Welcome to Allot's First Quarter 2020 Results Conference Call. All participants are at present in listen-only mode. Following management's 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, www.allot.com. I would now like to hand over the call to Mr. Kenny Green. Mr. Green, would you like to begin, please.

Thank you, Operator. Welcome to all of you to Allot's first quarter 2020 conference call. I'd like to welcome all of you to the conference call, and I'd like to thank Allot's management for hosting this call. With us on the call today are Mr. Erez Antebi, President and CEO; and Mr. Ziv Leitman, CFO. Erez will summarize the key highlights, followed by Ziv 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 to point out that this conference call may contain projections or other forward-looking statements regarding future events or the 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 the impact due to the COVID-19 pandemic, changing market conditions, trends, reduced demands, and the competitive nature of the security 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 now like to hand the call over to Erez. Erez, please go ahead.

Thank you, Kenny. 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 highlights for the first quarter. Our first quarter was another quarter of solid growth. Revenues grew 16% year-over-year for the first quarter, and reached $29.3 million. Non-GAAP gross margin improved to approximately 75%, and our non-GAAP net loss shrunk to approximately $400,000, about 22% of our net loss in the first quarter of 2019. This is our ninth straight quarter of double-digit revenue growth year over year, and I am very pleased with the results we achieved during the first quarter. I believe it shows we are on track and successfully executing on our plan. The number of opportunities we see continues to grow. We continue to close new deals, win against competition, bring more business, and grow our revenues. We expect revenue growth in 2020 to accelerate compared to our growth rate in 2019. As we see opportunities grow we are continuing to increase our investments to capitalize on the significant number of opportunities that we see. Ziv will provide more details on our financial sand forecast later. The last couple of months have been challenging at the COVID-19 pandemic is changing both the way we operate and the way our customers operate. I would like to start and discuss what is happening inside Allot, and then turn to discuss what is happening with our customers and where we see the market going. As the pandemic and restrictions started, we set for ourselves two primary goals with equal importance. One, to maintain and safeguard the health of our employees and their families, and two, to continue to meet our commitments to our customers in a timely manner and achieve the goals…

Thank you, Erez. Before I begin reviewing financial results for this quarter, unless otherwise noted, I will [settle] [Ph] entirely to the non-GAAP financial measure when discussing operational results [technical difficulty] ongoing performance for non-GAAP financial measure differ in certain respect from the Generally Accepted Accounting Principles and exclude share-based compensation expenses, expenses related to M&A activity and motivation of certain intangible asset, exchange rate differences, and changes in [share tech] [Ph]. And now to the financial results, revenues for the first quarter of 2020 were $29.3 million, growing by 16% compared to those of the first quarter of 2019. Generally speaking, the coronavirus pandemic didn't have a significant effect on the first quarter revenues. However, as we explained in the press release, we issued three weeks ago during the first quarter of 2020, some deals which were expected to book were delayed as the consequences of the COVID-19 pandemic and are now expected to close during the second quarter. I would like to give you more color regarding the revenue breakdown and diversification. The geographic breakdown for the first quarter was as follows. Americas was $1.5 million or 5% of revenues, EMEA was $23.1 million or 79% of revenues and Asia-Pac was $4.7 million or 16% of revenues. The breakdown between products and services in the first quarter of 2020 versus the comparable quarter last year was as follows. Product revenues were $18.9 million compared to $16 million last year. Professional Services revenues were $2.6 million compared to $0.8 million last year. Support and maintenance revenues were $7.8 million compared to $8.5 million last year. The portion of communication service provider revenues out of the total revenues in the first quarter were 87% compared to 83% in the comparable quarter last year. I know the revenue breakdown may fluctuate…

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question is from Eric Martinuzzi of Lake Street. Eric, please go ahead.

Thank you. I'd like to get a little bit more detail on the linearity over the past few months. I understand the quarter was, as you anticipated with the April 16 news, and you've reiterated your commitment to the year, but just how things progress in March, and April, and to this point in May, if we're seeing where things turned south and then maybe where things turned north.

Look, it's -- I'll try to give you that level of granularity. Typically when we book orders -- or I'd say most of the orders that we book in a given quarter are booked in the last month of the quarter, that's sort of typical for our business. That was no different in quarter 1. I don't expect it to be any different in the second quarter. So if you ask me how I look at the new business coming in and what does it look like in April, then I go back to look at the pipeline and what the projections are. And like I said, generally we think we're on track, and that's why we reiterated the yearly guidance.

You talked about not seeing as much of a contribution from the SECaaS deals that were signed in the first quarter. Is there any chance that that comes back in maybe your -- is the reason -- let me rephrase the question. Is that due to consumer demand or is that due to your partners and their focus on that part of their business? What's behind that, because you also talked about an increased demand for or a heightened level of cybersecurity threats as a result of COVID?

