Ladies and gentlemen, thank you for standing by. Welcome to Allot's Fourth Quarter and Full-Year 2018 Results Conference Call. All participants are at present in a listen only mode. Following managements' formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded. You should have all received by now 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 News section of the company's Web site at www.allot.com. I would now like to hand over the call to Mr. Gavriel Frohwein of GK Investor Relations. Mr. Frohwein, would you like to begin, please?

Thank you, operator. Welcome to Allot's Fourth Quarter and Full-Year 2018 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 of the quarter. We will then open the call for the question-and-answer session. Before we start, I'd like point out that this conference call may contain projections or forward-looking statements regarding future events or future performance of the company. These statements are only predictions and Allot cannot 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 security system industry, as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission. And with that, I 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. I would like to start with some key financial parameters for this quarter and full year 2018. The fourth quarter was another quarter of solid growth. Our revenues grew 16% year-over-year for the fourth quarter and 17% year-over-year for the whole of 2018. Our non-GAAP gross margins improved to 70% for the fourth quarter and 71% for the full-year 2018. Our operational loss in the fourth quarter 2018 was significantly improved over that in the fourth quarter of 2017. Our book-to-bill ratio was larger than one for the fourth quarter and for the full year 2018 as well. Our backlog increased during 2018 by approximately $13 million, bringing our 2018 year-end backlog to $69 million. I am very satisfied with the results we achieved in 2018, and I think the main message is that we are on track with our plan. We see a growing number of opportunities. We are continuing to win deals and grow our revenues. And we expect this trend to continue in 2019. While Alberto will provide more details on our financials later, I did want to start with our financial performance, because it shows that we are successfully continuing to execute on our plan. I would like to turn now to a discussion on our business, starting with the visibility and control domain. We are seeing an active market here with the growing pipeline of opportunities. Overall, we see similar use cases to what we saw in the previous quarters; smart traffic steering and optimization to effectively handle congestion and reduce connectivity costs; quality of experience where Communication Service Providers or CSPs can understand what the real user experience on their network is even…

Thank you very much, Erez. Before I begin reviewing the financial results for this quarter and for the year, I would like to inform everyone that on this call, unless otherwise noted, I will refer entirely to the non-GAAP financial measure when discussing operational results, which is what we use internally to adjust the performance of our business. Non-GAAP financial measure defer in certain respect from the Generally Accepted Accounting Principles and exclude share-based compensation expenses, revenue adjustments due to acquisitions, restructuring expenses, expenses related to M&A activity, amortization of certain intangible assets, change in tax related items and changes in deferred tax. Now with regard to the financial results. Revenue for the fourth quarter of 2018 were $26.9 million, growing by 16% compared with those of the fourth quarter of 2017. Revenue for 2018 were $95.8 million, growing 17% compared to 2017. Our backlog increased during 2018 by approximately $13 million, bringing our 2018 year-end backlog to $69 million. Since we expect to recognize between 70% to 80% of our backlog as revenue in 2019, this provide us good visibility into 2019 revenues. I would like to give you now some details regarding the revenue breakdown and diversification. The geographic breakdown of revenues for the fourth quarter of 2018 was as follows; Americas with $5.5 million or 21% of revenues; EMEA with $15.4 million or 57% of revenues; and Asia-Pacific with $6 million or 22% of revenue. The geographic breakdown of revenues for 2018 was as follows; America with $14.4 million or 15% of revenue; EMEA with $59.5 million or 62% of revenue; and Asia-Pacific with $21.9 million or 23% of revenues. Product revenues for the quarter accounted to $16.6 million compared to $13.3 million in the fourth quarter of 2017; professional and services revenue were $1.6 million compared…

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session [Operator Instructions]. The first question is from Georgia Iwanyc of Oppenheimer & Co. Please go ahead.

