Operator
Greetings, and welcome to the Audio Codes 3rd Quarter 2026 Earnings Conference Call. At this time, all participants are on a listen-only mode, and a question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. And please note, this conference is being recorded. I will now turn the conference over to your host, Itamar Rosen, Chief Legal Officer at AudioQuotes.
Sir, please go ahead. Thank you, Operda. Hosting the call today are Shabdai Adelsberg, 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 AudioCode's 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 laws. 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 audio codes 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 audio codes and its customers' products. and markets, timely product and technology development, upgrades, the advent 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 audio codes financing agreements, possible impacts and disruptions from audio codes acquisitions, including the ability of audio codes to successfully integrate the products and operations of acquired companies into Oracle's 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 are 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 audio code's filings made with the U.S. Securities and Exchange Commission from time to time. Audio code assumes no obligation to update the information. In addition, during the call, audio codes will refer to non-GAAP, net income, and net income per share. Odikos 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, Itamar. Good morning and good afternoon, everybody. I would like to welcome all to our third quarter 2026 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance of Articles. 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. 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 $64.1 million, an increase of 4.2% over the $61.5 million reported in the third quarter of last year. Services revenues for the third quarter were $37.1 million, an increase of 19.9% over the year-ago period. Services revenues in the third quarter accounted for 57.8 percent of total revenues. Revenue by geography was as follows. North America, 47 percent, EMEA, 34 percent, Asia Pacific, 16 percent, and Central and Latin America, 3 percent. Our top 15 customers represented an aggregate of 56% of our revenues in the third quarter, of which 35% was attributed to our 10 largest distributors. Gap results are as follows. Gross margin for the quarter was 65.7% compared to 65.5% in Q3 2025. Operating income for the third quarter was $3.4 million, or 5.3% of revenues, compared to operating income of $4.1 million, or 6.6% of revenues in Q3 2025. Net income for the quarter was $3.6 million, or $0.15 per diluted share, compared to net income of $2.7 million, or $0.10 per diluted share for Q3 2025. Non-GAAP results are as follows. Non-GAAP gross margin for the quarter was 65.8% compared to 65.8% in Q3 2025. Non-GAAP operating income for the third quarter was 4.8 million or 7.4% of revenues compared to 5.8 million or 9.5% of revenues in Q3 2025. Non-GAAP net income for the third quarter was $4 million, or $0.16 cents per diluted share, compared to $4.9 million, or $0.17 cents per diluted share in Q3 2025. At the end of September 2026, cash-cash equivalents, short-term bank deposits, short-term marketable securities, and long-term financial investments totaled $47.1 billion. Net cash provided by operating activities was $4.1 million for the third quarter of 2026. Days sales outstanding as of September 30, 2026 were 109 days. On August 4, 2026, we declared a semiannual cash dividend of $0.20 per share. The aggregate amount of the dividend was approximately $4.8 million. In September 2026, we received court approval in Israel to purchase up to an aggregate amount of 30 million of our ordinary shares. The court approval also permits us to declare a dividend out of any part of this amount. The approval is valid through March 9, 2027. During the quarter, we acquired 1.5 million of our ordinary shares for a total consideration of approximately 15.1 million. Now to provide an update on our guidance, we reiterate our guidance for revenues for 2026 to be in the range of $251 million to $256 million, a non-GAAP earnings per share of $0.60 to $0.75. I will now turn the call over to Shabtai.
