Tamar Rapaport-Dagim: We feel this is enhancing our operation to be much more technology-led and innovative in how we can deliver value to our customers.
Timothy Horan: Thanks guys.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Tal Liani from Bank of America. Your question please.
Unidentified Analyst: Hi. It is Matalan Brookston for Tal, Bank of America today. Just two questions from me. First, I was going to be looking at your guide. I just wanted to understand the breakout of organic growth, given that — the deal that was announced last year and was factored to have around 60 bps of revenue growth in the guide as of 4Q, given that that’s not happening anymore, I wanted to know just if there’s any commentary on organic growth without the deal.
Tamar Rapaport-Dagim: So, given the fact that we are reiterating the guidance even though this deal is not coming through, you understand that whatever was supposed to come from this deal, the 60 basis points of growth are going to be coming from organic additional and incremental revenue, and therefore, we can hold the line on our expectations of growth for the year. So pretty much, you can say that the year is growing based on organic revenue growth. There is some, I would say, full year impact of small deals we’ve done last year, but that’s marginal, but we definitely are pleased to see an improvement in our organic performance despite the fact milestone is not happening.
Unidentified Analyst: Got it. Okay.
Tamar Rapaport-Dagim: Just to be clear, we are not counting on any future M&A that has not been announced to make the numbers. This is based on the current known business and the assets that we have.
Unidentified Analyst: Okay. Perfect. That was going to be one follow-up. So then I’ll pivot to the other follow-up. Just wanted to see if there’s any concern in spending deceleration with service providers? And have you noticed any incremental change as the first quarter progressed?
Tamar Rapaport-Dagim: Look, looking on the deal signings and the strong momentum of sales we’ve done in Q1. You can clearly see the outcome of that in the strength of the backlog and the fact we’re reporting a record number and a very strong sequential increase of $120 million to the backlog versus prior quarter. We are seeing a solid pipeline. Yes, naturally, people are focusing sometimes about how to create an immediate impact, a shorter-term impact. We’re bringing them a lot of tools and capabilities that enable them both to accelerate revenue generation, as well as deal with efficiencies and cost structure. For example, our model of managed services or what we call the transformational and managed services together is like the sweet spot of both.
We can help our customers with our product suite, modernize their systems, move to the cloud, be ready for the 5G and digital world. And at the same time, provide them under a multiyear agreement, a committed cost structure, predefined KPIs and we take the full accountability for that. So, we are coming either with this model or some of it depends on their appetite and how we want to go about it.
Unidentified Analyst: Got it. Thanks, so much.
Tamar Rapaport-Dagim: Thank you.
Shuky Sheffer: Thank you.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Will Power from Baird. Your question, please.
Will Power: Great. Thanks. It looked like nice results. I guess, first question is just on a couple of the geographies. I mean, North America, of course, strong, but I’m curious on the European strength, if there’s any other color there on what drove that year-over-year growth. I’m really just trying to understand the durability of this higher revenue level. But I guess on the flip side, Rest of World was weaker year-over-year. I know you expect that to still grow. So, I’m just trying to understand the confidence level and the drivers of growing that rest of world business year-over-year?
Tamar Rapaport-Dagim: Yes. Sure. So yes, we are very pleased with the performance of North America continues to be strong. And to remind you, in Europe, specifically, I’ve been talking for some quarters now about the fact that Europe is growing on a constant currency basis, but unfortunately, the reported number, didn’t look as much because the currency was a big headwind. Finally, now when we have a quarter where the currency was not a headwind, you can clearly see the reported number of Europe growing. So it’s not only just a constant currency growth, it’s also on a reported level growth. And the fact is, we have been seeing a very strong momentum of wins and new activities in Europe for some quarters now, fueling our business.
So it usually takes a bit of time between signing in deals, starting to recognize revenue, and we continue to see very nice signings. So it’s not just that we are using in a way the past deals that have already gone into the backlog. We are continuing to see new deals. You’ve seen the pipeline and the new logos that we talked about, for example, called in Europe, as well as expansion of relationship and organization with Vodafone and with Three UK, and there are many other examples that we could not name specifically. So, we are happy about the momentum we are seeing, and we feel it will continue. And regarding the rest of the world, our business in rest of the world depends also on project activity and — sometimes there is a specific quarter like we just had in Q1 where certain activities naturally and as they mature and the project go live and then does a matter of the timing of the beginning of the new project awards.
So that’s when we have, on the one hand, Q1 with some softness, but the confidence we see a fast recovery and for the full year that we will see growth in the region.
Will Power: Okay. And then, Tamar, if I could slip in one more. I know you all focus, I think, more on operating margins, but the gross margin has kind of continued to tick up I wonder if you have any comments on kind of the key drivers of the gross margin expansion and what the outlook is for that going forward?
Tamar Rapaport-Dagim: So as we usually say, we are focused on the operating margin more so than the elements underneath such as the gross margin versus the R&D, and we are investing in R&D, and we have accelerated investment in R&D. And some of this investment goes into automation that helps us do our execution better and more efficiently. But it’s not necessarily that you should take the gross margin per se on a standalone basis and draw significant conclusions from that. On the other hand, for example, you can see that the SG&A was a bit higher this quarter. Again, there are some specific items that go into that, not necessarily consistent expected in the next quarter. So that’s why we are very focused on bottom line on the operating margin, and we feel that we will be able to execute on the operating margin around the midpoint of our new elevated range give or take a few tens of basis points maybe one direction, the other direction.
We think that this will be the continued consistency of activity of the company.
