion and dominance in this connectivity area. Our Microsoft business grew 6.5% year-over-year, fueled by ongoing strength for our connectivity business coupled with increasing attach rates of Voca CIC, our Team Certified CCaaS and our conversational AI business application services. Key to our success is our Live Managed services, with annual recurring revenues reaching $70 million exiting the second quarter, representing approximately 25% growth year-over-year. Booking of new large multimillion contract value opportunities increased about 6% in the second quarter, and new opportunities created value grew more than 10% in the quarter. Noteworthy in our growth story is the latest certification of Live platform for Microsoft Operator Connect for partners in EMEA and soon to be certified in the U.S. To put some color on the progress made in the second quarter, here are some examples of wins in the quarter. We enjoyed considerable success in the U.S. higher education vertical, securing several multimillion key wins and contracts in the sector. One example is our win with a large state university valued at more than $2 million in total contract value, of which about $800,000 came from a 36-month contract of LivePro Teams Managed Services and related professional services. A second example is the large follow-on order we recently closed, amounting to over $1.5 million in total contract value from a private university in the Midwest. We had won the initial deal in the second half of 2024 as part of its initial phase of UCCX modernization. Given the successful completion of the first phase, the university decided to standardize on AudioCodes services for all of its campuses. Our success can be explained by having the industry's most complete portfolio, best-in-class UCCX capability, strong track record of delivering customer satisfaction, and a referenceable list of marquee clients. We have built much credibility in the sector, and we are now getting inbound leads from other prospective university customers looking to modernize their UCCX. Further on the success in the UCaaS area, I'll mention two other entities. First, AT&T. AT&T is our largest partner channel for Microsoft Teams in the U.S. The second quarter was very successful; invoicing and booking grew by over 10% in the quarter sequentially, with new logos turning in throughout the quarter. While traditional managed services business continued to grow, the second quarter was a pleasant surprise in terms of rising numbers of PSTN shutdown projects in various U.S. states and working on PoPs replacements. This trend should support further continued revenue growth in the coming years. And then for our new activity with Cisco in the UCaaS market, we announced our certification for WebEx Connect in June 2025. During the second quarter, we have seen an initial pipeline built with service providers in EMEA, with opportunities created representing potential new multimillion dollars. We intend to increase marketing and sales efforts in the WebEx calling space in the coming years. Turning to CX. We made progress as planned in the quarter, and our healthy pipeline continues to support a positive outlook for the second half of the full year. We've seen growing customer and partner interest in Live CX, which is an essential part of the Live platform targeting application areas such as: the migration of contact centers to cloud and providing SIP connectivity for CCaaS; click-to-call applications as a replacement for traditional 1800 services for contact centers; and Voice AI Connect and LiveHub providing connectivity for cognitive services. In the second quarter, we signed a Tier 1 system integrator for Live CX and Voice AI Connect that will service the connectivity backbone in support of new customers. Signing up more Tier 1 system integrators is an important initiative as it effectively scales our addressable market. These partners target midsized CX customers that are historically not targeted by our direct sales team. Now to conversational AI or CAI. Let's discuss the highlights of what happened in the second quarter. As contemplated earlier in the year, we saw strong demand and opportunity wins, supporting our 40% to 50% segment growth outlook for 2025. We experienced increased activity across all of our business lines. Progress has been made in our leading product categories, such as the Voca CIC for the Microsoft Teams environment. We also saw success in the meeting intelligence platform space with two leading solutions. The first is Meeting Insight, an enterprise SaaS application, which targets enterprise-wide deployments and has demonstrated growth of above 200% year-over-year in the number of accounts and proof-of-concepts using GenAI for meeting summarization and inference. The second is the recently introduced Meeting Insight On-Prem or Mia OP, extending the GenAI-enabled meeting productivity and intelligence benefits to regulated industries and security-sensitive environments. This industry-first solution provides AI-enabled meeting summarization and intelligence and is completely detached from the cloud and/or Internet. Now let's talk about Voca CIC. In the second quarter, Voca CIC continued its strong momentum with bookings growing by 150% compared to the same period last year. We also established a robust pipeline of opportunities for the latter part of the year. Voca CIC benefits from the increased attach rate through its involvement in Teams Phone migration projects that AudioCodes has, especially within the higher education sector, as noted earlier. Revenue growth in the second quarter '25 remains strong, bringing us closer to our goal of surpassing 50% year-over-year growth. Highlighting our achievements, CX Today publication recently recognized us with the Best Customer Experience Deployment award for the successful contact center migration at the University of Central Florida, one of the largest public universities in the U.S. This project included merging over 40 help desks in a single centralized contact center serving 70,000 students. Furthermore, we secured second place in the Best CX Partnership category for our work with AT&T on the Voca CIC partnership, which delivered a market-oriented integrated UCaaS and CCaaS solution for Microsoft Teams. Moving on to Meeting Insights, Meeting Insights cloud Edition maintained strong momentum this quarter with continued growth in new customer acquisition and key metrics such as the number of meetings and unique active users reaching record levels. On the product development side, customer feedback has been positive regarding the launch of our mobile app, which brings our generative AI transcription and summary features to in-person meetings anywhere, not just in company facilities. Additionally, we have developed custom GenAI-based templates and prompts, and are now working on workflow solutions designed for specific industries. Moving on to Mia OP. Since its launch a few months ago in the Israeli market, we have observed strong interest from customers across multiple sectors, including defense, government, health care, and media. Meeting Insights On-Prem uses GenAI on a local service to assist organizations in regulated, security-sensitive industries by automatically producing secure, accurate, and efficient meeting recaps without relying on cloud or Internet services. Meeting Insights appears to be a key beneficiary of the cloud repatriation trend. With the rapid adoption of Generative AI, customers now recognize that certain workloads are better suited for on-premise environments due to factors such as high cloud costs, latency issues, and security demands. Launched earlier this year, we already have close to 10 customers in production and more than 20 proof-of-concept projects, all arising from word-of-mouth recommendations. The solution has already been demonstrated internationally and has generated much interest. Recently, Mia OP has been reviewed and received positive feedback from leading industry analysts who are working to expand market reach and awareness to more markets, including the U.S., in the coming months. So to wrap up my presentation, in the second quarter '25, we continue to make solid progress in our long-term transformation toward a hybrid cloud and voice services business application company. We delivered against our strategic objectives: first, we achieved our second consecutive quarter of top-line growth; second, we made necessary R&D and sales and marketing investments, particularly in our conversational AI activities that have fueled our robust pipeline of opportunities in the second half of the year; and third, we executed well to our playbook of leveraging our strong connectivity installed base to drive successful cross-sell of value-added services. We are operating from a position of strength, supported by a fortress balance sheet, a dominant connectivity franchise, and a growing conversational AI segment that enhances enterprise intelligence and productivity. We believe these factors position us well to navigate the potential challenges in the following years. I have completed my presentation and would like to hand over the session to our host. Thank you.