Thank you, Niran. Third Quora 2026 delivered solid financial results and healthy operating performance with both core business areas moving forward. Connectivity for UCAS and CCAS is an established, profitable, market-leading activity. Voice AI is a younger business, started back in 2018, continues to expand, and is projected to become a major growth driver over the coming years. Two primary growth engines continue to provide revenue, live managed services and Voice AI applications, aimed at the emerging intelligent voice enterprise. By the end of third quarter, 2026, they jointly represented $87 million in annual recurring revenues, a 16% increase from the prior year, which highlights how much high-quality recurring revenue now contributes to the business model. Over the last three years, annual recurring revenue has expanded by almost 90%, providing a solid base for further growth. Results from both primary business-matched expectations. Connectivity held its leading position in the UCAS and CCAS market, and VoiceAI kept growing at 40% to 50% year-over-year. As a result, the company remains on course for its status, VoiceAI revenue target of $25 million in 2026 and its goal of $50 million by 2028. Now to some of the financial highlights of the core. Year-over-year revenue growth picked up to 4.2%. Over 90% of revenue came from the enterprise segment, with the Microsoft Teams phone business expanding 4% lead. Connectivity covering the SBC gateways and CPE business lines has kept its revenue steady. The SBC business line... It has had a good year so far. Revenue is up 8.2% year-to-date versus the first week course of 2025, and full-year revenue is on track to exceed $135 million, which would set a record above the prior high of $131 million back in 2024. Among gateway sales, third quarter of 26 was the best quarter of the year to date, and the full year is projected to roughly $50 million. 2026 will mark a second consecutive year of stability and modest growth following the gateway revenue decline of 2023 and 2024. Service revenue rose 19.8% year-over-year. And now makes up for about 58% of total revenues. Ed count stood at 992 full-time employees at the close of third quarter, none fewer positions than in the prior quarter. Operating activities generated $4.1 million in net cash during the quarter. All those represent great financial performance in the third quarter. So to business strategy, what is driving our new growth story? What gives us the confidence that our strategy direction is the right one and that we are well positioned to capitalize on the opportunities ahead? Several durable industry trends underpin the growth strategy, reshaping enterprise communication through the adoption of new intelligent voice Technology. Central to this shift is the fast progress of Gen.AI, which is altering how people engage with computers, machines, and intelligent systems. Voice is quickly becoming one of the most natural, intuitive, and capable interfaces linking people and machines. Advances in speech recognition, natural language processing and understanding, and real-time conversational AI make interactions with intelligent. Systems feel increasingly human. These advances also carry voice AI, basic human-machine interaction. They open the way to intelligent automation of conversations, communications, and business workflows throughout the enterprise. Taken together, this development strengthens the view that intelligent voice for our enterprise is a major growth opportunity, and they underline the decision to speed up investment in intelligent voice solutions for the enterprises. AudioCode has invested in the UK as well for more than 25 years now, which places us in A strong position to pursue this opportunity, a customer base that has grown over several decades in voice communication to thousands of accounts for voice communication infrastructure, together with longstanding leadership in voice system and solution, supports the company's ability to lead this space. Now let's move to some of the actual business line. Let's talk first about Microsoft. Microsoft is practically delivering about close to 66% of our overall business. Third quarter, 2026, revenue came to $43 million, up for... Over the first nine months of 2026, revenue from the markets of business rose 5.2% year-over-year to $125 million, which keeps the company on course for its stated full-year revenue goal of above $170 million. Newly created opportunities in the space reached 90 million, a 9.4% increase of the prior year that points to a healthy demand environment ahead. Bookings of new contract value linked to Microsoft Teams phone activity climbed 61% year-over-year to more than 20 million. The quarter marks the second consecutive record quarter, which is a solid evidence of this segment potential and leadership in the space. Momentum built in the third quarter. on the opportunity that's above 10 million that we reported in the previous quarter. After starting at a monthly recurring revenue of only tens of dollars in the second quarter, the focus is now for an MRR of several hundred thousand by mid-2027. As reported earlier, the project is expected to contribute several million dollars of product revenue annually over the next three years on top of the annual gateway sales. The Microsoft team voice ecosystem is healthy. Overall, Teams phone represents only a small share of the more than 320 million monthly active Teams users. And with voice becoming more central to Microsoft enterprise strategy and for EIA-driven copilot workplace, the long-term outlook for this market looks favorable. A key component of our sales in the Microsoft space is the live platform for live teams. The sales of live platform made good headway in the third core as a platform service, the core underlying technology for the live team solution portfolio. Enterprises, service providers, and partners use AudioCode's live platform, a cloud-based voice. Service delivery platform to deploy, manage, and