Ladies and gentlemen, thank you for standing by. Welcome to Allot Technologies First Quarter 2017 Results Conference Call. All participants are in listen-only mode. [Operator Instructions] As a reminder this conference is being recorded. You should have all received the company’s press release. If you have not received it please contact Allot’s Investor Relations team at GK Investor and Public Relations at 1 646 688 3559 or view it in the instructions on the company’s website www.allot.com. I will now turn the call over to Gavriel Frohwein of GK Investor Relations. Gavriel would you like to begin please?

Thank you, operator. Welcome to Allot’s first quarter of 2017 conference call. I’d like to welcome all of you to the conference call and thank Allot’s management for hosting this call. With us on the call today are Mr. Erez Antebi, President and CEO, and Mr. Alberto Sessa, CFO. Erez will summarize the key highlights followed by Alberto who will review Allot’s financial performance for the quarter. We will then open the call for the question and answer session. Before we start, I’d like to point out that this conference call may contain projections or other forward-looking statements future events or the future performance of the company. These statements are only predictions and Allot do not guarantee that they will in fact occur. Allot does not assume any obligation to update that information. Actual events or results may differ materially from those projected including as a result of changing market trends, reduced demand and the competitive nature of the securities systems industry, as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission. And with that, I would like to now hand over the call to Erez. Erez, Please go ahead.

Thank you, Gavriel. I’d like to welcome all of you to our conference call and thank you for joining us today. Alberto and myself have been with the company for a few months. I would like to discuss with you our main findings and how we plan to take the company forward. Over the last few months, we took a good look at our markets, our competitive position and what we should focus on to drive growth and generate profitability. We also hired the international consulting firm Deloitte to help us with this process and provide us with an external perspective. As I stated in our previous call in February, I believe Allot has excellent products targeting the right markets, and employed highly professional people. What I saw in the past month reinforced this belief. I believe the main growth engine for Allot going forward will be providing network security products that communication service providers or CSPs can use and provide as a service to their customers both consumers and businesses. This is a relatively new market and we believe we are well positioned to enable these services. Security threat such as malware, ransomware, phishing attempts and others are on the rise. This has led to mobile phone security becoming a growing issue for consumers. Mobile subscribers today want to be protected. We want to see how they are protected and market research indicates that a significant portion of subscribers are willing to pay for such security. Communication service providers like Vodafone and Telefonica are well positioned to provide this value-adding service to their customers. Not only that, studies have shown that a significant portion of consumers expect their service providers to provide such protection. I believe Allot, together with CSPs worldwide are well positioned to take advantage of this…

Thank you very much, Erez. Before I begin reviewing the financial results for this quarter, I would like to inform everyone that in this call, unless otherwise noted I will refer entirely to the non-GAAP financial measures when discussing operational results, which is what we use internally to judge the performance of our business. Non-GAAP financial measures differ in certain respects from the Generally Accepted Accounting Principles and excludes share-based compensation expenses, revenue adjustments due to acquisition, expenses related to M&A activities, amortization of certain intangible assets and change in deferred tax. And now with regard to the financial results. Revenues for the first quarter of 2017 were $18.5 million compared with $23 million in the first quarter last year. I would like to give some details regarding the company revenue diversification. The geographic breakdown of revenue was as follows: America, with $3.1 million or 16% of revenue, EMEA with $12.5 million or 68% of revenues and Asia-Pacific with $2.9 million or 16% of revenue. Process revenue for the quarter accounted for 55% while service revenue were 45%. This compares to 63% and 37% lift in the first quarter of last year. In terms of customer concentration, our top 10 customer made up 57% of our revenues. Book-to-bill ratio in the quarter was slightly above 1. Gross margin for the quarter was 68% compared to 70% in the first quarter of 2016. The main reason for the lower gross margin is the decrease in revenue. In fact, a portion of the cost of goods sold is fixed and consequentially, the lower revenue amount impacted the gross margin. As we expect revenue to grow throughout 2017, we expect the gross margin to improve as well. We do not currently see any indication of any erosion in our product price. Operating expenses…

Thank you. [Operator Instructions] The first question is from James Kisner of Jefferies. Please go ahead.

Hi, guys. This is David Wishnow for James. How are you?

Fine, thank you.

Okay, thank you.

As we look forward at the revenue trajectory, you guys are very clear that second half is better than the first half 2017. How do we think about the order of magnitude differential between second half versus first half? Is this going to be kind of a smooth growth rate off of 1Q or is it going to be somewhat lumpy?

