2023-11-14 01:59:55 ET
Summary
- AudioCodes' Q3 earnings report showed a bottom-line beat and increased demand for conversational AI services.
- Technical charts suggest a potential sustained rally for the stock.
- The shift from hardware to software and services is positive for margins and earnings growth.
Intro
We wrote about AudioCodes Ltd. ( AUDC ) in May of this year when we stamped a conservative 'Hold' on the stock after the company reported in-line earnings for its first quarter. Lower-than-expected earnings of $0.08 per share for Q1 were revised down by management in the previous month (April) which subsequently led to BofA Global Research cutting its rating on the stock. Suffice it to say, these two levers (management cutting Q1 guidance significantly as well as the rating cut by BofA) resulted in the existing bearish trend gaining traction to the downside. Shares finally bottomed in late October with the company's recent Q3 earnings report being the catalyst for shares to continue their rally of those late October lows.
Before we delve into the ramifications of the company's Q3 earnings report, it is becoming evident from the technical charts that we may be in the initial innings of a sustained rally here in AUDC.
Long-Term Chart
Firstly, as we see from AUDC's long-term chart below, the monthly histogram has been getting stronger since the middle of this year. This means the two MACD lines are finally converging and look set to cross over in the not-too-distant future if present trends persist. The significance of the MACD indicator on long-term charts concerns the amount of information it digests as well as the dual role of the indicator (momentum & trend). Furthermore, the best buy signals present themselves when bullish crossovers present themselves well below the zero-line (oversold - what we potentially have at present). The one disclaimer here however is that shares of AUDC remain in a bear market which means any technical buy signal must be studied carefully until the stock in question returns to a sustained trend of higher lows & higher highs (what we do not have yet)
12-Month Chart
If we go to a near-term 12-month chart, we see that volume trends have been bullish since the May bottom of this year. Significant stronger buying from investors in this period has resulted in a rising OBV line (On Balance Volume) which should lead to more share-price gains if present trends persist. We state this because volume trends invariably precede share-price action although it is crucial now that the upside gap ( as a result of AUDC's recent Q3 earnings report) does not get filled over the near-term to ensure momentum can continue.
Q3 Highlighted Conversational AI Strength
What we witnessed in Q3 was a follow-on from the increased level of bookings in Q2, especially in the conversational AI space where there has been a clear increase in demand. AUDC beat its non-GAAP EPS estimate by $0.06 per share in the quarter with the company's gross margin of 66.5% continuing to go from strength to strength. Furthermore, it was encouraging to see full-year guidance (now approximately $0.70 per share) be raised on the earnings call as a result of the following trends.
Conversational AI bookings increased by over 50% compared to the same period of 12 months prior. The key here is how AUDC's initial CCaas offering spiked interest in this segment where now the company's AI generative services are in high demand. The CEO believes momentum in this segment is only in its early stages as we see below:
Our investment in conversational AI product innovation is paying off and have successfully positioned our UCaaS and CX segments for faster sustainable top-line growth. Conversational AI bookings grew over 50% year-over-year. Since we announced the Microsoft Teams certification of Voca CIC in July 2023, our lightweight AI-first Team CCaaS platform, we have seen a step-up in customers' interest and engagement.
The success of our CCaaS offering is having a pull-through effect on our -- on the rest of our conversational AI portfolio, in particular, in our generative AI-powered recording services. We are stepping up our efforts in the cognitive services space with key investments in speech-to-text and generative AI and LLM technologies.
Sustained Shift To Software & Services
AudioCodes' sustained decline from noncore hardware revenues to software and services revenue is bullish for the company's margins over time and also earnings growth. Noncore hardware revenues now make up less than 20% of the company's total sales and are expected to keep on going lower. Recurring revenue models tend to disappoint (in terms of growth) due to recognition having to be panned out for up to 5 years. This is why (at least over the near term), expect top-line sales growth to remain in the single digits but bottom-line growth (due to that margin strength & recurring model) is a whole different story altogether. Management believes bottom-line growth in AudioCodes will eventually settle between the 25% & 50% level (not much off from what consensus is predicting) which undoubtedly will move the share price meaningfully taking the company's present keen valuation into account.
Risks
AudioCodes' market cap at present is only fractionally outside micro-cap territory so elevated risk remains due to below-average trading volume in the stock. Furthermore, if macro uncertainty were to present itself once more in key economies, investors may become swift to sell their holdings once more. We reiterate that shares (despite near-term momentum) remain in a bear market as the stock continues to trade well below its long-term moving averages. The success of the likes of the conversation AI line (Voca CIC) would alleviate fears among investors so it will be interesting to see how this platform fares out in upcoming quarters.
Conclusion
To sum up, AudioCodes is just off the back of announcing its Q3 numbers where we saw an encouraging bottom-line beat with bookings remaining to the fore. Technically, shares look like they are cheap here but we require (due to significant overhead resistance) more validation before going long. We look forward to continued coverage.
For further details see:
AudioCodes: Getting Closer To Pulling The Trigger On The Long Side (Technical Analysis)