scale enterprise voice communications and AI-powered voice services, comprising of voice connectivity, centralized management, and automation. IDCODE's live platform kept up its strong growth in third quarter. September monthly recurring revenue came close to half a million and increased roughly 35% year over year. A new large customer in Asia Pacific, signed in the third quarter of 26, helped push live platform services beyond 5.5 million in annualized recurring revenues. This adds to the momentum behind the cloud-based intelligent voice services strategy. Now to the conversation of AI business. The voice AI growth strategy was carried out successfully in third quarter, adding one more quarter of growth. Voice AI revenue rose by nearly 50% year over year. The first nine months of 2025, compared to those first three nine months of 2025, that results move the business nearer to its status annual goal of 50% growth year over year and $25 million in revenue for the full year of 2026. Strength in voice AI technology is combined with a distinctive mix of expertise in telephony, networking, security, management, and orchestration for intelligent voice. In business application, cross-cloud and edge computing underlines the success in the conversational AI segment. The discussion now moves to business lines within that category in more detail. Let's begin with VoiceAI Connect. AudioCode's VoiceAI Connect technology and solution link enterprise telephony networks with the fast-growing ecosystem of VoiceAI business applications. Drawing on audio code's deep experience in voice communication and SBC technology, Voice AI Connect lets enterprises and solution providers join existing telephone infrastructure, such as the PSTN, SIP trunk, PBXS, UKS, CCAS, and the WERB RTC, to advance conversational AI solutions. Large enterprise and service provider customers, among them Deutsche Telekom, Vodafone, Rabobank, and others, Planning to build tens of distinct voice AI agents across their operations, all would be a voice AI target market. Connectivity is only one part of the offering. Voice AI Connect also supplies a flexible orchestration layer that integrates and coordinates best-of-breed AI technologies, those including speech-to-text, text-to-speech, large language models. Speaker identification and authentication, real-time translation, and voice analytics and recording. Above these layers sit enterprise applications, such as integration with CRMs, contact centers, databases, and business workflows. Now, Voice AI Connect and Live Hub operations advanced significantly over the course of third core 26. An accelerating pipeline, steady flow of new logos, substantial expansion with the existing custom bays made the momentum broad-based. Invoicing revenues grew by close to 40% of the first nine months of 2025. 60% increase in booking was recorded for the first nine months of 2026 versus the prior year period. The number of new opportunities created was more than 40% higher than in the same period of 2025. Notable wins with large enterprises in North America and Europe are also worth mentioning, including a major multi-million dollar and 24-month contract from a very large network operator in North America. What was unique in this score that, you know, usually Voice AI Connect opportunities, when it's a typically staying confidential, usually not allowed to be talked about. But there was one unique announcement that was public in the third quarter. Deutsche Telekom announced that they've selected articles of Voice AI Connect for their AI-powered mobile services. So, we know... October, 2026, Deutsche Telekom announced the deployment of Articode's Voici Connect to power its new mobile AI Notes mobile service for business customers, providing automatically recording, transcribing, and summarizations for mobile conversations. Voice.ai Connect serves the connectivity and orchestration layer between Deutsche Telekom Mobile Network and Mistral AI, a French company, demonstrating its ability to enable scalable network-integrated Voice.ai services. This deployment represents an important strategic validation of Voice.ai Connect's potential as an enabling platform for telecom operators. Sticking to introduce and monetize a broad-based range of AI-powered voice services. Now to VOKA CIC, or AI-first, contact center solution for Microsoft Teams. Vocus CIC kept up its strong operational momentum during the core, fueled by new customer wins in education, financial services, and large enterprises, along with growing adoption of AI capabilities. Revenue in the third core grew according to plan. Let me dwell on some unique wins in that core. We see deeper traction in education, mainly. Another major U.S. higher education institution shows VOCA CIC discourse as part of a project that also covers the Edicose Live teams for Microsoft. The deal additionally covered omni-channel capabilities with Agent Insights, the automated conversation summarization for agents, supporting them. A dozen of universities and colleges worldwide are now customers, reflecting both the depth and the potential of the education vertical for Voka CIC. Next, let's talk about financial services. After the Swiss and the Asian banking wins for Vocal CIC noted in earlier quarters, a major German insurance company chose Vocal CIC, this quarter, to replace its legacy contact center. That makes three quarters in a row in which major financial institution has selected Vocal CIC. Then let's talk about partner-driven wins. Vocal CIC is bundled with audio codes live teams. Microsoft migration project, and the same approach applies with AT&T business, and its AT&T cloud voice offering for Timstone. In the third core, the partnership produced a win of a Fortune 500 global enterprise, which shows VocoCAC through AT&T.
Operator
Apologies for interrupting. Sorry, Mr. Adelsberg, your line has just gone robotic for a moment. Apologies.
Operator
Yes, sir. If you keep talking, I'll let you know once it's cleared up.
