On Thursday, Needham, a financial services firm, adjusted its outlook for AudioCodes (NASDAQ: AUDC) stock, a provider of advanced voice networking and media processing solutions for the digital workplace. The firm reduced the price target on the company's shares to $11.00, down from the previous $14.00, while retaining a Buy rating on the stock.
AudioCodes reported third-quarter results for fiscal year 2024 that fell short of market expectations. The company confirmed the lower end of its full-year outlook as it continues to transition its sales model from license-based to subscription-based. The revenue for the third quarter was divided between product sales, representing capital expenditures (46%), and services, representing operational expenditures (54%). Notably, the company's Live Annual Recurring Revenue (ARR) from subscriptions rose by an impressive 40% year-over-year.
Despite the overall revenue growth being modest, with total business related to Microsoft (NASDAQ:MSFT) increasing by only 0.4% year-over-year and Customer Experience (CX) solutions growing by 4% year-over-year, the company's subscription-driven backlog saw a significant jump, increasing by 150% compared to the same period last year.
As a result of the ongoing revenue model shift, AudioCodes' management has revised its target, now aiming to return to meaningful top-line growth by fiscal year 2026. The adjustment in growth trajectory has led Needham to significantly revise its fiscal year 2025 estimates for AudioCodes downward, which is reflected in the lowered price target. The firm cited the combination of lower revenue growth, reduced operating profit, and a higher tax rate as key factors influencing the revision.
In other recent news, AudioCodes reported its third-quarter financial results, with a minor decline in total revenues to $60.2 million, but a growth in services revenue to $32.5 million, accounting for 54% of the total revenue.
Despite a decrease in net income to $2.7 million, the company highlighted growth in its conversational AI segment and its transition towards a unified communications as a service (UCaaS) and contact center as a service (CCaaS) model. The company also reaffirmed its 2024 revenue guidance between $240 million and $250 million.
The conversational AI segment, despite a reported loss of approximately $9 million for both 2023 and 2024 due to continued investments, saw a 50% increase in contract signings year-over-year. The company expects this sector to exceed $10 million in revenue for the first time. Additionally, AudioCodes reported strong growth in its Microsoft business, with projections for double-digit growth by 2026.
These developments reflect the company's strategic focus on expanding its conversational AI offerings and UCaaS and CCaaS model. The company ended the third quarter with $88.4 million in cash and equivalents, and a backlog of live managed services at $67 million, marking a substantial year-over-year increase. AudioCodes anticipates generating returns from its conversational AI offerings by 2025.
InvestingPro Insights
AudioCodes' recent financial performance and market position are further illuminated by data from InvestingPro. The company's market capitalization stands at $235.07 million, with a P/E ratio of 19.45, indicating that investors are still willing to pay a premium for the company's earnings despite recent challenges.
InvestingPro Tips highlight that AudioCodes' management has been aggressively buying back shares, which could signal confidence in the company's long-term prospects despite the current transition phase. Additionally, the stock is trading near its 52-week low, potentially presenting a value opportunity for investors who believe in the company's future growth potential.
The company's dividend yield of 4.63% may be attractive to income-focused investors, especially considering that AudioCodes has remained profitable over the last twelve months. This profitability, combined with the expectation that net income will grow this year, aligns with Needham's maintained Buy rating despite the lowered price target.
It's worth noting that InvestingPro offers 13 additional tips for AudioCodes, providing a more comprehensive analysis for investors considering the stock's potential in light of its ongoing business model transition.
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