Greetings and welcome to the AudioCodes First Quarter 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I would now turn the conference over to Rob Fink, Mr. Fink you may now begin.

Thank you, Operator. I would like to welcome everyone to AudioCodes’ first quarter 2019 earnings conference call. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer and Niran Baruch, Vice President, Finance and Chief Financial Officer. Before we begin, we 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 and plans and objectives related thereto and statements concerning assumptions made or expectations as to any future event, conditions, performance or other matters are forward-looking statements as the term is defined under the U.S. federal securities law. Forward-looking statements are subject to various risks, 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 current global economic conditions and conditions in general and in AudioCodes as industry and target markets in particular shifts in supply and demand, market acceptance of new products and the demand for existing products, the impact of competitive products and pricing on AudioCodes and its customers products and markets, timely product and technology development, upgrade and the ability to manage changes in the market conditions as needed, possible need for additional financing, the ability to satisfy covenants and the company's loan agreements, possible disruptions from acquisitions, the ability of AudioCodes to successfully integrate the products and operations from acquired companies into AudioCodes business and other factors detailed and AudioCodes filings with the SEC, the U.S. Securities and Exchange Commission. Audio assumes no obligation to update information. In addition, during the call AudioCodes will refer to non-GAAP net income and net income per share. AudioCodes has provided reconciliations of 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 it issued today and on its website. Before I turn the call over to management, I would like to remind everyone that this call is being recorded and an archived webcast will be made available on the Investor Relations website of the company at AudioCodes.com. With that said I would now like to turn the call over to Shabtai. Shabtai please go ahead.

Thank you, Rob. Good morning and good afternoon everybody. I would like to welcome all to our first quarter 2019 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President to Finance of 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 then discuss trends and developments in our business in the industry. We will then turn it into the Q&A session. Niran please go ahead.

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 non-GAAP P&L metrics exclude the recurring non-cash items. The earnings press release that we issued earlier this morning contains a reconciliation of the supplemental non-GAAP financial information that I will be presenting today. Revenues for the first quarter were $46.6 million, up 1.8% from the prior quarter and up 9.8% compared to the first quarter in 2018. Services revenues for the first quarter were $14.1 million accounting for 30.3% of total revenues. The shared revenues balance as of March 31, 2019 was $52 million compared to $49.2 million as of December 31, 2018. Revenues by geographical region for the quarter were split as follows. North America 45%, Central and Latin America 6%, EMEA 35% and Asia-Pacific 14%. Our top 15 customers in aggregate represented 63% of revenues in the quarter of which 50% are attributed to our 10 largest distributors. Gross margin for the quarter was 62.8% compared to 64% in Q1, 2018. Non-GAAP gross margin for the quarter was 63% compared to 64.5% in Q1, 2018. Operating income for the quarter was $4.5 million compared to operating income of $3 million in Q1, 2018. On a non-GAAP basis quarterly operating income was $5.5 million or 11.9% of revenues compared to an operating income of $3.8 million in Q1, 2018. Net income for the quarter was $3 million or $0.10 per share compared to net income of $2.4 million or $0.08 per share in Q1, 2018. On a non-GAAP basis quarterly net income was $5.5 million or $0.18 per share compared to net income of $3.9 million or $0.13 per share in Q1 2018. Our balance sheet remained strong at the end of March 2019 cash/cash equivalents,…