Erez, can you give us may be a little bit more color about how you feel the year will progress. I know you expect the second half to be stronger than the first. Is it a linear progression and a big uptick at the end or could there be some lumpiness as the deal flow flows through the year?

I don't know. I would expect it to work to grow basically, and that's why we said second half stronger than the first half. But based on individual deals and the timing of recognizing the revenue, and the exact timing of when the deals come in and so on, it could lumpy. But I don’t have to say more than that.

And can you give us a sense of how many tier one new carriers are out there that you're working on, how many are second tier and third tier that are past followers in this market?

I don’t have a number off the top of my head. But I would say that we were actively engaged probably with at least 10 or 15 tier one operators -- new ones that we're talking to. But I don’t have an exact number off the top of my head.

And shifting a little bit. You mentioned M&A is something that you could be looking at right now. What type of technologies or companies do you feel would be a good fit? And are you looking at primarily technology tuck-in or are you looking at companies that maybe could provide some market share at the same time?

I think that there are several criterias here we are looking as. We will be looking at our technology tuck-ins similar to what we've done with Netonomy, which is an excellent example. We expanded the Allot secure platform and by acquiring Netonomy, we allowed ourselves or we gave ourselves access to a security product for the home router market and in general to improve our securities capability for fixed broadband networks. So we will be looking at other companies that can help augment as increase the type of security offerings that we are able to enable operators to take to the mass-market. And we may also look for companies that have provide us a faster time to market in specific markets that we want to grow in, such as the United States, for example. However, I will repeat again that we are very conscious of our balance sheet and the amount of cash in our balance sheet. And it's important for us to maintain a strong cash position on the balance sheet, because we are selling to tier one operators, and it's important for us to be able to show them that we have a strong balance sheet and the process of making that sale and closing the deal.

So we intend to keep it that way as well.

And just a couple of final questions for you, Alberto. When you look at the full year guidance that you gave for OpEx? Can you give us a sense of where you expect the bulk of the increase is to come from, or is it balanced against or across R&D and the sales and marketing? Or will it be heavier in one of the other areas?

As I said, our guidelines for 2019 are that operating expenses will grow up to $79 million to $81 million. We want to continue to invest in those area, which continue to our growth. Mainly as we mentioned product wise, we will increase our investment in R&D. Sales and marketing in those areas in which we believe that we can increase our inflation in that market and customer success in order to be sure to deliver all the deals that we are able to achieve.

And my last question on the gross margin. Can you just tell us how mix impacts the guidance if you have a heavier security if you hit the MAR number? How does that change your full-year gross margin outlook?

So first of all, it's difficult to say at that point. But the assumption right now is that the gross margin for security deal will be very similar to that of the PIs. So a change in mix at this point in time would not impact significantly our gross margin. And for 2019 with the new guidelines, our gross margins will approximately 70%.

I will add perhaps to what Alberto said and emphasize again what we said. While we sign these security OpEx deals, it takes some time to ramp-up. Even a deal we sign today it will hopefully be launched quickly that is say in the summer. And then customers will start ramping-up throughout the second half of the year. So security OpEx deals that we signed in 2019 will not have or at least expected to have a very significant impact on the revenues and bookings for 2019. It will have a much more, so I expect them to have a much more significant impact in 2020 and beyond of course.

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

This is Roger Boyd on for Alex Henderson. I know you mentioned you're continuing to take share in the DPI space. Can you have any more color on environment there, or what you're seeing in terms of channel dynamics?

In terms of -- I can't hear your last few words…

In terms of channel dynamics within the DPI space?

