AudioCodes Ltd. (AUDC) on Q2 2022 Results - Earnings Call Transcript
Operator: Greetings ladies and gentlemen and welcome to the AudioCodes' Second Quarter 2021 Earnings Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mr. Roger Chuchen, VP of Investor Relations. Roger, the floor is yours.
Roger Chuchen: 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; and Dmitry Netis, Chief Strategy Officer and Head of Corporate Development. Before we begin, I would 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 US Federal Securities Laws. 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 risks, uncertainties, and factors include, but are not limited to, the effect of global economic conditions in general, and conditions in AudioCodes' industry and target markets, in particular, shifts in supply and demand, market acceptance of new products and demand for existing products, the impact of competitive products and pricing on AudioCodes' and its customers' products and markets, the timing of product, and technology developments, upgrades, and the ability to manage changes in the market conditions as needed, possible need for additional financing, the ability to satisfy covenants in the company's loan agreements, possible disruptions from acquisitions, the ability of AudioCodes to successfully integrate the products and operations of acquired companies into AudioCodes' business, possible adverse impact from the COVID-19 pandemic on our business, and results of operations, and other factors detailed in AudioCodes' filings with the US Securities and Exchange Commission. AudioCodes assumes no obligation to update this 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 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.
Shabtai Adlersberg: Thank you, Roger. Good morning and good afternoon everybody. I would like to welcome all to our second quarter 2022 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance for 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?
Niran Baruch: Thank you, Shabtai and hello, everyone. As usual, 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 $68.4 million, an increase of 12.9% over the $60.6 million reported in the second quarter of last year. Services revenues for the second quarter were $27.8 million, up 21.9% over the year ago period. Services revenues in the second quarter accounted for 40.6% of total revenues. The amount of deferred revenues as of June 30, 2022, was $75.2 million, up from $73.4 million as of June 30, 2021. Revenues by geographical region for the quarter were split as follows, North America, 43%; EMEA, 32%; Asia Pacific, 19%; and Central and Latin America, 6%. Our top 15 customers represented an aggregate of 53% of our revenues in the second quarter, of which 44% was attributed to our 12th largest distributors. GAAP results are as follows. Gross margin for the quarter was 65.1% compared to 69.4% in the second quarter of 2021. Operating income for the second quarter was $7.9 million or 11.6% of revenues, compared to $10.1 million or 16.7% of revenues in Q2 2021. Net income for the quarter was $6.9 million or $0.21 per diluted share, compared to $8.2 million or $0.24 per diluted share for Q2 2021. Non-GAAP results are as follows. Non-GAAP gross margin for the quarter was 65.6% compared to 69.7% in Q2 2021. Non-GAAP operating income for the second quarter was $11.9 million or 17.4% of revenues, compared to $13.6 million or 22.4% of revenues in Q2 2021. Non-GAAP net income for the second quarter was $11.3 million or $0.34 per diluted share, compared to $12.7 million or $0.37 per diluted share in Q2 2021. At the end of June 2022, cash, cash equivalents, bank deposits, marketable securities totaled $138.5 million. Net cash provided by operating activities was $4.8 million for the second quarter of 2022. Day sales outstanding as of June 30, 2022, were 75 days. During the quarter, we acquired 374,000 of our ordinary shares for a total consideration of approximately $8.3 million. In June 2022, we received court approval in Israel to purchase up to an aggregate amount of $35 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 12, 2022. We declared a cash dividend of $0.18 per share. The aggregate amount of the dividend is approximately $5.7 million. The dividend will be paid on August 31, 2022 to all of our shareholders of record at the close of trading on August 17, 2022. Regarding headcount, on the heels of 112 position in 2021 and 27 position in the first quarter 2022, we added 18 full-time employees and 13 outsourced employees, altogether 31 position in the second quarter of 2022. We adjust our guidance for 2022 as follows. We now expect revenues in the range of $275 million to $282.5 million, down from $277 million to $285 million, and we now guide for non-GAAP diluted net income per share in the range of $1.35 to $1.45 done from our previous prior outlook of $1.40 to $1.60. I will now turn the call back over to Shabtai.