Thank you, Niran. We are very pleased to report solid financial results for the first quarter of 2019. Touching on the highlights of our financial performance, in revenue we grew 9.8% compared to the year ago quarter pretty much in line with our guidance for 10% growth for overall 2019. EBITDA grew to $5.9 million compared to $4.2 million in the first quarter of 2018, an increase of 40%. Same for net income which grew 40% on a year-by-year basis and most important, we continue to improve our operational efficiency compared to the year ago quarter. Operating margin improved from 9.1 in first quarter 2018 to 11.9 in first quarter 2019, a direct result of growing revenue on a consistent basis while keeping expenses at the controllable level. Based on performance in the first quarter of 2019 and the business outlook connectivity thus far in April, we do not anticipate any change in our business trends they should be strong, the way they have been in the first quarter in previous years. At this stage we continue to see strong underlying trends in both the all-IP migration market and the UK adoption mainly in the Microsoft team space that should keep the momentum in our business in coming quarters. As such we’ve strong confidence that 2019 is to become another strong year of growth on tiers of previous three years growth since 2016. Now let's discuss some of the highlights of the business line in the first quarter of 2019. Key to our success in this quarter is the consistent progress in our networking business which grew 14.9% year-over-year to $44.5 million. The networking business now accounts to 96% of our business in this quarter. As presented in the past, the major factors supporting this growth is the strength of…

Thank you. [Operator Instructions] Our first question is coming from the line of Rich Valera with Needham & Company. Please proceed with your question.

Thank you. Good morning Shabtai. You mentioned the UC-SIP bookings growth I'm wondering if you can give the revenue growth number for the UC-SIP business in the quarter?

We're not providing the UC-SIP, we never provide the numbers themselves on a quarterly basis.

I was asking for the growth rate of the UC-SIP business year-over-year.

Year-over-year? So year-over-year again we plan for 15% to 20%.

Yes, I was asking specifically in the first quarter though normally you give a quarterly number there?

The booking, yes, so booking grew 15% and I think invoicing was around 10% or so.

Got it.

Recognition recognized.

I just want to -- that business grew about 30% year-over-year I think for the whole year last year and I think actually in every quarter. So any anything going on there which is just a bit of lumpiness or do we have, I think you're planning on growing that business closer to something close to 20% for the year. So is this just kind of a bit of lumpiness? Anything else going on in that quarter or in that business that we should think about from a growth perspective?

Generally, no. Well the key line in that which is more than 50% of that is the SBC and as I've mentioned the SBC grew more than 30% in the quarter. As I mentioned previously in previous quarters the transition from Skype for business teams is causing some delay in customer decision about our deploying project. If you recall I said that we do expect the market to get back to the same race we enjoyed in the past in the second half of 2019. So what you can read into that lower than usual revenue growth is the fact that there's still some delay in team's project to become effectively growing and then the IP phone line which is very strongly tied to the type of solution being offered as team's project just to get out the IP Phone was a bit lower but that's about it.

But it sounds like you have a nice collection of teams’ specific phones that should benefit as your team's deployment pick up.

Yes. Actually I can tell you that we recently got some data from basically the end of the first quarter and then we've got obviously the new data coming in for April that shows some very significant wrap-up in team's phone. So we believe that what we have been lacking maybe in January and February we now starting to see in March and April a very strong comeback. That's why we're not paying too much to that revenue initiative.

If you could just talk more generally on what you see from a product and revenue perspective for a Skype for Business on-prem deployment versus a team's sort of you know teams is inherently a cloud product. So how do you see the differences for you from a product and revenue perspective and those two different points of scenarios?

So let's take them one by one. On Skype for Business obviously we've been very successful and deployed many projects. Some of which by the way still do continue. We do have examples of large corporations both in North America and West Europe which being big really preferred to have an on-prem service solution. So a new, new such wins also let's not forget that when we talked in the past about winning an account that doesn't mean that that account was purchasing 100% of its needs. I would estimate that at this stage you know all of the wins in the past really deployed only between 20% and 40% over there in need. So the fact that kept growing and I've mentioned that we kept growing in Microsoft space in North America and Western Europe by more than 10% it means that there's a continuous expansion of networks that have been started to deploy in recent years and we do expect that thing to continue but as I've mentioned Microsoft focus and think also Microsoft numbers from last week their main focus is on cloud on Azure and in that environment teams is the solution that's being recommended. As any new solution it takes some for organization to evaluate it some part of it by the way the collaboration part of it is very advanced. The voice part of it is still lagging missing some capabilities. We attribute that delay in voice features and capability in things to the fact that we have seen some slow development but we've been assured and we have our discussion that this big push big effort to bring the missing capabilities voice into teams. So we expect the teams will now be growing very fast and that's evident by the numbers of the phones we sold into teams environment. We can see clearly on that by the way we got numbers of sales for the crowd. It seems the teams are now starts to develop and that's a phenomena of the past in months, so I think going forward we going back to what we've seen previously.