If I look at the DPI market, in general, I would say that we're seeing the large network equipment provider, such as Ericsson, Huawei, Samsung and companies like that that are providing core networks. They also have a DPI component in their -- as part of their offering. They typically when they can, they bundle that with the rest of the core network product that they provide to operators. And I would say as a very, very broad sentence, I would say that operators that are willing to suffice with a more simplistic and less capable type of DPI product will intend to buy from the mix of bundled products. Those operators that see the value in having a higher end and more sophisticated and higher capability DPI product will typically buy from either Allot or our direct competition, which today quite honestly is primarily Sandvine. Now I think that what we're seeing is that we're seeing companies that are either do not have DPI and are looking to add that, we have several instances where operators have been working with our DPI for years and are now looking to add that capability to their portfolio. So they look at what their options are. And we see operators that have run with a certain platform for a number of years, and are either not so content with maybe the product they've brought, the service they have or even for corporate governance reason need to go and issue a bid -- a new bid to check what's out in the market after number of years. And then we have -- then they in either of these cases, they will put out some kind of RFP or RFI, something to look at the opportunity and that creates an opportunity for us. I'm glad to say that we are winning many deals and they were doing this above our market share, and that’s the reason for us to grow in this market.

And then a quick housekeeping item. Do you have the tax rate in mind we should be using for '19?

Can you repeat your question?

I'm wondering if you have a tax rate in mind that we should be using for model in 2019.

I think that from a cost point of view, I think that modeling in 2019. You should use the 2018 figure and then factor it according to the increase in revenue, that's the way that I would do that.

The next question is from Jeff Bernstein of Cowen. Please go ahead.

You mentioned the opportunity in NFV, and congratulations on winning your first deal there. Any thoughts about how many vendors a carrier might have? I think there is a second source some of the hardware-based DPI type equipment. But in an NFV situation, is it going to be only one vendor? And also how standardized do you think these implications are going to be, or is there going to be learning that have to get done inside of each guys' NFV environment?

The big promise of NFV at least if you ask to the people who invented it and are pushing it hard is that an operator can have a uniform hardware platform. Many, many servers that are exactly identical and look the same and so on and then bring in software from multiple vendors, whether it's different vendor for as packet core different vendor for DPI, different vendor for security, a different vendor for DDoS whatever. And there is the central orchestrator that orchestrates this whole thing and brings all the software together and make sure that each piece of software regardless from which vendor it comes can work together and it gets the resources it needs at any particular time. So the big promise of NFV that the operator will be able to bring in software solution from multiple vendors not from one. And will be able to change out a solution if he doesn't like it from the vendor A to vendor B relatively easily, because there's no hardware change and everything should be running on the same machine. So the promise is actually and the direction for operators is to have multiple vendors, and have best-of-breed for each and every function. Now, that's with CRE and that's where the technology is supposed to take us. As was I think with a similar other major technology changes to getting there will be a little bit more complicated. It's not entirely standardized. For example you have two main NFV systems. One is based on VMware. One is based on Open Stack. They are not the same. They're even different versions between these various alternatives. I think there are multiple different orchestrators out there in the market today. And to the best of my knowledge, there is no clear market leader in orchestration yet. So I see many operators talking about or still considering which orchestrator they want to use. And so there may be a phase where there will be less than smaller number of vendors or software vendors participating in the NFV implementation of a specific operator. And there definitely will be integration issues, compatibility issues and so on. And I expect that it's going to be a learning curve as these networks get rolled out, software packages will become more -- not just more integrated, but will have more standardized interface that everything around it will converge to a more standardized interface operating system. And so this will take some time.

So it sounds like there is a significant competitive advantage to being an early mover here and making this stuff work in the real world for carriers. And if your competitor is a year or two or several behind, it's going to be much more difficult for them to then come in?

Yes, there's definitely a competitive advantage to being early in the market with this, and we are I think early in the market with this.

The next question is from Marc Silk of Silk Investment. Please go ahead.

So it seems like some of your DPI customers are potential security customers and vice versa. So could you enlighten us about maybe your cross selling strategy and opportunities?