Shabtai Adlersberg: Thank you, Niran. I would like to remind everyone that in conjunction with our earnings release, we have posted on our Investor Relations website and earnings supplement deck. I would like to start by providing an agenda for today's discussion. First, I would like to discuss our strategy and business characteristics that differentiate us in the market. Then I will discuss our financial highlights and outlook for second half of 2022. Finally, I will provide detailed discussions of our core business segments. On the first topic, I would like to address the macroeconomic uncertainties and remind investors why the strong business foundation we have built so far should enable us to outperform during the uncertain environment. We are leveraged to multiyear secular growth trends in the unified communications market, notably Microsoft Teams and Zoom Phone and in the customer experience space. Customers deploy our software and services to drive greater productivity, which is particularly relevant in the tight labor and inflationary environment. We have a consistent track record of strong profitability and cash flow generation. On a trailing 12 months basis, despite short-term elevated supply chain costs, our non-GAAP operating margin was 19.2%, which is amongst the highest in our industry. Over the same period, we also generated $33.9 million non-GAAP free cash flow. Our strong financial profile enables us to continue to make prudent investments in our business to further strengthen our competitive mode and differentiate us from competition. We have a rock solid balance sheet, ending the second quarter with $138.5 million of net cash. We are in a great position to capitalize on any dislocations in the market, and we are actively looking for unique assets to add to our portfolio that can accelerate our long-term growth and transition to recurring revenues. Throughout our history, each time we experienced macro turbulence, we have extended -- we've exerted strong control of our expenses and managed to not only survive the Pos market dislocation to strain our franchise and leapfrog competition. While it is difficult to ascertain the path of the next potential macro term, this time should not be any difference for us. I would like to remind everyone the strategy that has served us well over the past several years that we will continue to fine-tune and execute. First, expand the reach of our core voice solutions and services in enabling our unified communication and collaboration and customer experience with focus on Microsoft teams, Zoom, Genesis and other major customer experience vendors. Second, increase customer value by upselling a broad and extended portfolio of voice services and applications. And third, accelerated transition to software and subscription, organically and inorganically. Now to the quarter financials. We're pleased to report solid top line results, growing 12.9% year-over-year. Revenue growth, this quarter was mainly driven by ongoing momentum in the Microsoft Teams and Zoom Phone in the UK space and the return of strong growth in Customer Experience segment, which led our enterprise activity. Revenue from Microsoft Teams, Zoom Phone and the Customer Experience market, grew as a group by 22.1% year-over-year and accounted for 67% of our revenue. Service revenue grew 21.9% year-over-year and accounted for 40.6% of total company revenue. This is the proof of execution on our strategic priority by successfully transforming our company to cloud services and recurring revenue model with AudioCodes Live managed services, which grew roughly 100% year-over-year. As evidenced by Microsoft Team's momentum, a recent Morgan Stanley CIO report cited by several Microsoft executives, says that, over 50% of the organization have standardized on Teams, and that's expected to increase to about 60% in next three years. We believe this dynamic will further fuel our business, particularly in the adoption -- in adopting increases with large enterprises. Quantifying this large market opportunity, third party firm, Wainhouse Research, forecast Microsoft Teams to grow at roughly 35% to 40% compound aggregate growth rate through 2025, which supports our confidence in multiyear runway for our Teams business. There are today over 270 million monthly active Teams users, of which only low-single-digit percentage based on our analysis as adopted Team's phone system with PSC and coning. This is where we play. Our market share within Microsoft ecosystem for back routing application remains strong and is well above 50%. Equally strategic is a strong momentum with Zoom Phone, which continues to grow. And in the second quarter of 2020 grew over 50% year-over-year. Shifting gears to the Customer Experience segment, I'm pleased to report a strong netback in our CX line, up over 20%, after being down 8.5% in the prior quarter. Strong second quarter results were propelled by the ongoing healthy spending environment in Contact Center and the closing of large deal