And then on the -- you mentioned you've got three large service provider deals in Europe that is sort of ongoing projects and that they're driving a significant service provider CPE. Can you remind us what those CPE are and it sounds like you have good visibility but just talk about the visibility on those projects for this year and beyond?

Right well I should remind everybody that those projects are very large in nature and each is of a few millions. Usually it takes between 12 and 18 months to get selected to agree on the missing feature to develop them, to be tested in the lab of that large Q1 service provider and then after everything is clear then we start deployment and this is exactly what happened. We are beyond that 12-18 months initial period. We started to deploy it earlier this year. We expect the process to lasts between two, three or maybe even more years going forward. The products specifically are mainly gateways and MSBR. MSBR is an equivalent of an integrated access device where you have a combination of a gateways with ADSL interface and I would also tell you that due to the specific nature of design implementation we use, we now start to see a very interesting phenomena where an MSBR that was sold DM 500L which is capable also to run our SBC application. We start to see some requirements for adding the SBC software on top of the MSBR just to enable future SIP trunk services and cognitive services and other things, so very important project and with our very nice future ahead.

And then if you could just talk a little bit is it really about the voice AI business in terms of the size of that? I know you haven't given that number before but I think last quarter you said you expect it double it potentially this year. Anything you can add to kind of the expectations for that business this year?

So yes, we've been running up our resources and capabilities in the past year. We saw very nice designing activity earlier in this year. We now expand our production into Europe. We do expect also, we basically had only one language available for us last year. This year we'll have more than three or four languages. By using the voice AI gateway we will be able now to increase the span of languages to tens of languages. So we definitely are confident in our ability to double our revenues this year and grow further next year. We are receiving a lot of good feedback on those projects. Just an example this week I think we are scheduled to go to air with three conversational bots in three different applications. So the number is growing very nicely.

And then another product when you mentioned it the gateways are kind of seeing a resurgence and they were actually up 20% I believe in the first quarter which is kind of a surprise. It sounds like that's tied to these service provider projects that you referenced. So just wondering how you're thinking about that gateway business for all of 2019.

So, I'm very optimistic. You can assume that if you went up with gateways in the first quarter and because the majority of the need came from those large service providers that we should see similar as such trends. I also know from initial data regarding this quarter, second quarter that again we will see increasing gateways. So all in all I think there was some very wrong assumption made by many people in the past that gateway is going away. Well, based on the numbers we have and what we can present our gateways are not going anywhere for the next 3-5 years. They're still with us in the last three years we had flat. This year we will grow and I will not be surprised because don't forget the all IP migration now happens mainly in the U.S., Germany and other countries in Europe, Australia maybe but we're talking about 100 countries. So many other countries and among them you can count UK, you can count Japan. You can count some very large countries where the whole migrations haven’t started yet. So I'm confident that we will keep selling gateways for a long time.

Got it and just one more for me. I noticed a $23 million operating lease showed up on the balance sheet. Can you talk about what that is?

Sure. Hi, this is Niran. As of January 2018, we implemented the new GAAP standard ASC 842. This new standard required us to record operating lease right of use asset and operating lease liabilities for all operating leases with a duration longer than 12 months. The implementation of this standard result the right of the asset and the right of their operating lease liabilities of approximately $31 million.

Got it. That makes sense. Thanks very much gentlemen.

[Operator Instructions] Thank you. I'd like to turn call back to Shabtai for closing remarks.

Thank you very much operator. I would like to thank everyone who attended our conference call today with continued good business momentum and execution in the beginning of 2019. We believe we are on track to achieve another year of growth for our business. We look forward to your participation in our next quarterly conference call. Thank you very much. Have a nice day. Bye-bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.