It’s very hard right now for us to see what would be the ratio between quarter-to-quarter. As we study the company a little bit more compared to the last call we had I mean we feel much more comfortable with our projections. We feel more comfortable with our guidance at the end of the year and as a consequence of that, also, with the fact that the second half of the year will be better than the first one. Now, magnitude of increase is really very hard to say right now, visibility is quarter-by-quarter is low and from time-to-time we have few deals that may move from a quarter to another and that can seriously impact the single quarter. I think it’s much better to look the other half of the year or year and not revenue quarter-by-quarter.

That’s helpful. Thank you. And on the gross margin side, obviously, 1Q was not great. It sounds like there is some fixed cost absorption issues there. How do you guys feel about the overall gross margin for 2017 versus 2016?

Gross margin, as we mentioned, I mean there is a portion of the cost of goods sold which is fixed, it’s not variable, that the allocation of our customer success to the team to the cost of goods sold. The reduction in gross margin this quarter is mainly actually all due to the decrease in revenue. As we see revenue growing and get to a level of $80 million to $84 million in 2017, we do believe that the gross margin will – we grow accordingly and we will certainly be higher than this quarter probably very similar to what was, I mean, last year.

Basically, what we are saying is that, at similar revenue levels – sorry - a similar revenue level that we had last year we should have about same gross margins.

Exactly, that’s what I meant.

Okay, perfect, perfect. And one last question for me. The Telefonica deal that you guys announced, can you guys have a sense on when we should start seeing that show up in the income statement or when should you recognizing revenue on that, is that already in there or is that later this year?

We are starting to get orders from them. It’s – let me put some color maybe on this order, on this agreement. There has been an agreement with Telefonica Global, now, Telefonica has different operating businesses throughout Latin America and Europe. And this whole project is part of what Telefonica calls their fourth generation platform. It’s a part of it and the fourth generation platform there are many things not just security, about privacy and customer service and a whole lot of things, but this is one element of it. Now, they are going to launch in different business – in different operating businesses, or different countries this year and perhaps next year an additional one. Now, right now, we get the order from the individual operating businesses and not from Telefonica Global itself. So we started getting some of these orders. I would expect that we will get additional orders and as we get the orders and we start delivering, and installing we’ll start seeing the revenues come in. It’s very, very hard for me to comment on exactly what the timeline is for when we will actually get an order and when we will actually deliver and we will have all the elements that requires the revenue recognition, but I can’t share with you that it is Telefonica’s plan to start providing these services to their customers at least in some markets already before the end of – of this year, before the end of 2017.

Okay, great. That’s very helpful. Thank you very much.

The next question from Alex Henderson of Needham & Company. Please go ahead.

Thanks, I have couple of things. First off, can you give us some sense as you are looking at these two programs, what portion of the improvement in the back half are coming from these? And what is coming from additional orders you expect to come in over the course of the year? In other words, what portion of this is pretty well locked and loaded assuming they execute as expected?

I am not sure what you are referring to and you said two programs.

You talk about Vodafone and Telefonica programs being fairly important pieces to the – of the visibility.

Vodafone is a long-time customer of Allot and we have been seeing orders in revenues from them for several years now. And I expect that to continue and as part of the expected booking and revenues for this year as well, and hopefully, it will continue that way. Telefonica, for this kind of offering is very new. We just reached a deal with them during the first quarter and we will gradually start seeing orders come in and then subsequently delivery and revenues and so on. Like I said before, it’s very, very hard for me to pinpoint on exact order and how much it will be out of the total. It’s mixed into – when we do a forecasting, we take everything that we see in the pipeline, we take a look at what the risks are, we took a look at what we think will happen, we find certain probabilities and at the end of the day, we come out with a forecast that we feel comfortable with and that’s what we’ve done. So I would rather not go into an individual order and say how much a specific customer will end up being during this year and so on, I don’t think that is correct.

Okay. The second question on the visibility around the gross margins. It sounds like the fixed cost variable cost mix obviously changes with the revenue levels. As we get to $20 million level, is that consistent with the 70% in 21 and 22, 71%, 72% is that kind of the right way to think about it?

Yes, as we said before, I mean, we do expect margins to grow again at the same level of revenue meaning that getting to – getting back to 2021 as you mentioned, we will probably be around 70% or something like that, I mean, this is the calculation and that’s actually what happens is this quarter, we did not see any pressure from the price and again, the reason is actually the [decrease in] [ph] revenue. We do expect to regain margin as revenue will grow.

So, going down to the OpEx line, obviously, the cost of your marketing programs impacted the sequential numbers quite a bit, I assume that that moderates as we go forward. Is there is a little bit of a spike? Is that the right way to think about it? Or is this 8, 6 range kind of sustainable over the back half of the year?