that has slipped in the prior quarter. We continue to see great progress with our conversational AI business, where Total Contract Value signed during the quarter grew over 100% year-over-year. We are well positioned to grow above 50% in our portfolio in 2022 compared to the previous year. Importantly, AudioCodes Live, our managed services offering for UCC and CX and for the conversational AI segments, continue to see strong momentum. We exited the month of June, a $24 million ARR run rate, putting us on track to achieve our 2022 target of doubling the annual recurring revenues to over $30 million from over $15 million in 2021. Our top line continues to expand across core areas of our business, supported by long-term secular trends of migration of voice infrastructure to cloud, hybrid work and enhanced customer engagement and experience, solution powered by AI. Shifting to margin discussion and OpEx. Our non-GAAP gross margin came in at 65.6% versus 69.7% in the year ago quarter. This was influenced by several figures, a product mix, as were accounted for a greater percentage of our sales this quarter versus the year ago quarter. And they typically carry lower than corporate average margins. Second, our supply chain costs accounted for the balance of the gross margin difference. Specifically, we incurred $1.2 million of higher component costs in the second quarter versus the year ago quarter, which was lower than the $1.4 million we mentioned in the previous quarter. We estimate the higher supply chain cost impact on our non-GAAP gross margin by about 170 basis points. Excluding this impact, which we believe is temporary, our margin should have been 67.3%. We now believe substantially lower impact in the third quarter. While we continue to invest in our strategic areas in our business, we have slowed down this investment in the second quarter in view of the global macroeconomic slowdown. The non-GAAP OpEx growth slowed to 15% year-over-year, still growth, comparing to 20% in the previous quarter. The OpEx growth was primarily driven by adding position. We have added 119 positions year-over-year. Non-GAAP operating margin was 17.4% versus 22.4% in the year ago period, which was impacted by increased investments in new product and technology development, product mix, our supply chain costs and increased hiring activity. On the heels of this development, our non-GAAP earnings per share came in at $0.34, in line with our internal budget. This compares to $0.37 in the second quarter of 2021. With regard to headcount, as Niran mentioned, we have added 18 full-time employees and 13 outsourced employees, altogether, 31 position in the second quarter of 2022. That speaks for itself in terms of our confidence in our ability to continue to grow and prosper. On the heels of 112 position added in 2021, and 37 position added in the first quarter of 2022, as we continue to invest in strategic areas of our business while prudently managing OpEx in light of uncertain macro environment. We expect continued growth in headcount in the third quarter of 2022. Now to our updated guidance. While we continue to see strong business momentum and fundamentals, we believe it is prudent to update our guidance in view of the macroeconomic headwinds and the short-term elevated supply chain cost in 2022. As Niran already stated, we adjust our guidance as follows. On the revenue side, we now lower our revenue range by $2.5 million, about 1% of annual plan for the year to be in the range of $275 million to $282.5 million, down from the original one -- original guidance provided in January. As to earnings, we now guide to non-GAAP EPS to be in the range of $1.35 to $1.45 million, down from the original guidance of $140 to $160. There is no change to our long-term financial targets, which remain in growing income by 13% to 15% year-over-year and by working to get back to the range of 20% to 23%, non-GAAP operating margin. Touching on sales in the quarter, this has been a very good quarter. We have -- our targets in sales in North America we have a strong channel that keeps developing and outperform our plans by 20%. We have few regions and territories that pass the original plan. All-in-all, I would say that we performed well in North America, in EMEA and some areas in. Now let's dive into our core business engines. First and foremost, Microsoft, as mentioned previously, Microsoft business grew over 20% and year-over-year with the activity in Teams, up 45% year-over-year. Skype for Business declined -- continued to decline above 50% this quarter, and now it's down to only about 4% of our overall company quarterly business. No question that in coming quarters, the impact of the decline in Skype for Business will be negligible and we will see the full par of the growth in Teams, which has set it to be 45% year-over-year. We had another record quarter for Microsoft Teams account additions, we added $317 accounts versus $209 million in the year ago period and versus $260 million in the prior