Your first question for today is coming from Joshua Reilly with Needham.

All right. Maybe just starting off on the tariff impact here. What are you seeing in terms of customer demand for virtual SBCs versus physical hardware following the tariffs being implemented? And what are your thoughts on pricing? Have you adjusted your pricing? Are you thinking about it? Or what should investors be considering here?

Okay. So usually, SBCs are designed into specific well-designed solutions and architectures. If the design is for a cloud virtual SBC and/or for an on-prem data center physical device, that's something that is not changing that fast. We also believe that after we go through these months of instability, things will settle. We have obviously taken steps to ensure that our margins are not hurt by the increasing costs by raising the prices for those devices. Overall, we don't really see much impact on the business from that. That's a temporary extra cost that we are incurring during this second and third quarter, but we believe there is no real effect on the actual business and/or decision regarding which SBC to use.

Got it. That's helpful. And then if you look at the Microsoft business, that seemed to be a bit above a growth rate above my expectations for the quarter. Could you provide some more color on what's driving that strength in particular?

Yes. I think, as I've mentioned, the underlying infrastructure is the fact that Teams Phone continues to grow at least 20% a year. We are a very dominant player there, holding over 60% or 70% market share. In fact, we've heard about one competitor leaving the space. Customers acknowledge AudioCodes' dominance in the Teams Phone Managed Services space, and we signed several large multimillion total contract value projects with large companies recently. For us, that's going to be a growth area for many years. Our dominance in this market, coupled with our ability to improve the platform used to deploy those services, positions us well for continued success.

Got it. That's very helpful. And then last question for me is, if you look at the pipeline for the WebEx opportunities, have you won any of those deals yet? Would you expect to win any in 2025? Or what is your trajectory for those opportunities over the next couple of years?

Right. That's still early in the game. We just completed certification in the second quarter. However, I believe we currently have between 5 and 10 new opportunities. We need to do a lot of work with Cisco partners as we have not been in that market previously. It will take a while for that to catch up, so in terms of revenue, we won't see much impact in '25. We do see a lot of interest, particularly from one major Tier 1 service provider in Asia Pacific that is already talking to us about deploying the Live platform supporting Cisco WebEx. Overall, we expect to see a rise, but the majority of it will come in '26.

Your next question for today is from Samad Samana with Jefferies.

This is Billy Fitzsimmons on for Samad. Maybe to start, Shabtai, you talked about conversational AI remaining a key area of growth supporting the 40% to 50% segment growth for 2025. First off, did you disclose the second quarter growth rate? I knew it grew, I think, 10% plus in the first quarter. Just trying to figure out how that product is ramping into the back half.

Right. So we didn't disclose the growth for the second quarter. One thing to understand is that we are discussing a set of applications, currently 4 to 5, which are either in the first phase of selling or getting mature. We do expect non-linear growth, but rather much more significant growth in the second half. For example, with Mia OP, which produced almost none in the first half in terms of real revenue, we expect a very substantial uptick of over $1 million or more in the second half. The same goes for the other applications. So we do expect to keep up with our 40% to 50% growth plan for '25.

And then maybe a little more high level. I think investors are trying to differentiate between vendors in the Voice AI landscape and what drives differentiation. Can you talk about AudioCodes' underlying technology and how you differentiate in the conversational AI market?

Yes, definitely. We are not among the companies providing cognitive services technologies in the cloud. We're not vendors of large language models or selling cloud services such as speech-to-text and machine learning. Our focus is mainly on applications. We understand that even if you have the best STT or one of the best LLM, you still need to connect to the real world. To achieve that, integration with CRM solutions, telephony, contact centers, and management is necessary. Our heritage of over 20 years of developing these components provides us with a significant advantage, allowing for rapid deployment. Mia OP, for example, can be deployed in a matter of days rather than weeks or months that others may require. Our extensive portfolio enables us to deliver fully integrated solutions more efficiently, which sets us apart from many other companies. Consequently, we do not have a track record of failed projects, as we can deploy quickly and effectively. We believe this year will conclude with an ARR of $17 million to $18 million, and we anticipate substantial growth in '26 and beyond.

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

Thank you, operator. I would like to thank everyone who attended our conference call today. With continued good business momentum in our enterprise operations and positive underlying market growth trends in UCaaS, CCaaS, and CAI, we believe we are transitioning the business towards growth and better profitability in coming years. We look forward to your participation in our next quarterly conference call. Thank you all. Have a great day.

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