As I said before, I mean, we do expect 2015 level of OpEx to be very similar to the level that we have in last year in 2016. The 2017 is going to be very similar to 2016. I mean, that’s our current forecast. Taking into consideration several things. First of all, as you mentioned the two events, two sales and marketing events in the first quarter is – those are one-time event, but we have additional events through the year. So that’s one thing. The other thing is – we do want to invest in such areas, which as report our strategy. So we will continue to invest in OpEx from one side on the other side, I mean we will control over it. At the end of the day, we – as said before, I mean, we do see a level of OpEx as very similar to last year. And that’s growing irrespective to the level of Q1.

Just a couple of book keeping things. Can you give us the headcount for the quarter? At the end of the quarter, the VAS ratio, the services ratio and how many 10% customers you had?

Generally, we do not give the number of headcount we have. But, yes, at the end of Q1, we were approximately 470 people, 468, to be exact. You mentioned –

VAS and Services?

I am sorry.

VAS and services as a percent?

I think we will have to get back to you with this.

Yes, I don’t have the number in front of me. We’ll have to get back to you.

Okay, and how about 10% customers, how many 10% customers in the quarter?

10% customers were – yes, the 10% customers made up approximately 57% not approximately exactly 57% of our revenue this quarter.

No, that’s top 10, the question is how many 10% customers did you have? I think, last quarter, for instance you had two 10% customers.

There is one customer there.

One, okay. Great, thank you.

The next question is from Joseph Wolf of Barclays. Please go ahead.

Thank you. You went through some detail on, I guess, the strategy and I am wondering how closely aligned that is to selling, kind of that, or how that works with the new Head of Sales, how integrated with the team figuring that? But what would you expect his first steps to be given the plan that you outlined?

Okay, well, he is on board now for – I think a matter of days. So, as you can guess, he wasn’t a part of the process that we went through in the last two-and-a-half months. But I think he came from a background of – worked many years for Nokia Siemens. He came from a background of selling core components to operators. He came from a background, he has been doing that, left Nokia as well and other locations. So, I think he is very, very much – for a lot of other reasons as well, but given also his background he is the right person to lead the sales organization and he is focused on increase both large and small. Now I think one of the first things that we need to do together Ron and myself is now to modify the sales organization mostly in structure and then focus to go after these strategies that I talked about earlier in this call. Is the sales organization today is really is built very well towards that end, not, well, to some degree, yes, but I think there is room for improvement as part of the execution plan, sorry, improvement in the execution that we need to plan for and execute rather quickly.

Okay. And I guess, the way that you – the way that I’ve understood the sales, the opportunities in terms of product was a focus on security, but not giving up or collecting the core VPI. And I am curious if you do that still to stand on or whether that’s an integrated product within your security part which is a differentiator and how you differentiate between that kind of investment?

Okay, I mean, we have to look at it both ways. Right, I mean, on one hand, we need to put the proper attention and investment and emphasize those areas that we believe are going to grow and that’s why you heard me talk with an emphasis on security and less so on VPI. But on the other hand, we should lose sight of the fact that we are selling both of these products both the security and the VPI into the same customer base. The communications service provider and by selling them both into the same customer base, there is a lot of opportunity for cross sell and up sell between them. So I think they go hand-in-hand together and sales organization is going to have a very focused target in the CSPs and they are going to have essentially more of an offering to provide them and in one phase will be, maybe one product, in other case another and hopefully in more than one cases, in more cases than a few it will be both of them together.

Okay. I assume that Telefonica – the contract that you’ve been addressing is not a utilization, but it’s more of a lump sum payment that you guys get which is based on subscribers. Is there any kind of – is there any enhanced fee that you get for you if the penetration rate does hit a higher number, how is that contract structured?

That deal is structured as license payment for the licenses, as the number of subscribers grow they have to pay for more licenses and those are perpetual.

Okay. And then finally, just cash flow expectations for the year, a little bit of cash down in the quarter. Would you expect to generate cash flow from operations for the year given your guidance for the year?

Regarding the execution in cash, I mean, we are going probably to burn a little bit of cash going forward into the year. But not more than that.

A little meaning, $2 million, $5 million?

It’s very hard at this point in time to point out a number. It’s dependent on so many things, I think that few million dollars of cash that will be a reasonable best answer I can give you right now.

All right, thank you very much.

The next question is from Matt Robinson of Wunderlich Securities. Please go ahead.

Hey this is Peter on for Matt. So where are you guys in the transition from purposes of hardware to NSV. Can you just give a little detail on that?

