Audiocodes Ltd Q3 FY2025 Earnings Call

Greetings, and welcome to the AudioCodes Third Quarter 2025 Earnings Conference Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Roger Chuchen, Vice President of Investor Relations. 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, 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 following: the effect of global economic conditions in general and conditions in AudioCodes' industry and target markets, in particular, including governmental undertakings to address such conditions, shifts in supply and demand, market acceptance of new products and the demand for existing products, the impact of competitive products and pricing on AudioCodes and its customers' products and markets; timely product and technology development upgrades the event of artificial intelligence and the ability to manage changes in market conditions and evolving regulatory regimes as applicable, possible need for additional financing; the ability to satisfy covenants in AudioCodes financing agreements, possible impacts and disruptions from AudioCodes acquisitions, including the ability of AudioCodes to successfully integrate the products and operations of acquired companies into AudioCodes business; possible adverse impacts attributable to any pandemic or other public health crisis on our business and results of operations; the effects of the current and any future hostilities involving Israel, including in the regions in which we or our counterparties operate, which 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 any other factors described in AudioCodes' filings made with the U.S. Securities and Exchange Commission from time to time. AudioCodes assumes no obligation to update the information. In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share. AudioCodes has provided a full reconciliation of the non-GAAP net income and net income per share to its net income and net income per share according to GAAP in the press release that is posted on its website. Before I turn the call over to management, I'd like to remind everyone that this call is being recorded, and 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 everyone to our third quarter 2025 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance at 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 third quarter were $61.5 million, an increase of 2.2% over the $60.2 million reported in the third quarter of last year. Services revenues for the quarter were $30.9 million, a decrease of 4.8% over a year ago period. Services revenues in the third quarter accounted for 50.3% of total revenues. The amount of deferred revenues as of September 30, 2025, was $81.6 million compared to $78.6 million as of September 30, 2024. Revenues by geographical region for the quarter were split as follows: North America, 48%; EMEA, 33%; Asia Pacific, 15%; and Central and Latin America, 4%. Our top 15 customers represented an aggregate of 53% of our revenues in the third quarter, of which 38% was attributed to our 10 largest distributors. In the third quarter of 2025, we experienced increased expenses due to the implementation of the new tariff on U.S. imports accounting for approximately $0.5 million additional cost, which impacted both GAAP and non-GAAP. GAAP results are as follows: Gross margin for the quarter was 65.5% compared to 65.2% in Q3 2024. Operating income for the third quarter was $4.1 million or 6.6% of revenues compared to operating income of $4.9 million or 8.1% of revenues in Q3 2024. EBITDA for the quarter was $5.2 million compared to EBITDA of $5.9 million for Q3 2024. Net income for the quarter was $2.7 million or $0.10 per diluted share, compared to net income of $2.7 million or $0.09 per diluted share for Q3 2024. Non-GAAP results are as follows: Non-GAAP gross margin for the quarter was 65.8% compared to 65.6% in Q3 2024. Non-GAAP operating income for the third quarter was $5.8 million or 9.5% of revenues compared to $7 million or 11.7% of revenues in Q3 2024. Non-GAAP EBITDA for the quarter was $6.9 million compared to non-GAAP EBITDA of $7.9 million for Q3 2024. Non-GAAP net income for the third quarter was $4.9 million or $0.17 per diluted share compared to $4.9 million or $0.16 per diluted share in Q3 2024. At the end of September 2025, cash, cash equivalents, bank deposits, marketable securities and financial investments totaled $79.7 million. Net cash provided by operating activities was $4.1 million for the third quarter of 2025. Days sales outstanding as of September 30, 2025, were 122 days. In July 2025, we received court approval in Israel to purchase up to an aggregate amount of $25 million of additional ordinary shares. The court approval also permitted us to declare a dividend of any part of this amount. The approval is valid through December 30, 2025. On July 29, 2025, we declared a cash dividend of $0.20 per share. The aggregate amount of the dividend was approximately $5.6 million. The dividend was paid on August 28, 2025, to our shareholders of record at the close of trading on August 14, 2025. During the quarter, we acquired 1,267,000 of our ordinary shares for a total consideration of approximately $12.7 million. Regarding the direct cost impact from the tariff announced since the beginning of 2025, we expect roughly $3 million of cost burden for the full year 2025. Given the recent stabilization in the tariff developments, we are resuming our practice of providing full year outlook. For 2025, we expect revenues of $244 million to $246 million and non-GAAP earnings per share of $0.60 to $0.64. I will now turn the call over to Shabtai.

Thank you, Niran. I'm excited to share that we have achieved our third consecutive quarter of top-line growth and successfully executed our strategic objectives during our ongoing transformation into an AI-driven hybrid cloud software and services company. This quarter, we built on the strength of our UCaaS and CCaaS connectivity business, which now accounts for over 90% of our revenue. We effectively leveraged our enterprise customer base to promote cross-selling of our rapidly growing GenAI business applications within our Conversational AI division. We can confidently say that AudioCodes has made Voice AI a central focus for sustained growth moving forward. Our strong results in the third quarter highlighted the success of our dual growth engines: the Live family of Unified Communication and Collaboration and customer experience connectivity services, as well as our conversational AI business line. In fact, our conversational AI segment grew by 50% in the quarter, putting us on track to achieve an annual growth rate of 40% to 50% by the end of 2025. Together, these two segments propelled our annual recurring revenue to $75 million at the end of the third quarter, representing a 25% increase year-over-year, and positioning us to meet our full-year target of $78 million to $82 million. We are increasingly optimistic about our strong ARR momentum and growth potential for the company, supported by a robust pipeline of opportunities following the recent launch of our next-gen live platform and the rising demand for productivity-enhancing GenAI services. This expectation is further underlined by a growing backlog of live and managed services that will convert into revenue in the upcoming quarters, with our backlog reaching $76 million, up 13.4% from $67 million a year ago. I would like to highlight some key developments in our strategic business lines that enhance our confidence in our growth prospects. We have witnessed an increase in demand from partners for our live platform, an all-in-one cloud software stack that enables seamless integration of connectivity with GenAI-powered business voice applications. In the third quarter, we signed a live platform agreement with a global Tier 1 system integrator. This strategic deal focuses on the alignment of all sales aspects from pursuing initial opportunities to post-sales delivery, ensuring customer satisfaction. The initial agreement scope includes managed services and gateway support for major UC and CX platforms, as well as for existing customers transitioning to the cloud. When applicable, the partner will also cross-sell our award-winning Teams certified Voca Contact center, ensuring a unified UCCX experience. Based on the services committed, we anticipate low single-digit millions in recurring revenue during the first year of this agreement. This agreement is a clear win-win; for the Tier 1 system integrator, our all-in-one UCCX conversational AI stack simplifies operations and enhances customer experience, while for us, it broadens our market reach and scales our go-to-market execution in the enterprise sector. Coupled with our successful partnership with AT&T in North America, this announcement boosts our market credibility as a preferred partner for AI-infused UCCX services, prompting strong interest from other Tier 1 prospective partners. Turning to conversational AI, we are experiencing widespread interest in our Gen AI-powered voice applications from end customers, including notable progress with our new service, Meeting Insights on-prem, or Mia OP. This unique platform offers meeting intelligence capabilities such as transcription, summarization, automation, and connectivity to leading enterprise IT applications, targeting regulated and security-sensitive industries. Launched earlier this year, we have gained traction in the Israeli market, especially in the government sector through word-of-mouth referrals. Our leadership in the Israeli market was solidified when we secured a contract under Project Nimbus, the Israeli government's multi-year cloud migration initiative, as the exclusive provider of meeting intelligence services for calendar year 2026. This award streamlines procurement for all Israeli agencies, allowing them to activate Mia OP without a lengthy tender process. We are also actively marketing this solution outside of Israel, and initial customer responses in APAC and North America have been overwhelmingly positive. In another strong segment, our Voice AI Connect and Live Hub connectivity services business achieved over 50% year-over-year growth. We had an outstanding quarter, emphasizing our strong performance driven by high booking growth, which positions us to exceed our full-year targets. This momentum was supported by numerous new customer wins in the U.S., Europe, and APAC, alongside significant expansions within our existing customer base. The growth is fueled by the emerging voice bots market, projected to surpass $25 billion by 2034, driven by Gen AI and NLP advancements. A key standout project in the Voice AI Connect space was a significant voice access project agreement with a leading agentic platform, supporting virtual agent and agent assist use cases for large enterprise clients. We view this initial engagement as a foundation for a promising partnership. On the expansion front, we renewed a strategic agreement with a long-standing VoiceAI Connect customer in the healthcare sector, reflecting substantial growth driven by demand for virtual agent capabilities. We also received a significant follow-on order from one of the largest credit unions in the U.S. for our VoiceAI Connect solution in conversational IVR use cases. Transitioning to Live Hub, our cloud-native self-serve platform for voice bot developers, we introduced Agentic AI capabilities within our Live Hub during the third quarter. This enhancement provides a comprehensive solution integrating text-to-speech and speech-to-text functionalities with LLM-powered bot development and premium connectivity services, tailored for small to medium-sized customers. Our financial performance continues to be strong, with ARR for Live Hub exceeding 30% sequentially and significantly above 100% year-over-year. In terms of profitability metrics for the third quarter, we outperformed with a revenue increase of 2.2% year-over-year and a non-GAAP gross margin of 65.8%, improving from 64.5%. This improvement is mainly due to a favorable product mix and lower tariff-related costs. We anticipate fourth-quarter tariff costs will remain consistent with the third quarter. Non-GAAP operating expenses for the third quarter were $34.7 million, slightly down from the previous quarter's $35 million and up from last year's $32.5 million, primarily due to targeted investments in the conversational AI segment and currency impacts. Our non-GAAP operating margin improved to 9.5% from 7.2% last quarter. Looking ahead, we expect a significant shift in our top-line performance in 2025, projecting revenues of $244 million to $246 million and non-GAAP earnings per share between $0.60 and $0.64. The UCaaS and CX connectivity business has stabilized compared to previous years, supported by our agreement with a leading global system integrator and increasing engagement with Cisco. We also anticipate strong growth of over 40% annually in our conversational business. In the CX market, we saw a 13% year-over-year growth, benefiting from increased connectivity for CCaaS. Our robust pipeline of opportunities gives us confidence about our growth prospects moving forward. The conversational AI business segment continues to thrive, fueled by the success of Voice AI Connect and Live Hub. As we continue our long-term transformation into a hybrid cloud and AI application provider, we have achieved a third consecutive quarter of revenue growth and successfully executed our strategic objectives. The investments in R&D and sales over the past quarters have led to record bookings in the conversational AI sector, and our healthy pipeline supports our optimistic growth outlook of more than 40%-50% annually in the conversational AI business area. We operate from a strong position, backed by a solid balance sheet and a thriving connectivity and conversational AI segment, setting us up for increased top-line growth into 2026 and beyond.

We have a question from Joshua Reilly with Needham.

All right. Nice job on the quarter here. On the global Tier 1 system integrator win, maybe you could give us some more color on what helped you win that deal from a product perspective or any other factors that you think would be relevant to give to investors here.

Right. Well, I need to go back to the significance of our Live platform, which is a services delivery platform for UCaaS and CX. I think by now, this is the only platform that allows large system integrators, which serve large enterprises around the world, to deliver all of the different services that are needed in order to modernize the enterprise and to enhance, I would say, communication and collaboration. Starting from connectivity, which connects all of the sites of a company across the globe, and then adding on top of that management, management of users, management of sites. And then on top of that, a list of business applications, including an advanced AI-first contact center, coding solution, meeting intelligence platform, and now we're coming with voice bots and Gen AI applications. So, all in all, this is the most advanced platform these days. And for a large system integrator that operates globally, this would be a great services delivery platform to serve its customers. And I think from that stems the recognition and the importance of that platform.

Got it. That's helpful. And then you're obviously building a lot of these kind of adjacent AI solutions for the communication landscape. If you look at the older products that you have in the market, whether it's FPCs or some of the gateways and all the older products that you sell, those are typically in pretty price-sensitive markets. What are you seeing with some of these new AI solutions and your ability to drive pricing power relative to the UCaaS market, which is historically a pretty price-sensitive market.

Right. Well, voice AI is an emerging market, and therefore, those organizations that are early adopters and quick to implement workflows and solutions that will substantially enhance their productivity are not less concerned with the cost. So, we do not see any price pressure at this point on the Voice AI business application. And we believe that as we will continue to enhance and add more features and make the solution substantially richer, we can still maintain that. So, you have identified correctly the difference between the legacy business, which is price sensitive. But again, we enjoy the fact that competition is becoming less and less powerful. Thus, we enjoy a relatively convenient price environment, I would say, for Voice AI business applications.

Got it. That's helpful. And then on the Microsoft business, I believe last quarter it grew 6% year-over-year, and I think you said it was flat this quarter. Is there any change in the trends there? Or is that just really around the year-over-year comparison dynamics for the growth rate?

I think the overall UCaaS market has stabilized over the past year. We've observed a strong trend until 2022, but the growth rate has significantly slowed since then. It remains a favorable market with considerable potential. Looking back 15 years, there were about 400 million endpoints in the enterprise sector served by PBX systems, whereas UCaaS currently serves less than 100 million. This indicates a large opportunity for expansion. Most of the growth has been concentrated in the U.S., U.K., Western Europe, Canada, and Australia. Additionally, over 50% of the $400 million market is still dependent on older PBX technology, creating further growth possibilities. While I anticipate UCaaS will increase, our services may need to target the non-UCaaS market at lower price points, which I believe will drive growth moving forward.

Got it. And then last question for me is, if you look at the mix of revenue in the quarter, I would say that the product revenue was pretty strong, above what my estimate was and what I would have expected. Can you just help us understand maybe what outperformed on the product revenue side in the quarter?

Yes. As you've seen, first, we had a great quarter in terms of product recognized revenues. It was driven mainly by the software, which is part of the voice AI solution. So that's where the product growth came from.

As we have no further questions on the lines at this time, I'd like to turn the call back over to Mr. Adlersberg for any closing remarks.

Okay. Thank you, operator. I would like to thank everyone who attended our conference call today. With continued good business momentum in our UCaaS and CCaaS operations and continued growth in our emerging voice AI business, we believe we are on track to grow revenue and profitability in the next coming years. We look forward to your participation in our next quarterly conference calls. Thank you all. Have a nice day.

Thank you. Ladies and gentlemen, this does conclude today's call. You may disconnect your lines at this time, and we thank you for your participation.