quarter, which speaks for the accelerating adoption of Teams in our growing pipeline. Also, Teams new readability here, we look on the new business that's being created every quarter has grown 25% year-over-year, which provides, again, a strong basis for further growth in coming quarters. Another point to note is that, while our overall Microsoft business in 2021 was about 120, when we combine our revenue year-to-date, with the above 80% probability opportunity that we have on hand, we are now at a similar level already at the end of July 2022, which again speaks and shows the strength of our growth. And thus, we have a high confidence in our ability to grow Microsoft business in 2022 by 20% to 25% compared to 2021. To mention some of the key developments in the Microsoft space, we have seen substantial growth in drive in our devices activity. We've seen IP phone business growing nicely. We've seen demand substantially growing and continuing after the return to work with a decline of the COVID-19 pandemic. We saw continued increase in IP phone business across several cores now. This is the third quarter of growth, and we plan for about 20% annual growth. I should mention though that if we were enable to deliver all of the purchase orders that we received, we would probably end up with the IP phone business growing in the future. We had shortage and that has really limited our ability to deliver. Also, great service by Microsoft on increasing efforts, equipment and delivery and installation of meeting rooms. That becomes a major topic with Microsoft. We are acting to build a new product to offer new services, and we expect those to deliver and launch this product and services in this meeting space in the second half of 2022. Also, we have seen increased activity in the Live Cloud platform we have and Microsoft Operator Connect. Those solutions are meant to enable a service provider in the market to quickly get on board with Microsoft Teams who's out going through tedious operations. And so we have been working closely with Microsoft and some other partners in order to accelerate live cloud operations. Just to mention two, three accounts that we have in that space. So working with a Tier 1 service provider, we have signed a 36-month contract with a large international investment firm, selling AudioCodes Live Services for 1.5 million total contract value. This deal covers the migration from Alcatel to Teams Voice for 7,000 employees in APAC and EMEA is service for expansion. Another win we had in Europe, working with another Tier 1 service provider, we signed a 48-month contract with multinational European energy company, selling AudioCodes Live Services for close to $1 million of total contract value. The live services cover migration of 15,000 employees from Alcatel to Teams Voice by the end of 2022. We are hopeful of potential expansion in this project and upselling additional solution in our portfolio. Third, working alongside the system integrator, we signed a 42-month contract with an international energy company, selling AudioCodes Live Services for about $1.5 million total contract value. The deal provides managed SBC services plus various operations such as addition, changing the leading services part of the migration from this time from Cisco to Teams Voice for 7,000 employees in the US and APAC. Now let's dive to the most important business line we have at AudioCodes, which is AudioCodes Live. AudioCodes Live stands for managed services portfolio in the Microsoft space, Microsoft Teams space. We had excellent execution in our live subscription services portfolio. We ended the second quarter at $24 million run rate, up from $20 million last quarter, and keeping us on track to achieve over 2022 target of over $30 million. Importantly, we benefit from multiyear visibility from this revenue stream as live customers often sign 36, sometimes 48 and sometimes 60-month contracts. We ended the June quarter with over 60 million of total contract value, up over 100% year-over-year. Actually, in each of the last three quarters, we have added more than $10 million in total contract value in Microsoft Teams. AudioCodes Live success stems from the fact that it removes complexity from the process of integration with legacy enterprise telephony and provide a seamless rapid and cost-effective migration to Microsoft Teams for enterprises. Regarding live teams, total contract value, as I've mentioned before, just to repeat the information. In each of the last three quarters, we have signed contracts for a total value of more than $10 million each quarter. And at the end of the second quarter, our total amount of contributed total contract value is now above 160 million. Let's move to our success in the Zoom space. In the second quarter, revenues from activity in the Zoom Phone space grew above 50%. We will grow this year close to 100% compared to previous year, still will be in the range of 5 million to 10 million. Second quarter 2020 was also a record quarter in