Ladies and gentlemen, thank you for standing by. Greetings and welcome to the AudioCodes Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to introduce your host, Brett Maas with Hayden IR. Please go ahead, Brett.

Thank you, operator. I’d like to thank and welcome everyone to the AudioCodes third 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 beginning, I’d 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 events, conditions, performance or other matters are forward-looking statements as the term is defined under 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’ 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; upgrades and the ability to manage changes in the market conditions as needed; possible need for additional financing; the ability to satisfy covenants in the company’s loan agreements; possible disruptions from acquisitions; the ability of AudioCodes to successfully integrate the products and operations and acquired companies into AudioCodes’ business; and other factors detailed in AudioCodes’ filings with the U.S. Securities and Exchange Commission. AudioCodes assumes no obligation to update that information. In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share. AudioCodes has provided a reconciliation of the non-GAAP net income and net income per share to its net income and net income per share according to GAAP in its press release 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 section of the company’s website at the conclusion of the call. With that said, I would like to now turn the call over to Shabtai. Shabtai, please go ahead.

Thank you, Brett. Good morning and good afternoon everybody. I would like to welcome all to our third quarter 2019 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President for Finance of AudioCodes. Niran will start off by presenting a financial overview of the quarter. I’ll then review the business highlights and summary for the quarter, and then discuss trends and developments in our business and industry. We will then turn it into the Q&A session. Niran?

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 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 third quarter were $51.4 million, an increase of 3.9% from the prior quarter and a 15.5% increase when compared to the third quarter last year. Service revenues for the third quarter were $16.3 million, accounting for $31.8 million of total revenues. Deferred revenues balance as of September 30, 2019 was $54.4 million compared to $44.2 million as of September 30, 2018. Revenues by geographical region for the quarter were split as follows; North America 42%, Central and Latin America 5%, AMEA 39% and Asia-Pacific 14%. Our top 15 customers in aggregate represented 63% of revenues in the quarter, of which 48% are attributed to our nine largest distributors. Gross margin for the quarter was 62.9% compared to 62.2% in Q3 2018. Non-GAAP gross margin for the quarter was 63.2% compared to 62.7% in Q3 2018. Operating income for the quarter was $6 million compared to an operating income of $5 million in Q3 2018. On a non-GAAP basis, quarterly operating income was $7.4 million or 14.5% of revenues compared to an operating income of $6 million in Q3 2018. [Audio Dip] was $4.4 million or $0.14 per share compared to net income of $4.1 million or $0.14 per share in Q3 2018. On a non-GAAP basis, quarterly net income was $7.4 million or $0.24 per share compared to net income of $5.8 million or $0.19 per share in Q3 2018. Our balance sheet remains strong at the end of September 2019. Cash, cash equivalents, bank deposits and marketable securities totaled $69.5 million. Day sales outstanding as of September 30, 2018 were 43 days. Operating cash flow generated during the quarter was $4 million. On August 6, 2019 we declared a semi-annual cash dividend of $0.12 per share. The dividend in aggregate amount of $3.5 million was paid on September 3, 2019. Now to provide an update on our guidance, we now expect revenues for 2019 to be in the range of $198 million to $201 million compared to the previous range of $194 million to $198 million that we updated following the close of the second quarter 2019. We anticipate non-GAAP diluted earnings per share to be in the range of $0.86 to $0.89 compared to our previously revised range of $0.82 to $0.86. I will now turn the call back over to Shabtai.

Thank you, Niran. We’re very pleased to report record financial results for the third quarter 2019. Following on the heels of success of previous quarters, third quarter 2019 performance represents our best quarter ever both on the business side and the financial fronts. Top line advanced 15.5% over the year ago quarter. Net profits rose 27.6% year-over-year. In fact, targeting about $200 million for 2019, this year represents the second year in a row, where top line growth will be above 12% annually and earnings keep growing on an annual basis of 30%. In summary of the third quarter performance, I would point out the following; the unified communication and collaboration market continues its multi-year expansion, a trend expected for the next – at least next three to five years. And so we are operating in a fast-growing market. We have created for ourselves a strong market position as a dominant voice infra and connectivity player. As such, we are a natural choice for partnership with the leading UC&C market leaders. Investment and activities we perform in alignment and collaboration with market leaders have played – has played key factor in our success during the past four years and should provide strong basis and support for continued success in the next three to five years. We maintain and continue to create new partnerships with market vendors and market entrants such as with Microsoft, with Cisco and BroadSoft operations, RingCentral, Zoom, Amazon and Dolby, among others. At the same time, our growing customer base across the enterprise and service provider space provides us with a strong basis for continued success. We continue to improve our operations efficiently to be very efficient, underscoring our financial success is our ability to improve quarterly operating margin to 15.5%. This is a record in our…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Rich Valera from Needham and Company. Your line is now live.

Thank you. Good morning, Shabtai. Wanted to dig into Microsoft a little bit, you mentioned it sounds like they grew about 10%, which is actually a little slower than your overall business. But could you just give a sense of where they stand in terms of the Skype for Business, the Teams transition and how you see that business playing out over the next couple of quarters as maybe Teams catches up from a feature functionality standpoint to Skype for Business?

