Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Enterprises Ltd. 2019 First Quarter Financial Results Conference Call. With us on the line today are Magic's CEO, Mr. Guy Bernstein; Magic's CFO, Mr. Asaf Berenstin; Magic's Software Division VP of Technology and Innovation, Mr. Yuval Lavi; and Magic's VP, M&A and General Counsel, Mr. Amit Birk. I would now like to turn the conference over to Mr. Amit Birk of Magic Software. Please go ahead.

Thank you, and good day, everyone. Our quarterly earnings release was issued before the market opened this morning, and it has been posted on the company's website at www.magicsoftware.com. Before we start, I would like to remind everyone that this conference call may contain projections or other forward-looking statements. The safe harbor provision provided in the press release issued today also applies to the content of this call. Magic expressly disclaims any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in its views or expectations, or otherwise. Also, during the course of today's call, we will refer to non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results has been provided in the press release issued before the market opened this morning. A replay of this call will be available after the call on our Investor Relations section of the company website. I will now turn the conference call over to Mr. Guy Bernstein, CEO of Magic Software. Please go ahead.

Thank you, Amit. Good morning, everyone, and thank you for joining us today as we report our first quarter 2019 financial results. We are pleased to report another good start for the year as we continue our forward momentum with consistent year-over-year growth in the revenue, operating income and net income, which demonstrate the solid execution of our corporate strategy. Our first quarter revenue increased 3% to $71.8 million compared to $69.7 million in the same period last year. Non-GAAP operating income increased 4% year-over-year to $10.1 million for the quarter. We continue strengthening our competitive advantages to support our future growth as we reported the acquisition of PowWow SmartUX, a leading low-code development platform for mobilizing and modernizing enterprise apps, which is strongly synergetic to the technology and paradigm of Magic's Low Code existing solutions. By combining them together, we will be able to offer to new and existing clients' solutions and services, which better meet today's high demand to complete transformation to digital workplace. Now, I'd like to turn the call over to Asaf, our Chief Financial Officer, to discuss the financial results in more detail. Asaf, please?

Thank you, Guy, and good morning, everyone. Our first quarter revenues totaled $71.8 million compared to $69.7 million for the first quarter last year, reflecting a 3% year-over-year growth. Looking at the geographical breakdown of our revenues, North America accounted for 48% of total revenue, Israel 39%, Europe 8%, and APAC and the rest of the world accounted for 5% of our annual revenue. Most of our growth in the first quarter [indiscernible] was from Israel. Turning now to profitability, our non-GAAP gross profit for the first quarter of 2019 was $23.6 million, down approximately 4% compared to $24.6 million in the first quarter of last year, and up 1% compared to $23.4 million in the previous quarter of 2018. Our non-GAAP gross margin decreased to 32.9% compared to 35.2% in the first quarter of last year, an increase compared to 32.4% in the previous quarter. The decrease in the gross margin compared to the first quarter of last year resulted mainly from the shifting on revenue mix from software toward professional services, as professional services accounted for 85% of 2018 growth. The breakdown of our revenue mix for the first quarter of 2019 was 26% related to our software solutions, and 74% related to our professional services versus 28% software solutions and 72% professional services in 2018 as a whole. Research and development expenses on a non-GAAP basis in the first quarter of 2019 totaled $2.5 million, compared to $2.3 million in the same quarter of last year. Our non-GAAP operating income for the first quarter increased 4% to $10.1 million compared to $9.7 million in the same period of last year. This reflects an operating margin of 14% same as in the first and the fourth quarter of 2018. Our non-GAAP tax expenses this quarter totaled $1.7 million representing an effective tax rate of approximately 17%, compared to a tax expense of $2.2 million in the first quarter of 2018, reflecting an effective tax rate of 22%. We expect our full year 2019 tax rate to be slightly higher in the range of 19% up to 21%. Our non-GAAP net income for the first quarter increased 8% to $6.7 million or $0.14 per fully diluted share compared to $6.2 million or $0.14 per fully diluted share in the same period last year. The increase in our net income is consistent with the above mentioned increases in our revenues and operating profit. Our earnings per share for the first quarter compared to the first quarter of 2018 was negatively impacted by an amount of $0.013 per fully diluted share, resulting from the private issuance of 4.3 million shares we concluded on the third quarter of 2018. Turning now to the balance sheet, As of March 31, 2019, we had cash and cash equivalents, short- and long-term bank deposits and marketable securities of approximately $109 million compared to approximately $116 million at the end of 2018. The decrease is mainly attributable to cash dividend paid during the first quarter in the amount of $0.15 per share and in the aggregate amount of approximately $7.3 million for the second half of 2018, which reflects the dividend yield of approximately 3.1% and the remaining decline resulting from M&A. Total financial debt as of December 31, 2018 amounted to approximately $28 million same as at the end of this quarter. From a cash flow perspective, we generated $10.7 million from operating activities in the first quarter. Lastly, with respect to our balance sheet, this quarter we implemented for the first time a new accounting standard, ASC 842, which required us to present future commitments on the lease agreements against asset in order to represent our right to use such assets. While, there is an impact on our balance sheet in the form of assets versus liabilities, there is no such impact on our P&L. I would like to turn now to our guidance for 2019. Looking out to the remainder of 2019, we remain confident in our ability to achieve our full year 2019 guidance. As a result, I would like to reiterate our 2019 full year revenue guidance, which we expect to be in the range of $313 million to $319 million on a constant currency basis, reflecting an annual growth rate of 10% to 12%. In accordance, we expect to see incremental revenue growth throughout the remainder of the year. With that, I will turn the call back to Guy for closing comments. Guy?