Fine. Okay, so let's move on to the next voice AI area of activity, which is Meeting East Act. Talking about Meeting East Act Cloud Edition, strong momentum carried Meeting East Act Cloud Edition through the core. It's key. Operating metrics kept growing. Meeting volume climbed 90% year-over-year. Massly recurring revenue moved and doubled. An active number of users set new records with 50% year-over-year growth. By the end of the third quarter of 2026, Meeting ISAT had become a mature, field-proven cloud platform shaped by years of innovation and customer deployments. A significant rise in the use of meeting inside mobile client recording ranked among the main developments of third quarter. Beginning in third quarter 26, a shift in the go-to-market approach towards specific verticals has noticeably improved the success rate in winning new accounts. Customized tailored workflow solution for these verticals form the basis of the strategy which keeps gaining traction and is producing meaningful commercial and operation momentum. Moving to the last business line in the voice AI business, moving on to MIA Edge. MIA Edge is our next-generation meeting insight on Prime Solution, which provides secured meeting analysis and intelligent extraction. Interest in error-gapped solution, which operates without access to the Internet or to cloud services, has been rising in recent years. Secure, meeting, insight, and intelligent extraction are what MIA Edge offers, with government and defense use cases as the main target, growing worldwide emphasis on data sovereignty as produced comparable needs in the verticals, such as healthcare and finance. More than 25 accounts were active as of the second quarter, according to our previous reporting. Ten were in production and the rest in pilots and implementation. A new advanced solution launched in the third quarter brought in 11 new customers across defense, healthcare, security, infrastructure, and government in Israel. The quarter saw the first development and deployment in Israel of a real-time translation application for asylum seekers adopted by the State Population and Immigration Authority. Thank you. It provides live translation intensive interview rooms daily. It is now in full use. Evaluation of this solution is now underway at two comparable European authorities. Other public organizations, including such as police and further public service entities, are also evaluating the real-time translation application as a way to simplify the typically complex job of serving foreign citizens and visitors in a given country. And with that, I've pretty much concluded my presentation. Just to wrap up, operational momentum was good in the third quarter of 2026. Driven especially by continued strong growth in two primary engines, the live family of managed services, and voice AI business application. Steady gains in recurring revenue operations and services keep the company on track to meet its business target for the full year of 2026. And with that, I've concluded my presentation, and I'll open the session for questions and answers.
Operator
Thank you, sir. Ladies and gentlemen, at this time, we will be conducting our question and answer session. If you wish to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. And you may press star 2 if you wish to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. We have a question from Joshua Riley with Needham. Your line is live.
All right. Thanks for taking my questions. Starting off on Voice AI Connect. You've positioned it as a vendor-neutral orchestration layer that keeps enterprises from being tied to a single AI vendor. At the same time, Microsoft, Zoom, NICE, and other cloud communication vendors are all bundling their own AI agents into their platforms. In your recent wins in pipeline, how often are customers choosing a best-of-breed multi-vendor approach versus just using the AI that comes with their phone or contact center platform, and what's typically driving that choice?
Okay. Thank you, Josh. Well, you know, as we all know, VoiceAI is making advances in the, you know, very fast pace. And actually, we all know that. Large enterprises prefer a best-of-breed approach, meaning they would like to choose each a different LLM that's adapted to their specific needs, a different speech-to-text, and a few more. So, yes, it's true that, you know, the traditional, I would say, you see providers such as Microsoft and others have a complete set of functionalities. But, you know, when we work with large enterprises and, you know, what... Talking to enterprises that have hundreds of employees, they prefer to work with some of the more advanced frameworks, some materials from Google or from others. Usually the flexibility, just assume that you've been working with an LLM and there's a new one that came up, you know, more accurate, you know, cheaper. You would like to be able to switch to that new LLM in a matter of simple development. And that was... The value that Voice AI Connect offers as it is providing, you know, full flexibility in moving and evolving their solution with different components that may appear in a very fast pace.
Great. On MIA Edge. You've described strong interests from government, defense, healthcare, and finance customers that can't use AI on public clouds. How eager are these regulated customers to adopt AI in closed or air-gapped environments today, and are they moving from pilots to production or still mostly evaluating?
Well, actually, the need is very, kind of urgent, you know, especially when you're talking about defense applications, they need to move fast because we all understand that use of meeting intelligence and the ability to, you know, transcribe, generate summaries and a few more applications is ramping very fast. Think about, you know, organizations which are new to respond to new threats in a very fast pace. So, yes, you know, I think usually and substantially different than what we see in networking and telecom, the move is pretty fast. This is a test. The application is fairly fast, respond on what needs to be fixed or improved, and then they move very fast to production. And this is an increasing trend today in the world. Everybody kind of starts with big organizations, enterprises, and governments feel the need to go completely off. You know, the public internet and or clouds, and therefore, it is, you know, talking about, you know, organization in Europe, we know that they are very anxious to be using their own technology, and they do not want to go cloud, so it's a fast-growing trend.
Great. Thanks for taking my questions.
Sure. You're most welcome.
Operator
Thank you. If there will be any final questions, please indicate so now by pressing star 1 on your telephone keypad. Okay. As we have no further questions on the lines at this time, I would like to turn the call back over to Mr. Adlersberg for any closing remarks.
Thank you, Operator. I would like to thank everyone who attended our conference call today. With continued solid performance in our UKS and CKS operations and rapid growth in the Voice AI business, we believe we are on track to grow and expand our business in the next coming years. We look forward to your participation in our next quarterly conference call. Thank you all. Have a nice day.
Operator
Thank you. Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time, and we thank you for your participation.