Right. So Microsoft is transitioning their unified communication and collaboration solution from Skype for Business, which is an on-prem solution and was the key deployments and implementation in previous years. As they’re moving to a UC as a Service solution, named Teams, and basically, that transition is now taking place about mid-2019 and is growing and growing pace going forward. One thing that we’ve seen lately is that because of the success of the web conferencing application in the market, where there were new players growing, such as Zoom Video Communication and others, major focus in partner activity went from overall Teams to Meeting First or Video First, and as such, some of the development for Teams’ voice were pushed a bit. So what we are experiencing in 2019 is basically a delay in completion of features, which are needed to provide a comprehensive -- full comprehensive Teams’ voice capability. On the other hand, I can tell you, and as I’ve already reported earlier in the call that we’ve started to see phones, IP phones. With Teams starting to grow, we see more interest and deployment by more customers, and that trend is evident also early this quarter. So we believe that and based on what we hear from our partners is that we should see Teams’ voice coming into full gear, somewhere in the first half of 2020. At the same time, with much activity going on on the meeting space and as much investment in coming up with new devices is more functionality, if everybody understands the application of voice recognition technology and machine learning technology will come into effect also in the meeting space. So there’s much that goes on in terms of development, we believe that we will see 2020 already better than 2019. So we should forecast for more than the typical 10%, 11% that we are witnessing this year.

That’s a helpful overview. Thank you. Wanted to explore huddle rooms a little bit for you, it sounds like you’ve announced the partnership here with Dolby, and if I’m not mistaken, they’re providing all the hardware and you’re providing your voice.ai technology. Just wanted to understand that the revenue model there, how do you sell that voice.ai technology? Is that a subscription or perpetual license? And just give us a sense of your kind of revenue opportunity in that huddle room space.

Right. So at this stage we’re still not in the recurring revenue. So all for ourselves are CapEx. In this specific example that you presented, basically the conferencing device is part of an overall solution sale. So side-by-side, with our ability to provide gateways, SBCs, phones, we will provide the conferencing device. Obviously, the hardware comes from Dolby. Our technology and software will help complete everything that’s needed from the user interface and the solution architecture to connect that device to the Teams solution. We will add, on top of that, two key elements; one, which is the management solution or one voice operations center, which will have the conference device part of the overall company devices; and also, we will apply our Meeting Insights, which will basically provide a software solution that helps to analyze and process the content of the meeting. Now going forward, we will sell devices just as we’re selling our phones these days. But on the software side or the Meeting Insights side, we definitely, we will look to go more for a service model. So on Meeting Insights, we believe we will go to the Software as a Service approach.

Okay. I guess, the follow-on, and sort of you mentioned that you had I think 20 customers or so trialing your Voice AI gateway. So I guess, the same question. How do you see that revenue model playing out? Is that going to be an upfront purchase, plus a recurring service or software revenue stream?

Right. The Voice AI gateway indeed will deviate from our traditional CapEx approach. We do intend to sell it as a service, and it will be basically charging based on a recurring basis. So you will pay as you use it.

Got it. That’s interesting. I think you mentioned in your prepared remarks that gateways were up 15% year-over-year, which is a pretty impressive and maybe surprising number. And I think that’s on the strength of these network transformations with large service providers. So can you just lay out how you see that? I think it sounds like you expect another strong year next year, but off of some probably difficult comparisons. So just wanted to get a sense of how you’re thinking about that gateway business, and in particular, the driver of the big network transformations with some of your big Tier 1s.

Right. So the success of 2019 is driven mainly by several, no more than four or five, large service providers. And from what we know now, about four of them are going to continue to ship for us in 2020, and we already have another new big Tier1 service provider that will be joining. So all-in-all, I think the business is fairly good, fairly stable. And we’re talking about – I’ve mentioned so far, five, six, seven countries. Let’s not forget, it’s a global process and trend. We know a very big country where we have done the first steps this year in terms of testing, integrating, making sure that service will work. And we already have plans to start shipping in 2020. And so it’s a process that should pretty much continue into the next at least three to five years. And then, give or take, we will have years that will be stronger than others, but all-in-all, a very strong business. I would also mention that this is a strategic point that usually is overlooked. We’re talking about products that are based on hardware. And as we all know, that the trends in the world that most of the players and organizations are flocking away from hardware. Basically, everybody goes into either software and/or services. We do the same, right? I mean, I’ve mentioned Meeting Insights, I’ve mentioned Voice AI gateway, those will be SaaS products, and we’ll offer in the future more of such products. However, on the hardware side, keeping – when product gets to end of life. We are probably the only vendor that’s left out there, and I would not say only, but one of the very few vendors left out there, that who are capable of basically having access to all of the different projects are either running and/or initiated because other products are going end of life. And we know for a fact that other companies are not that committed to it. So we enjoy the fact that year-by-year, players and competition are deserting the space of hardware solution. And us enjoying good profitability and dominance in that field, we’ll keep enjoying that for coming years.

Got it. And one more, if I could. You mentioned, I believe that your gateway was certified for use in a Zoom phone deployment. Can you give us any color on what visibility you have towards the ramp of that business with the Zoom phone-related business?

So we work with our partners. And obviously, we are exchanging information about potential opportunities brought into and – it suppresses just started earlier, mid this year. So it’s only in the beginning, fairly early to make a call on where it goes, but it’s a good start, and we are on it.

Got it. Okay. Well. That’s it me. Thanks for taking all my questions, Shabtai.

Sure. Thank you, Rich.

[Operator Instructions] Ladies and gentlemen, we’ve reach the end of our question-and-answer session. I’d like to turn the floor back over to management for any further or closing comments.

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