AudioCodes (AUDC) Q2 2026 earnings review
Steady AI Execution Masks Legacy Drag
AudioCodes delivered its fourth consecutive quarter of top-line growth, with Q2 revenue up 3.1% YoY to $63.0 million. The company is successfully executing its pivot from a legacy voice connectivity hardware provider to a higher-margin AI and software services business. This transition is evident in the dual growth engines—Live Managed Services and Voice AI—which achieved an $84M Annual Recurring Revenue (ARR) exit rate, up 20% YoY. Gross margins recovered nicely from tariff-induced lows a year ago. Management expressed confidence by raising the lower end of full-year revenue guidance, but the reality remains that hyper-growth in AI is still just offsetting stagnation in the core legacy product business.
🐂 Bull Case
The Conversational AI business grew over 50% YoY again, and nearly 100% in H1. If this trajectory holds, the segment will reach its $50M target by 2028, significantly improving overall revenue mix and gross margins.
The Microsoft Teams business remains robust, growing 5% YoY and expected to contribute ~$170M (66% of total revenue) this year. A newly activated $10M+ contract will add recurring layers to the connectivity base over the next three years.
🐻 Bear Case
Despite AI segment euphoria, overall top-line growth is a sluggish 3.1%. The legacy product business (flat YoY) remains a heavy anchor on consolidated metrics.
The top 15 customers represented 55% of Q2 revenue, with the 10 largest distributors making up 37%. Any disruption or aggressive vendor consolidation in this cohort would materially damage earnings.
⚖️ Verdict: ⚪
Neutral. AudioCodes is successfully transforming its product mix toward recurring software and AI, which is protecting gross margins. However, total revenue growth remains uninspiring, requiring investors to wait for the AI segment to become large enough to pull the consolidated top line upward.
Key Themes
Voice AI and Managed Services Fuel Recurring Revenue
Accelerating. The strategic shift toward software is working. The combined Annual Recurring Revenue (ARR) for Live Managed Services and Voice AI grew 20% YoY to an $84M exit rate. VoiceAI Connect and Live Hub achieved record quarters, driven by existing enterprise customers doubling their capacity for virtual agents. This shift fundamentally improves earnings quality and visibility.
Microsoft Teams Ecosystem Penetration
Stable. The Microsoft Teams business grew 5% YoY in Q2, contributing over half of the company's total revenue. AudioCodes expanded its moat by becoming the first solution listed under Microsoft's new Teams Voice Agent certification program with Voca CIC. Additionally, Total Contract Value (TCV) tied to Microsoft Teams rose 73% YoY to over $20M, indicating strong future demand.
Legacy Product Stagnation
Decelerating. While management rightfully champions the AI and software narrative, product revenues were completely flat YoY. The overarching risk is that the legacy hardware and connectivity business declines faster than the nascent Voice AI segment can scale, capping total company growth in the low-single digits.
Elevated Working Capital Metrics
Stable but elevated. Days Sales Outstanding (DSO) stood at 107 days in Q2. While this is an improvement from the 122 days seen in 25Q3, it is higher than Q1's 104 days. A DSO over 100 days indicates slow cash conversion cycles and requires continuous monitoring for potential collection risks.
Other KPIs
Accelerating. The backlog grew 23% YoY, up from $73 million in 25Q2 and $79 million in 26Q1. This provides robust forward visibility for the Live Managed Services conversion into revenue over the coming quarters.
Reversing positively. Gross margin improved from 64.5% a year ago, climbing out of the trough caused by $1M in unexpected tariff impacts in 25Q2. The margin improvement reflects a higher mix of software and services (54.9% of total revenue).
Guidance
Accelerating. Management raised the bottom end of its guidance range (previously $247 - $255 million). The new midpoint ($253.5M) implies a ~3.2% YoY growth rate compared to FY25's $245.6M, signaling confidence in the H2 backlog conversion.
Stable. Reiterated guidance implies relatively flat earnings compared to FY25 ($0.61). The lack of EPS acceleration despite revenue growth highlights the heavy R&D and S&M investments currently suppressing operating margins to fund the Voice AI pivot.
Key Questions
Legacy Run-Off Profile
With product revenue remaining flat while AI grows over 50%, what is the expected normalized decline rate for legacy hardware over the next 2-3 years, and when will the AI revenue base be large enough to offset it completely?
Profitability Timeline for Voice AI
Given the heavy investments suppressing non-GAAP operating margins (7.4% this quarter), at what specific ARR threshold does the Voice AI segment cross into operating profitability?
Cash Conversion Cycle
DSO remains stubbornly high at 107 days. Is this a structural outcome of the shift to larger enterprise/managed service contracts, or are there specific collection delays in certain regions?