Thank you, Asaf. In summary, we are pleased to witness that the strong momentum for 2018 continue to 2019. We continue to remain focused on preserving and expanding our customer base by constantly developing, evolving and enriching our products and services portfolio, with diverse, powerful and innovative technologies, which comply with the requirement of organizations to complete the transformation to digital workplace. With that, I will now turn the call over to the operator for questions.

Thank you. Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] The first question is from Tavy Rosner of Barclays. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. I was wondering if you could elaborate a little bit on your PowWow acquisition. You talked about synergies. Can you give more color on what they are? And also, I believe that in the press release you mentioned that it would become accretive within 18 months? So can you also give some color, what's going to happen in terms of investment in the company and things like that? Thank you.

Okay. Hi, it's Yuval. I'll talk a little bit about the synergy and how we see it, and maybe then the numbers, Asaf can add something. But as far as synergy, we're looking synergy in two levels. First - or the two of them, so [for instance] [ph] second, but technology-wise, and paradigm and methodology, and go-to-market, and et cetera. So, obviously, when we talk about low-code paradigm, we all know than Magic started 35 years ago with low-code, and all our customers, existing customers are expecting us to provide the concept of low-code. So synergy as far as organization, methodology, sales people, communicating the added value, et cetera, is already there by definition. Technology synergy, Magic, in the last two years we developed our web client [and angular] [ph] solution, which transform our legacy Magic engine to be able to run on the mobile. But we kind of left behind a user-experience buildup or how we create the screens and how we create the frontend. And this is where PowWow actually is putting the most for us. And PowWow is coming with an amazing studio, that is focusing mainly on the user experience and then going back to the logic technology behind and connectivity. So the two products are actually sync technology-wise as well. Of course, we will have to invest some effort in the next 12 months to build the technology, because it's two different technology steps. But they sync, they have a lot of good symbiosing relationship between them. And we are going to take the PowWow platform and do localization, and bring it into our existing branches around the world, like Japanese market that we are quite strong there. But as we know, we need localization, we need studio in Japanese. We need to communicate with the Japanese company in order to sell in Japan. So synergy is strong in all aspects, okay. Do you want to talk about price effectiveness on the incomes?

As we said, I think that basically this is still, as Yuval probably also said, it's still a young platform. In order to take it and put it out for sale, we are anticipating investment in marketing to make it available as a download version for developers to start and have something that the basic side - and basic tools that they can start working with. We are still finalizing the investment or the business plan that we want to come up with or the pricing model that we think was best viewed to address this platform as they [called] [ph] more than that we are applying is a subscription mode. This is why at the beginning revenues are considered low, and then as you are growing the service, it kind of builds up one over the other and then you get significant stack of inflow coming in.

Yeah. That's super helpful. And maybe just a quick one, I mean, revenue decelerated a little bit during the quarter, yet you maintain the guidance for year-end. So is that a question of just timing of recognition?

Not a question of timing of recognition. I think that 2018, what was a very strong year, it begun very strong since January basically. Q1 2019, we had - versus the end of Q4, we had some slowdown in the sale of technology, which is something that we always experience between ending of one year and the beginning of another year with company's closing the budget and doing all of the accumulating acquisition at the end of the year. We increased our headcount for professional services by approximately 150 people during the first quarter, which also something that explains the decrease or the decline that we had in our gross profit for Q1. And in terms of the growth, 2019 didn't start as strong as we expected it for the first quarter. But on the second quarter, we already see the improvement, especially on our professional service side, and also on the sale of software.

Okay. Thanks. I appreciate it. Thanks, guys.

The next question is from Maggie Nolan of William Blair. Please go ahead.

Hi, I wanted to dig into that last comment that you just made, you're seeing an improvement on the professional services side. So as you continue to see that mix of professional services kind of kick up, obviously, that puts some pressure on the gross margin this quarter. Maybe it will pressure gross margin in future quarters. But your operating margin did hold up pretty well, so as we see that mix turned upward a little bit, what are some of the levers that you can pull to keep a more stable operating margin profile?

I think that - first of all, I want to say that Q1 gross profit is not something that represents growth in gross margin. If you see, if you look at our numbers in Q1, 2018 was around 35%. We are now consistently Q2 through Q1 of - Q2 2018 through Q1 2019 show a consistent 33% of gross profit. We don't expect the gross profit to a decline from this level of the 32%, 33%. In terms of the keeping our gross profit intact, but in that - out of the 150 people that we hired, most of the hiring that we did were out of Saint Petersburg location. I can tell you that, two years ago, we had approximately 40 people in our [indiscernible] Saint Petersburg location. Now, we have close to 200 people that provide offshore services to customers mainly in the U.S. And with that, this is how we think that we can maintain the level of gross margin that we show today in our data. And we also expect to see improvement in the sale of technology going forward with the addition of PowWow.

Okay, understood. And then, when we're thinking about the guidance range and the start to the year, as we look at kind of how the rest of the year is going to play out, what would it take to get to the high-end of that guidance range?

Hard work and luck.

Are particular buildup in the pipeline, things you are hoping to convert, is that looking strong and kind of playing into that high-end of the guidance? Or is there any color you can give there?

We are quite - we have a few big customers that we expect them to grow, especially when we talk about the pharmaceutical industry, the merger between CVS and Aetna. I think that part of the reason that we were a bit slow in this quarter is because we estimated that we will get a lot more work from CVS. We see first time we start to move, but at the end you are dependent on big giant that sometimes it takes them a bit more of time. Although, they give you their projections and sometimes they are a bit behind. But, all in all, we got some new names and we believe we can meet the guidance.

Okay. That's helpful. Thanks. And then, thinking about PowWow and some of the investments that you were just talking about in the previous questions? So is this something that's going to be dilutive to 2019 and what would that impact be compared to 2018?

In terms of what?

Bottom line, is it going to be dilutive to EPS, just given some of the investments…?

Probably it will have some negative effect on the EPS. I don't think it's going to be dramatic and we are working to overcome this through some efficiencies in our operations. All in all, we think that the investment is a good one for us, especially due to the synergies, and the fact that - it's a shortcut to our customers and to new customers. And after all, if it's kind of a startup, so although they have some customers running, it is still a very young company.

I think that basically also that the fact that we are relying on a subscription model for the sale of the software, this is something that also one of the main reasons why there is a - why this company is not accretive to our result. If you are seeing the guidance of the impact on the EPS, it can have something between the $0.02 to $0.04 per share negative impact.

[indiscernible] Okay. Thanks. That was very helpful. Thanks, guys.

[Operator Instructions] There are no further questions at this time. Mr. Bernstein, would you like to make your concluding statement?

Yeah. So thank you very much for joining us for this call, and hope to see you in our next call, and bring you some more good news. Thank you.

Thank you. This concludes the Magic Software Enterprises Ltd. first quarter 2019 results conference call. Thank you for your participation. You may go ahead and disconnect.