Yes, I’ll try at least. I mean, the company has been on this path for a while now. And I think that if you look at it, there are two major steps to be taken here, right. One is, if you take the software and put it on standard off the shelf hardware platform, and I think to that Allot – for the new product, the legacy will remain with what it is, but for the new product, I think, for most parts that is we are 90% there. We are very, very long way there. Not only that, as you may or may not be aware, Allot actually closed its hardware development team about nine or so months ago and the company is not developing really new special purpose hardware. So, that’s one step. The second step to work with NSV is, it’s a big world. NSV is a world that where, yes, everybody has to run on standardized hardware platforms, but all of the software components need to be interoperable and conformed to standards and so on. The standards are still evolving. Interoperability is something that is very partial at this stage. So we are following the evolution of the standards, we are doing work on this. We are talking to the various players to see how we get there, but I think there is a way to grow in that area not just for us, but for the industry in general.

Okay, thank you very much. And how the enterprise initiatives doing and have you guys seen any incremental interest in traffic management since Agee took over the FTC?

We’ve seen a lot of – I’d say a lot of articles and a lot of talks about reversing that new trial in the US and we are definitely in discussions with US service providers to see what they plan to do. Let’s remember that, there is a lot of talk about it, but the rules are not yet been changed. So, it’s not clear to me when that will happen. There is so much talk I am going to think that there is a good chance that it will happen, but when is unclear, and when it does, now, lot of the operators are thinking, okay, whatever they want to do, if they wanted to create fast lines, do they want to do a zero rate plan, it’s more a marketing issue and a business issue for the operators now that they expect to have the choice and now they are trying to figure out what they want to do and to what degree they want to do it. So it’s changing the discussion level. It’s not changing the business level, so it is not happening.

Okay. And what type of licenses are getting the most traction for you guys?

What do you mean by that?

Sorry, now that’s gone. I guess a different one is, when do you guys expect to term or subscriber base licenses to drive revenue and cash flow?

I am sorry, if you could give us a bit more clarity on the question, I am not sure I understood.

For your term and subscriber based licenses, when do you see that actually driving revenue for you guys?

We typically sell licenses, the business model that we have so far is that, we typically sell licenses that don’t have a term on them. They are perpetual. So, I am not sure what you mean by that. We do sell of course, what we sell license, there is additional revenue to be made from that customer on – of their maintenance, professional services, modifications, upgrades, additional – the customer requires additional licenses because he expands his network and so on. So, I am not sure - I hope that was helpful, but I am not sure.

Yes, I think that covers it. Thank you.

The next question is from George Iwanyc of Oppenheimer. Please go ahead.

Thank you for taking my questions. Can you just give us an update on the McAfee relationship? How is that contributing at this point and when do you expect it to become more meaningful?

Yes, we are working with McAfee on the development of the unified product. We expect that product’s third version to be released later this year and we are working with them on a series of deals that I would hope to close of course, sooner rather than later. I am optimistic on this, but as of now, there are no deal closed with McAfee. No deals on the unified products that are actually sold and closed to CSPs.

Is that something that you feel could contribute in the second half of the year or is it more of a 2018 type of opportunity?

That depends on really two factors. One is, whether or not we close any deal during 2017 and also whether or not the deal that was closed can end up contributing to revenues during 2017. And it’s hard for me to answer that. I can’t assure with you that, I think that it’s a good opportunity to discuss about what the value I see with McAfee is and why I think it’s an interesting opportunity for us. McAfee is of course a significantly larger company than Allot. Probably, ten times larger or so. And they have – they are a security company and they are – they have deals with various CSPs – with many CSPs around the world to sell through them, through the various service providers to sell their endpoint security solutions. However, we are seeing – as I talked about earlier in this call, they are seeing penetration rates like everybody else in that business in the single-digit range. While with network security what we are seeing for example with Vodafone, we are seeing that there is a possibility to reach penetration rates up 30% or more. So, I think from a business perspective, if we have the unified product or when we will have a unified product, the product – it will do two things. One is, we’ll have a better protection for the customer because it will have both network protection and the end-user device protection. From a business perspective, not only it’s a better offering, but the idea is that McAfee can take us to more service providers because of their size and relationship with the CSPs and because we are part of that solution is going to be a network-based offering, we expect we would hope at least that penetration rates are going to be much higher for the unified product and they are for the end solution only. That creates a win-win-win for the CSP for McAfee and for us. Now, that’s the premise on which all of us are working right now. And I hope that we will turn it into a reality sooner rather than later.