which new opportunities were created. New opportunity creation really grew by north of 200% in the quarter, which tells you about the big potential that's developing for a solution in the Zoom Phone arena. We know that Zoom is focusing more and more on the Zoom Phone and as stated, it's a strategic importance publicly. And we know that a 5% report out of October 2021, Zoom is expected to gain market share from about 11% this year in the US market to 15% in 2026. Just to remind everybody, we're talking about a $400 million sits US market. We are cooperating with Zoom on projects targeted to increase the number of products and solutions in the Zoom Phone environment. We invest in coming up with a solution for a lot of resiliency, several phones, connectivity devices, MSBR and gateways, some conference devices and more. So all in all, we believe that we are making nice progress also with Zoom in the US market. The next strategic business segment is the customer experience. We are pleased to see the return of strong growth, up over 20% in second quarter, after being down 8.5% in the prior quarter. Growth was fueled by continued healthy adoption of connectivity services and the closing of a large deal in EMEA this quarter that was left in the prior quarter. On that particular large deal, we are working with a global system integrator to provide SBC infrastructure to a large European financial institution, which has embarked on a digital transformation initiative. This is a 48-months deal worth of roughly $1 million in contract value. As you can see here, during the past two years, we are increasingly growing the number of long-term high contract value for two, three and sometimes even five years, which tells you that we are building and paving for ourselves the future going forward. Also, we see growing adoption of new products and services launched during the past 12 months that we expect to boost revenue growth. Among them, it's web or CC solution and then Voice.AI related product and solution, including conversational IVR solution, Voice.AI connect , which enables voice connectivity to chat box and intelligent voice agent and assistance. I'll just mention original success in the customer experience. So in addition to North America, where we have traditionally had a strong activity that is related to our long-term relationship with Genesis. We've seen nice pickup in activity, both in EMEA and APAC. And this time, we are â have activity that enrolled directly end users. Lastly, let me talk about our Global Services. Global Services, as we have mentioned, is really growing pillar for our business. In the second quarter of '22, services grew to become 40% of our revenues. Specifically, we've grown 12% in the second quarter year-over-year. And if we combine first quarter, altogether, we grew 13% in first half. Growth in support and maintenance contract was mild 4.3% in second quarter and then about 8.1% and this is a good result from moving from selling in a CapEx mode to selling in recurring mode, simply because then support services really be more to pass transactions. On our professional services, we grew substantially. We grew over 35% in the second quarter with our professional services year-over-year, coming mainly from North America and EMEA. In fact, professional services at the highest in recent quarter on record globally and in North America. North America Professional services as a first half year-over-year growth of above 35% and then just to mention, we won in North America, 45 new AudioCodes live managed services customers. So all in all, bringing the federal contracted Americas managed services customer count to above 200. And with that, I have concluded my introduction, and I will now turn to fashion to Q&A. Operator?
Operator: Thank you very much, Shabtai. . Your first question is coming from Greg Burns of Sidoti & Company. Go ahead. Please ask your question.
Greg Burns: Good morning. So just first on the revised guidance. In terms of the EPS, the decrease in EPS guidance, what are your assumptions in terms of margins for the back half of the year? Are you expecting any improvement from the second quarter or should we expect the gross margins to remain under pressure?
Shabtai Adlersberg: Yes. Generally, I think generally, I believe that we will see the additional cost for components going down. We've seen it going down a bit in second quarter. We expect higher decline in the third quarter. So, all in all, I think we hope to return as I have mentioned to a cross-margin that's about 67%.
Greg Burns: Okay. I think about our operational margin
A â Shabtai Adlersberg: Yes. right.
Greg Burns: Okay. And Microsoft had mentioned they had 12 million PSTN users on Teams. So is that what -- are those the users that are -- where you're your services are touching, -- like if they're reporting to that number, is that a good number to kind of gauge the voice adoption in teams? And what are you seeing in terms of their efforts to increase that rate of adoption?
A â Shabtai Adlersberg: Okay. Good point. So yes, teams-- I'll quote some of Microsoft in our statement. So A we announced â¬270 million of Teams uses right? Teams users does not include phone. So if you want to understand how many Teams phone users are, they stayed 80 million. Now out of those 80 million people who use Teams phone, not all are communicated with the outside world. So we have announced, and this is indeed an important announcement, they have mentioned in the last call a week ago that now they have 12 million of PSTN users compared with just 6 million a year ago. So growth on what's been -- we point here to the SBC acquired functionality, okay? Every organization that has embarked on using Teams can work internally without any specific solution. However, in order to communicate with the PSTN either to receive code in or to dial outside you need to add the SBC acquired functionality. As we just heard right now, the state 12 million such sets using that. I can tell you that we saying and we see it in the field that we control north of 50% of these sets and we see big growth in that. So yes, that is an important data point to base our future estimation as to the potential that we see ahead of us.
Greg Burns: Okay. Great. Thank you.
A â Shabtai Adlersberg: Sure.
Operator: Thank you. Your next question is coming from Samad Samana of Jefferies, Samad, please ask your question.
Samad Samana: Hi. Great. Good morning. I wanted to follow up on the guidance question, but on the top line. I guess just as I think about the implied numbers, it kind of suggested back half deceleration to, let's call it, about from 13% in the first half of the year. And the comps are easier in the back half of 2020 versus the back half of 2021. So I guess I'm just trying to maybe understand what you're seeing specifically that led to the guidance reduction? I know you said macro, but are you seeing deal cycles get longer? Are you seeing people do smaller scale projects? What is driving the top line dollar revision?
A â Shabtai Adlersberg: Right. So I'll just say initially that -- the update really was done due to our update on the earnings side, okay? If we would have not target to update that, I probably would have not changed my update on the revenue. As we provide an update, we said, okay, we're going to take down growth from -- we've guided initially to 13% a year. Now, it's going to be 12% a year. So we don't see that as a major uptick, right? To your question, yeah, we do see some of the projects taking a bit longer time. It's either a delay in decisions. I think the world has been in the previous months, questioning how this crisis is developing worldwide. I know that in the last months, estimate is more positive. But just to be prudent and not just take the guidance, we gave initially and say, okay, everything runs as before. No. There are some headwinds. We see longer projects, we see some delays, but the impact is in income is about 1% that's all.
Samad Samana: Okay. That's helpful. And then maybe just in terms of what you're seeing with â when you're doing Microsoft conversions from Skype for Business to Teams, or as customers move over to Zoom Phone â are you seeing any change in behavior in terms of the footprint? Like are they moving over the entire base at once? Are they being more methodical about how quickly they're moving over to the cloud environment? I guess, what are you seeing as customers that you're helping convert over to the cloud? Like, how are you seeing in terms of trends there?
Niran Baruch: Yeah. We definitely see a very strong trend of all Skype of Business and Skype of Business online accounts moving to Teams. That just to talk numbers, right, a year ago or Sky for Business at 10 million, 8 million quarter â in the second quarter, I think it was down to about 2.7% versus the quarter ago, was about 4%. So the decline is fairly rapid. I know that, we know that, it's kind of costly. You can assume that, it's costly for Microsoft to maintain three different, I would say, infrastructure, application solutions, such as Skype for Business, Skype for Business Online and then Teams. So it is with Microsoft interest to speed up that process. And we are aware of that fact, customers aware of that fact â and I think it will not take more than a year, before the amount of scatter business really goes to almost nothing. But again, as I've mentioned because it's that low this time, $2.7 million a quarter, less than even 5%. And â the growth expected in Teams will substantially dwarf that decline of Skype for Business.
Samad Samana: Great. Thank you for taking my question.
Operator: Thank you. Your next question is coming from Ryan Koontz of Needham & Company. Ryan, please ask your question.
Ryan Koontz: Thanks for the question. On the strong services growth here with the AudioCodes Live $24 million ARR, what inning would you characterize Narin in terms of this transition of your new sales from product over to subscription? Where are we in that migration today on new sales? Thanks.
Niran Baruch: Okay. Yes, it's a good -- great question actually because we still keep selling products. At this stage, I think, products are above 50% of our revenue core. 50 is a very rapid transition. Already now, if I need to give an estimate, I think that approximately above 25% or maybe close to 30%, already moved from you know, bank â you know, AudioCodes live, let's say, recurring service compared with our CapEx transaction items. So it's a rapid. But again, I think, we have shown so far the ability to grow 100% year-over-year with because life move to recurring. We do not see -- actually, I would tell you that this is a very -- accepted very well in the market because the current difficulties of chronic lack of professional and talents in this space and the inability of large companies to deal with the modernization of the solution and actually, most of them are very often to is not part of their core competence. Many of them are open to using many services. This is all I think, I think managed services at this time or accepted federal simply because it alleviates a lot of the issues, one is to deal with when its deploying in the new solution in our system. So yes, we will see continued growth, if not 100% a year. I would tend to think that in the next three years, we will see between 50% and 100% growth every year.
Ryan Koontz: Super helpful. And can you remind us of the gross margin difference in your managed services versus your corporate average?
Niran Baruch: Actually, the live because it's with more services and the margin there is higher than onetime CapEx deal.
Ryan Koontz: Got it. And just a quick follow-up if I could. Any update on the competitive environment there, particularly as it relates to Microsoft's own internal solutions for SBCs?
Shabtai Adlersberg: Yes. I think, I mentioned before, everything we discussed so far relates to enterprise business. Microsoft acquired SBC from the Metaswitch deal is not in this space at all. They try to the operator connect. And there actually a substantial ramp-up of sales really did last for. So we do not see at this stage an impact to our business from that.
Ryan Koontz: Good to hear. Thatâs all I had. Thank you.
Shabtai Adlersberg: Thank you.
Operator: Okay. Your next question is coming from Tal Liani of the Bank of America. Tal, over to you.
Tal Liani: Hi. Thank you. Good morning. Good afternoon. Hi, guys. Shabtai, I didn't understand your answer on the previous, previous question. So I'll ask it again, but in a different way. You lowered the revenue guidance for the next two quarters. Is it based on concern, or is it based on a decline in orders you've seen from customers? And where -- if there was a decline, where is it? Is it specific product lines or specific customers. Can you elaborate on the revenue side? And then on margins, why now? We've seen supply constraints throughout the last at least four quarters, heavy, heavy supply constraints. Actually, most companies are saying that it has stabilized. It didn't improve, but stabilized. So why now you are flying it more than before?
Shabtai Adlersberg: Okay. So let me answer the second question first. A, we watch our costs in this market and our ability to get delivery and supply, I can tell you that towards the end of the second quarter, the two or three manufacturers, which we use, most of them solve their issues. So we believe this going forward. I'm not sure we're not using the same volume that large companies are using. So with our volume, we believe that third quarter will be a nice improvement. And actually, I'm told that in the fourth quarter, it will be minimal. So that's what we're seeing here internally at AudioCodes. Can you remind on your first question, what this is regarding theâ¦
Tal Liani: Yes. The revenue -- the question is, in simple terms, where do you see the weakness that drives you to lower the revenue guidance for the next two quarters. Is this coming from specific customers or specific products? Is it related to order cuts, what drives you to lower the guidance for the next two quarters?
Shabtai Adlersberg: Okay. On the revenue side, okay, no order cuts. No specific situation with specific customers. It's simply taking into account we have seen the velocity and that we had two years ago in providing products and services and getting to revenues. And the picture in the second quarter was more difficult, right? I think we all experienced headwinds anywhere in this world. So, just being more precautious. Simply, we have -- again, I've mentioned that with revenue, that's not the reason for providing an updated guidance. This is just since some updating guidance, it should -- this will take that into account. And so we lowered it by 1%. Not as specific. It's simply longer project decision being taken slower than before, et cetera.
Tal Liani: And where do you -- right.
Shabtai Adlersberg: Right.
Tal Liani: And this 1% -- it's 1% for the year, but it's greater for the next two quarters just because of the math. And where do you expect -- if you think about kind of where to take it from, where do you expect the weakness to be for the next two quarters? Is it -- I'm trying to understand if certain projects or certain customers, or is it more general kind of all over the place? Is it services? Is it product? Is it shipments?
Shabtai Adlersberg: Listen, just to give you an idea, it's not tied to any specific area. I'll give you the reason for it, right? I mean, we're talking about deals. If you take a Contact Center deal, that could be $1 million in size, that could be $0.5 million in size. So, just a removal of one project or a project replanning. I mean, we feel with revenue of close to 70 million a quarter. So, the ability to be on top in such difficult environment, I assume I need to leave more space for misses here and there. It's not tied to any specific area. It's not tied to Microsoft at all, not tied to -- specifically to the contact center. It's not it to the service provider space. But all-in-all, if I want to take the overall environment into account, if I have to basically estimate, I would probably say that middle of 2022, contrary to the beginning of 2022, chances are that it's going to be harder to achieve the revenue target and that's why we made that change.
Tal Liani: And I know you don't provide guidance for 2023, but from your discussions with your customers and the projects you're involved in, do you already see some cautiousness from customers about project pushouts or anything that could suggest that we shouldn't be cautious on the following year?
Shabtai Adlersberg: Not really. No. Actually, I can tell you that we discussed in second quarter, I'll tell you that we have already -- July behind us. I can tell you that the pickup in projects in July is very strong. We have not heard in even one case projection for 2023 is going down. Think Microsoft keeps growing. Well, if you want to take Microsoft announcement a week ago, they are taking more very cautious, right? They are limiting the hiring trends before. I need to relate to that, right? And I think there was another announcement in May, I believe, where they've mentioned that they intend to decrease the rate of hiring in certain areas, including our Phase 2. So, taking that into account makes me make estimate that we're no different than Microsoft, right?
Tal Liani: Got it. Last question, Shabtai, about your own hiring and your own kind of workforce, what are your plans? And how do you adjust to the environment?
Shabtai Adlersberg: So, we keep hiring. I mean, we have stated that this quarter, we did 31 position, about 18 full-time employees and 13 in outsourced positions. We continue to hire. I can tell you that I'm sitting daily and weekly with new request. Our services business approach, we need to add people. We have more position. We would like to increase our business in Asia-Pacific because it's growing very nicely, and we will have 12 positions. So, all in all, we simply need to be in control of how we grow, but we will continue to hire.
Tal Liani: Great. Thank you.
Shabtai Adlersberg: Sure.
Operator: Thank you very much. Your next question is coming from Brian McWilliams from Barclays. Brian, please ask your question.
Unidentified Analyst: Hi, this is Jack on for Brian. Thanks for taking the question. So, you hit a strong inflection point in the CX business coming off the first quarter's year-over-year decline. After this return to growth versus the first quarter, should we expect this momentum to continue into the third? Thanks.
Shabtai Adlersberg: Yes. Well, I can tell you that from what we see already in the third quarter, we are in a good position to continue to grow in the third quarter. And all in all, I will tell you that the disruption in that market and the whole fast growth of call automation and conversational solution, yes, we will see contact center growing up.
Unidentified Analyst: Great. Thanks. And then in the first quarter, you discussed bringing on covers, so virtual agent of the global market in the second half of the year. Is there any sort of update here?
Niran Baruch: So, we're talking about progress, but there's no big contracts that I can talk about. I can tell you that a new solution that we got to the market in the second quarter for conversation of IVR. We are receiving very strong reception. And we are right now -- the product is now being trialed in between five and 10 new accounts. And since the -- it seems to be a gap in the market, that we can cover with that new product.
Unidentified Analyst: All right. That's it for me. Thanks.
Niran Baruch: Thank you, Brian.
Operator: Okay. We appear to have no further questions in the queue. Would you like me to hand back over for closing?
Shabtai Adlersberg: Well, thank you, operator. I would like to thank everyone who attended our conference call today. This continued good business momentum in the second quarter of 2022 and strong underlying market trends in our industry. We believe, we are on track another year of growth in 2022. 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 call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
