AUDC — Q2 2026 Financial Report Analysis

Services growth and buybacks carried a thin quarter

AudioCodes, an Israeli company that sells the equipment and software businesses use to run phone calls over the internet (VoIP — "voice over internet protocol"), grew second-quarter 2026 revenue 3.1% to $63.0 million. All of that growth came from services: services revenue rose 6.2% to $34.6 million while product revenue slipped 0.5% to $28.4 million. GAAP net income was just $0.5 million ($0.02 per diluted share), up from $0.3 million ($0.01) a year earlier — a doubling of EPS that sounds dramatic only because both numbers are tiny. Management raised its full-year revenue outlook on the call.

At a glance

• Services now 55% of revenue ($34.6M of $63.0M, up from 53% a year ago) — the recurring, subscription-style business is what's growing; hardware and licences are flat.
• 5.1% GAAP operating margin, up from 4.3% — better, but still thin: only about 5 cents of each revenue dollar is left after running the business, before interest and tax.
• 12% fewer shares than a year ago (25.8M diluted vs 29.4M) — buybacks, not profit growth, explain most of the per-share improvement.

All figures in US dollars, from AudioCodes' Q2 2026 earnings release (6-K, Exhibit 1). AudioCodes is a foreign private issuer, so it reports quarterly via this release rather than a 10-Q; there is no segment breakdown or MD&A for the quarter. The prior-year ARR is implied from the stated 20% growth.

What's growing and what isn't

Two parts of the business are doing the work. Management names two "growth pillars": Live, its managed services — AudioCodes runs a customer's calling setup for Microsoft Teams and other UCaaS ("unified communications as a service": cloud-hosted phone, chat and meetings) and contact centres for a recurring fee — and Conversational AI, software that lets automated voice agents answer calls or assist human agents in real time. Together they reached $84 million of ARR (annual recurring revenue — the yearly value of contracts that renew automatically), up 20% from a year ago. Conversational AI alone grew "by more than 50% year over year," matching Q1, and the CEO said Voice AI Connect and Live Hub "delivered record bookings." The Microsoft Teams business grew 5%.

Products are flat. Product revenue — mainly session border controllers and gateways (the boxes and software that connect a company's phone system to the phone network) — was $28.4 million versus $28.5 million. For the half year, products were essentially unchanged at $56.5 million. That's the legacy core, and it isn't shrinking, but it isn't contributing growth either.

Margins improved on both lines. Product gross margin (revenue minus the direct cost of what was sold, as a share of revenue) rose to 63.9% from 61.7%, and services gross margin to 67.2% from 66.1%. Overall gross profit rose 5.7%, faster than revenue — the release doesn't explain why product costs fell, so treat the product-margin gain as unexplained rather than structural.

Spending grew faster than sales. Operating expenses rose 4.5% to $38.2 million, led by selling and marketing (+5.9% to $21.0 million) and R&D (+3.3% to $13.3 million). Because gross profit grew faster still, operating income rose 23% to $3.2 million — but that is $0.6 million of improvement on a $63 million revenue base.

What the headline numbers hide

• The +100% EPS is a small-number effect. Going from $0.01 to $0.02 per share is a $0.17 million increase in net income plus a 12% smaller share count. It says little about the trend; the half-year view is less flattering: H1 GAAP net income fell to $2.4 million from $4.3 million, and H1 diluted EPS fell to $0.09 from $0.15.
• Most of the gap between operating income and net income is currency and tax. Financial expenses were $1.8 million (vs $1.2 million a year ago); AudioCodes attributes such items to revaluing non-dollar (mainly Israeli shekel) assets and liabilities, and excludes them from non-GAAP results. Then tax took $1.0 million of the $1.4 million pre-tax profit — a 67% effective rate (78% a year ago), which is why so little reaches the bottom line.
• GAAP vs non-GAAP: a $3.4 million gap. Non-GAAP net income ($3.9M) adds back share-based compensation ($1.4M), a sliver of intangible amortization, and exchange-rate losses. One oddity: the release's reconciliation table leaves the 2026 exchange-rate line blank, yet the totals imply an add-back of about $2.0 million for the quarter ($2.4 million for the half). The non-GAAP figure is internally consistent only with that implied number. Note also that non-GAAP net income fell 4.7% — non-GAAP EPS rose 7% only because of the lower share count.
• Buybacks are the main EPS driver — and they cost more than the business generates. AudioCodes bought back $8.9 million of stock in Q2 and $22.5 million in H1, and paid $5.3 million in dividends. Against that, H1 free cash flow (operating cash flow of $18.9 million minus $2.3 million of capital spending) was about $16.6 million. The gap was funded from the cash pile: cash and investments fell to $64.2 million from $75.7 million at year-end, and shareholders' equity fell to $145.8 million from $171.3 million. A further $4.8 million dividend was paid on 3 September. There is no bank debt on the balance sheet, so this is sustainable for a while, but not indefinitely at this pace.
• Cash conversion is strong, partly from working capital. Operating cash flow ($6.1M in Q2, $18.9M in H1) far exceeds GAAP net income ($0.5M / $2.4M), helped by non-cash stock compensation and, in H1, a $6.8 million drop in receivables. Q2 cash flow was down from $7.7 million a year earlier as receivables rose again by $2.9 million.
• Inventory is creeping up while product sales are flat: $23.8 million at June 30 versus $22.0 million at year-end (+8%). Not alarming in size, but worth watching given product revenue isn't growing.
• Deferred revenue rose (current portion $41.5M vs $38.2M at year-end) — cash collected for services not yet delivered, consistent with the managed-services build-out.

Takeaway: AudioCodes is slowly turning into a recurring-revenue voice-AI and managed-services company — services are 55% of revenue and the two growth pillars' ARR is up 20% — but that shift is not yet visible in profit: non-GAAP net income fell, H1 GAAP EPS fell by 40%, and per-share figures are being propped up by buybacks that outspend free cash flow.

Outlook

Management's guidance (from the 4 August earnings call, not the written release): 2026 revenue raised to $251–256 million from $247–255 million, and non-GAAP diluted EPS reiterated at $0.60–0.75. On the call, management also said backlog reached nearly $90 million, up 23% from $73 million a year earlier, and that sales cycles for new voice-AI deals had in some cases shortened to about six months from a historical 12–24 months.

Our read: the revenue guide looks achievable — H1 revenue was $125.1 million, so the range implies H2 revenue of roughly $126–131 million, only modestly above the first half, and growing backlog supports that. The EPS range is the harder part: H1 non-GAAP EPS was $0.28, so even the bottom of the range needs $0.32 in H2 and the midpoint needs about $0.40 — a clear step up from Q2's $0.15 run rate. Continued buybacks help the per-share math, but the remaining court-approved capacity for buybacks and dividends combined was $17.4 million at June 30 (valid until 12 November 2026), and the approval allows dividends such as the $4.8 million September payout to be drawn from it. The things to watch in Q3 results (expected early November): whether ARR keeps growing ~20%, whether product revenue stays flat or starts to decline, and whether operating margin moves meaningfully above 5% or the EPS guidance gets trimmed.