Yes, many of the -- can buy either or both, and look it's -- even though it's and I'll rephrase it a bit, even though it's the same operator, the buying persona within the operator is different. When we sell DPI solution to an operator, we will typically sell it to the network engineering department and the CTO, the guys who are responsible for the network itself. When we sell a security solution, the value of that security solution is enhancing the brand of the operator to becoming a secure provider of services, bringing in new reps and things like that. So the buying persona typically is more is a CMO, the marketing guys, the value added service guy, the guys who own the P&L. So it's different buying personas within the same operator. However, there is no doubt that if we are already in an operator and we're engaged with part of the organization, say we sold in the DPI system and we're engaged with the network guys, it is easier for us to get them to introduce us through the marketing people and start selling the value of security. And we also have a good reputation in that customer, they are using us, they trust us, the network guys are comfortable with us. So it's easier for us to sell into these customers. Same thing in reverse where if we are -- if we sell into a customer, our security system and the network guys already accept our software and sometimes appliance to put in line into their system, it is then an up-sell opportunity to go through them and say okay, we're already inside the system, here you take another software package and other license and you have additional capabilities from the DPI side. So yes, it's definitely on security, but it's very important for me to note that there are clear examples where we don't have both. So we, for example even in Telefonica. Telefonica has DPI from Sandvine and we're providing network security. So it gives us an opportunity, it's an opportunity that we tried hard to leverage on, but it's not a necessity to have both.

I appreciate that insight. And so I agree with you. It is important to have a healthy balance sheet when you go into each telcos. And I'm just encouraged by your continued success. So, good luck going forward.

We have a follow-up question from Jeff Bernstein. Please go ahead.

You talked about being involved in some bidding opportunities on 5G. And can you just flush out a little bit more of what the requirements are [Technical Difficulty] that people are look at for 5G networks?

Well, fundamentally it's very similar to what they're looking at 4G network. They want to understand whether the applications they're running in the network, we're talking about DPI. So they want to understand what the applications are running on the network, how much bandwidth from whom, which customers et cetera. And to the extent they can, they want to be able to exert some control on it to handle congestion better, to eliminate perhaps to somebody who reached that individual's program max to limit perhaps the speed of access and things like that, that are typical for DPI implementation. Now, in 5G it's the same but it's actually even enhanced. Because what happens in 5G is that the 5G philosophy of the network is that the operator will be able to provide end-to-end services and control the quality of delivery of each and every service from end-to-end throughout the whole network. In that sense it's very unlike 3G or 4G network where in a 3G or 4G network if you have any certain site that is congested, a certain cell tower, all the applications of software. They all get slowed down. In a 5G network, at least in CRE, we'll see how this rolls out as really about 5G networks and that's what we deploy. But the way their design is that you will -- the operator will decide, for example, on a certain quality that he wants to deliver, voice traffic and the certain quality that he wants to deliver usual traffic just to name a few mundane examples. And that will be the service level that will be guaranteed in the network from anywhere from the endpoint, to the radio, to the co-ordinate, to transport, the core network, the whole thing, and to control everything in the network to enable that quality of experience to be maintained throughout. Now if DPI going to have to be part of what will enable that, and this means same functionality but some technological adaptations to working in the 5G network, such as we'll have to package our software in what is called micro services, we'll have to have a tighter integration into the packet core that the operators are providing, so same functionality, a slightly different implementation, better integration with the other vendors.

And then lastly on the security side, it looks like in the U.S. the cable companies are using a company called Cujo or a couple of them at least. It seems to be more of a local U.S. type company closely related to the cable industry or whatever. Do you see other small guys out there as competition or what is a competitive front look like?

On the whole router security side, I would say that we're seeing really two competitors. To us, one is Cujo that you mentioned and the other one is MacAfee. So when some dealers were co-operating with MacAfee where we were combining our network security with their endpoint and another dealers we're competing with them where they provide their home router security software and we provide ours.

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

Yes, I'd just like to thank everybody on behalf of myself and the management of Allot. Thank you for your interest and your support of our business. And I look forward to talking to you in the next quarter. Thank you very much.

This concludes the Allot fourth quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.