Okay. And you are looking at your second half visibility and we’ve talked about Telefonica a bit. Are there any other new CSPs that you are working on in the pipeline that will contribute this year? What type of visibilities you have there?

We are talking to CSPs really around the world. That’s our major customer base today and we are continuing to talk to many CSPs that are not our customers yet. Now, our pipeline is full and our forecast for the year is obviously a combination of what we see from existing customers and in some new deals that we believe we can win as well. I am not sure I am comfortable quantifying that other than repeating the guidance that we have given.

Okay. And just one last question. You talked about some of the adjustments that you are making with the sales organization. Are there any other internal adjustments that you are planning on putting in place over the next quarter or two to do with optimizing organizations?

Yes, so I think the one thing we’ve decided on what our strategy is, where we are going to focus and what we are going to focus less on the whole organization has to aligned to it, it’s not sales, it’s R&D, it’s product, it’s support, it’s the organization is one big team, right, so obviously, there will be additional adjustments and like I think I even mentioned it in the previous call. But I don’t remember, there are some procedures and processes within the company that I do not feel are effective enough and we are going to modify a few things like that to make sure that we work a lot more effectively.

Okay, I understand that’s kind of an ongoing process, but I think it’s the biggest work. Do you anticipate that to be a quarter or six months type of effort or could that take longer than the rest of this year?

No, I think it’s – we are starting to make changes. You see we are bringing new people on board. We have articulated where we are heading and why we are heading that way and we’ll start implementing these things and I think within the next six months, we will see – we will be implementing some things and they will come to bear later on.

Thank you.

The next question is from Marc Silk with Silk Investments. Please go ahead.

Hi guys. Thanks for taking my questions. So, I am encouraged that you are not going to try to use the money to make an acquisition or you are going to try to build this organically. So my first question is, because as this turnaround is taking time and your stock keeps trading closer and closer to cash, do you have a buyback in place? And if not, maybe it makes sense to revisit that, because again if you retire shares that are pretty cheap, long-term that might be the way to go.

As you know, I mean, we had such a plan last year in place, the plan has expired. Actually, right now, there was even a discussion on the Board and there was - the season right now not to have any additional buyback plan. And as of now, and again it’s not – it’s the Board.

Okay, and I see that you’ve talked about trying to go to a more recurring revenue model and I understand that takes time. Looking out two to three years, do you have a – maybe a point where you say, okay, you know what, we can see that, our goal is to have 30% recurring revenue, 50% do you have kind of an internal goal that you are trying to get to?

No, not at this point. But you are absolutely right, it does take time. It’s does takes time, not all operators will agree to go with that model, not in all circumstances, so I think we have to start offering it, we have to start talking to our customers on it which we have, by the way, already and we have to increase that and we will see how the market takes through and what we can achieve that way.

And my last question, we can talk about this online or you can answer it now, but as I am trying to look over your product offerings, say, I am a telco customer, what differentiates your product from your competitors?

Okay I think that the – once if personal, I am not familiar with anybody else that has a combination that we enabled, it be a telco in all of a swing. The ability to handle very, very large volumes of traffic with millions of – with many millions of subscribers provide a security configurable and on or off to an individual subscriber provide that security to his family as well in a different way, for example, you may want your kids not to go to certain sites, but not block your phone for that. And provide visibility to the individual subscriber on what he or she has been “save from” or protected against over a last week or month or whatever. I am not familiar with other products that have that combined capability and I think that that combined capability is what makes this an interesting business proposition, business value-added service for the CSPs.

Okay and on a personal note, so, Erez, what is your – what differentiates your management staff from the last management team? Meaning, kind of what have you seen that you say, you know what, this should have been done this way and it’s kind of the changes that you are making, that maybe we don’t see?

Look, I would really appreciate not to refer to the previous management team that I was not part of. I can tell you, what I think, I think that we need to have – we need to look at the markets and we need to see where we should be going to generate growth and then we need to do a lot of fact-based decisions and we need to work very hard and deliver results. That’s what I can tell you.

Okay. Thanks for taking my questions and good luck going forward.

Thank you very much.

There are no further questions at this time. Before I could turn to Erez to go ahead with his closing statement, I would like to remember that a replay of this call is scheduled to begin in two hours. In the US, please call 1-888-269-0005 in the UK please call 0-800-917-1246, in Israel, please call 03-925-5927, internationally, please call 972-3-925-5927. Mr. Antebi, would you like to make any closing statement?

On behalf of the management of Allot, I’d like to thank you for your interest and your support of our business and I look forward to talking to you in our next quarterly call. Thank you very much.

Thank you. This concludes Allot Technologies’ first quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect.