AudioCodes Ltd. Q4 FY2024 earnings call

• 2024 showed stabilization compared to 2023, with a minimal revenue decline of about 1% and corresponding impact on earnings. - The company began shifting its focus to AI and generative AI-powered value-added services. - The enterprise UCaaS and CX business performed well in the quarter, with Microsoft business seeing a 13% increase in the fourth quarter and 6% growth for the full year. - Services revenue grew by 10.9% year-over-year in the fourth quarter, accounting for 54.5% of total revenues. - The Voice AI business, which has been invested in since 2018, experienced a 30% growth in 2024 and is expected to grow at 30%-50% annually in the coming years. - Microsoft Teams witnessed a 13% growth in the fourth quarter and 6% growth for the full year, with Live Teams growing by 30% in the fourth quarter. - The CX business made progress, with growth in CX Live and a healthy pipeline. - The company introduced a live services platform that integrates connectivity, management, and value-added services.

In the fourth quarter of 2024, services revenues were $34.2 million, an increase of 5.4% compared to the third quarter, accounting for 55.6% of total revenues. Annual services revenues in 2024 were $130.2 million, a rise of 8.2% from 2023. The connectivity business contributed approximately 95% of the company's revenue in 2024, with a well-established and mature operation growing roughly above 10% annually. The Voice AI business saw a growth of about 30% in 2024, contributing around 5% to total revenue and is projected to grow at a rate of 30%-50% annually in the coming years.

• For 2025, the company expects revenues to be in the range of $246 million to $254 million. - Non-GAAP EBITDA is guided to be between $34 million and $38 million. - The connectivity sector aims to sustain a growth rate of 20%-26%, with a target annual recurring revenue of $78 million to $82 million. - The value-added services sector anticipates a year-over-year booking increase of over 40% to exceed $17 million.

• Impact of global economic conditions, including conditions in AudioCodes' industry and target markets. - Shifts in supply and demand. - Market acceptance of new products and demand for existing products. - Influence of competitive products and pricing. - Timely product and technology development upgrades. - Ability to manage changes in market conditions. - Possible need for additional financing and compliance with loan covenants. - Disruptions from acquisitions and integration of acquired companies. - Impact of the COVID-19 pandemic. - Effects of the Middle East hostilities, including potential broader regional conflict and its impact on operations. - Obligations of personnel to perform military service due to current or future military actions involving Israel.

Q: Great to see solid growth in services revenue in the quarter. Can you help us understand what is driving your confidence for improved top-line growth in 2025 and beyond? Are customers more optimistic about their spend in 2025 or is this being driven by AudioCodes AI opportunity?

A: As mentioned, there was a pickup in new projects and bookings in the fourth quarter, with over $20 million in total contract value signed. It is believed that GenAI and Copilot technology will drive more enterprises to adopt AI and GenAI for Teams meetings/calls, thus boosting growth in 2025 and beyond.

Q: For the CCaaS in the quarter, how did that fair compared to 3Q? And then are you seeing increased attention from buyers on Voice AI?

A: There is a substantial increase in the capacity of the Live CX services offered. A gap in the market was identified post-migration to the cloud, which is being filled by a more comprehensive Live CX portfolio. There is a trend of applying AI to contact center recordings, with GenAI technology enabling the analysis of calls to derive insights.

Q: Great to hear the traction on Microsoft picking up there around teams and what kind of trend you're seeing relative to operator voice connections into teams. Are you seeing a trend over toward this new Operator Connect capability or still a lot of direct routing and how does that impact your attach rate for teams?

A: There is a shift in the encouragement to use Operator Connect over direct cloud, but it is not an overwhelming trend yet. While there is a trend moving from SBC Direct Route to Operator Connect, it is not a dominant shift observed in the market currently.

Q: At a high level, you talked about some big customer wins here in Brazil and the systems integrator North America. I wonder if you're seeing a trend toward larger, fewer, larger customer wins? Are you seeing more activity down market where you maybe have a higher number of smaller customer opportunities in the pipeline?

A: The market is segmented into enterprise and SMB. In the enterprise space, there is a continued adoption of Teams by large enterprises driven by AI, with strong growth. In the SMB space, there is competition, but the platform with AI-driven applications provides an advantage.

Q: Billy Fitzsimmons on for Samad: Maybe to start, a couple months back, you announced support for AudioCodes Meeting Insights for Zoom meetings. Obviously, Zoom also has their internal AI companion. Shabtai, can you just talk about differentiation between your solution and Zoom's in-house solution and maybe traction you're seeing since launch with customers?

A: Meeting Insights targets a UC agnostic solution, capable of containing sessions from different UC environments unlike Zoom's internal solution. It aims to serve larger enterprises with finer requirements and custom prompts, which sets it apart.

Q: More broadly, obviously the business has been going through this kind of subscription transition shift to more recurring ratable revenue. Can you just help us think a little bit more next year about kind of the revenue mix? In the longer-term is there a point where the product revenue and some of the legacy stuff in there should start to bottom or should we expect perennial declines there for the services support side to make up for that in terms of growth?

A: Legacy business decline stabilized in 2024 and is expected to continue stabilizing in 2025. Voice AI revenues are growing, targeting $18 million in 2025, and growth rates are expected to intensify as solutions mature.

Q: Billy Fitzsimmons on for Samad: If I could sneak in one final question, you guys obviously guided to EBITDA for next year, but could you maybe go a step further and just help us think even high level of about kind of the individual OpEx lines next year? Where are you making kind of incremental headcount investments and maybe where are you kind of paring back spending, obviously there have been a lot of AI products, but R&D spend is actually down over the past couple of years. Could we expect that line for example to pick up a little bit next year in terms of OpEx spending?

A: The company plans to invest more in sales and marketing, not in G&A and R&D. OpEx growth is expected to be 1%-2% in 2025, primarily in the sales and marketing area.