AudioCodes Ltd. Q1 FY2025 earnings call

• Solid first quarter performance with healthy growth in key business lines, moving towards cloud voice software and services company. - Connectivity business: enterprise UC and CX business performed as planned, CX connectivity grew 2% y-o-y, conversational AI business grew over 10% y-o-y with growing pipeline. - Services: accounted for 54% of revenue, grew 3.4% y-o-y; Live managed services ARR up ~25% y-o-y to $67M, expect growth of AI-powered services after Q2 platform integration. - Microsoft business: Teams business grew 7%, created opportunities in Microsoft space grew ~6.5% y-o-y, ARR ended Q1 at $67M vs. $53M y-o-y. - Cisco Webex opportunity: selected as enablement partner, estimate $5M TCV opportunity in next 3 years, expect to expand success in Q3. - Voice AI business: strong quarter with revenue growth supporting full year 30% target, new logo wins and expansions, Live Hub ARR up ~150% y-o-y. - Voca CIC: healthy bookings, captured attention of large partners, won deal with system integrator for Tier 1 BPO customer. - Meeting Insights: solid quarter, launched Intelligent Meeting Room solution, announced Meeting Insights On-Prem for secure environments with close to 5 deployments in Israel and growing pipeline.

Revenues for the first quarter were $60.4 million, an increase of 0.5% over the first quarter of last year. Services revenues were $32.6 million, up 3.4% over the year ago period, accounting for 54% of total revenues. Geographical breakdown of revenues: North America 48%, EMEA 34%, Asia Pacific 14%, Central and Latin America 4%. Top 15 customers represented 52% of revenues, with 36% from nine largest distributors. GAAP gross margin was 64.8% vs. 64.4% in Q1 2024. Operating income was $3.6 million or 6% of revenues vs. $3.3 million or 5.5% in Q1 2024. EBITDA was $4.6 million vs. $3.8 million in Q1 2024. Net income was $4 million or $0.13 per diluted share vs. $2.1 million or $0.07 per diluted share in Q1 2024. Non-GAAP gross margin was 65.2% (same as Q1 2024). Non-GAAP operating income was $5.4 million or 8.9% of revenues vs. $6.3 million or 10.5% in Q1 2024. Non-GAAP EBITDA was $6.2 million vs. $6.7 million in Q1 2024. Non-GAAP net income was $4.7 million or $0.15 per diluted share vs. $5.2 million or $0.17 per diluted share in Q1 2024.

• Withdrew previously provided annual guidance due to tariff fluidity and macroeconomic uncertainty. - Plan to resume annual outlook once tariff rates are finally determined. - Estimate approximately $3 million additional cost burden for full year 2025 or ~$4 million annually on run rate basis from tariffs, not considering price increase actions taken.

• Effect of global economic conditions, industry and target market conditions. - Shifts in supply and demand, market acceptance of new/existing products. - Impact of competitive products and pricing. - Timely product/technology development and ability to manage market changes. - Possible need for additional financing, covenants in loan agreements. - Disruptions from acquisitions and integration of acquired companies. - Adverse impact of COVID-19, current terrorist attacks, regional conflicts, military service obligations of personnel.

Q: About tariff impact, do you plan to move manufacturing out of China and how you're thinking about price increases if tariff rates don't come down?

A: We plan to move part of our manufacturing out of China to other countries (including Asia Pacific and Israel) in the next 3-6 months. By taking these steps, we foresee a burden of about $3 million to $4 million instead of potentially $10-12 million without action. As for price increases, we've taken actions across affected product lines but will see based on final tariff rates.

Q: Trends in Microsoft ecosystem between Operator Connect and direct routing and relative business opportunity?

A: SBC direct route came first, but we see transition towards Operator Connect which will likely become the governing way. It's a growing market with relatively mild growth but Operator Connect is expected to be the winner.

Q: How to manage go-to-market dynamics for Cisco opportunity and win those opportunities?

A: We have experience in the service provider space, known brand, and being in the service provider world gives us an advantage. Other competitors are relatively smaller, so we believe we'll gain as we have ongoing projects and certifications, with two opportunities already in the U.K. soon after EMEA certification