I think it's a couple of things, okay, and it's a bit early to dissect the exact reasons, but I think deals that -- if I look at services that were already launched, like I said, the number of customers is continuing to grow, but during lockdown period it grew less than before. So I expect that to change as situations ease up and people start going back to some kind of normality. Part of that is due to the operators focusing on other things, and part of that may be due to consumers being, at this point in time, focusing on other stuff as well. Deals that we signed towards the end of '19 and that are expected to launch this year are getting a bit delayed. So the revenues that we thought we'd see from them this year will probably be a bit less. So overall, I think we'll see a bit less of the recurring revenues that we expected this year, but overall we see the guidance for the year stands as it is.

Yes, and that's what I wanted to finish my questions with. I was surprised at the robustness of the outlook, your business is still, I think, about three-quarters on the visibility side and about a quarter on the security side. What is behind that, because we've obviously got a robust second-half built in here to get to the $135 million to $140 million? Is this more on maybe perpetual license side of the security business, is this more increased demand on DPI licensing maybe where those free licenses or complimentary licenses turn into revenue events? What's driving that second-half robust outlook?

Hi, Eric, this is Ziv. As you will recall, we started the year with a backlog of $138 million. And we said that at least 70% of the backlog will be recognized in 2020. So, most of the revenues in 2020 will not come from new orders, and we feel comfortable that we will be able to deliver those projects in the coming quarters.

Got you. Okay, very helpful. Thanks -- go ahead.

And as we said, most of the revenues in 2020 will come from visibility and control, and this kind of business, rather than from security since the growth engine of the company is the security coming from the SECaaS deals, but we will see those kinds of revenues only in the coming year, and not in 2020, when the SECaaS deals will be just a few millions of dollars, as explained before.

Got it. Thanks and congratulations on the robust outlook relative to other datacenter and communication equipment companies I follow.

Thank you.

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

Thanks. I wanted to just dive into the mix in orders that you expect over the course of 2020, obviously when you do OpEx deals that doesn't really show up in book-to-bill or anything of that sort, but you entered the year with an exceptional backlog, and I was wondering if you expect to be able to sustain that backlog even as your mix shifts to more contracts coming in on an OpEx relation, or whether we should be anticipating the backlog will gradually diminish as the visibility shifts from the traditional business to more of the OpEx-related security type business. So it's more of a conceptual thought than a request for guidance.

So, Alex, as you will recall, we said that our guidance, we didn't give a specific number, but we said that the booking in 2020, we expect them to be higher than the 2019 revenues. However, they will be lower than the expected 2020 revenues. It will be in this range. And one of the explanations is that we don't put focus anymore no security CapEx deal but on OpEx deals. And as Erez explained, we will see it in the booking. We will not see it in the backlog, but we will see it in the booking and in the revenue only in the coming year, and this is the reason why we are using the MAR as a metric to follow internally and externally our progress in this business, and right now we feel comfortable with the guidance of additional $140 million of MAR. And again, this $140 million MAR will not generate revenues in 2020, but will generate revenue in the coming years.

Yes, totally understand. Just wanted to make sure everybody understood the mechanics behind it. Going back to the gross margin, obviously a very nice software mix in the quarter to get that 74.8% gross margin, is it reasonable to think that the remaining three quarters should be modeled pretty consistent to the 2019 average, which was just at 70%?

Yes, as you will recall, that's what I said in my comments before, that the gross margin depends on the product mix, on the customer mix, and we think that for the rest of the year the gross margin will be the same as was in previous years, which mean around 70%, but there might be fluctuation from one quarter to another.

One more question, if I could. The exchange rate, the shekel really fell out of bed when COVID started happening. It then promptly rebounded most of that decline. Were you able to take advantage of that decline? I mean it sounds like you stepped up given your comments about the balance sheet on the FX expenses, so can you give us some sense of what you did during that window?

Usually we do some hedging activity for the coming four quarters. So, it's not 100% of our operation, but once you have change in the exchange rates for one month as it was lately, so you can hardly benefit from it. Because part of your operation is already covered, and it goes both ways, if it's going up or going down. So I wouldn't say that there is a significant change due to the exchange rate fluctuation.

Okay, so, no change because despite that decline, okay. One more question if I could the enterprise business the Packeteer stuff, how do you see that feathering in? Do you -- I mean, obviously that's -- it takes a little while for those type of programs to kick in. It was just announced recently. Is that more of a back half dynamic or do you expect it to be more of a ‘21 dynamic? How does the timeline look on realization there?

Well, honestly, we're still looking at it and trying to figure out how it will play out. Look, we've had approaches from many dozens of value-added resellers of Packeteer that are talking to us and discussing now how they can work with us, what are their end-users needs, what type of products, when do they need them? And so on and so forth. So, we think there is a very nice potential in that deal for us, but it's -- but I don't see anything significant happening in the next few months. It takes some time to -- think of the end user or a small business or a large business that has a Packeteer product and this requires a swap. These kinds of things take time. So I don't see anything significant happening in the next few months, but we'll see in the next few months how the dynamics of this will play out, and we'll understand a lot better who are really these end customers. What are their demands, what is their timeline, et cetera? We're learning that as we go right now.

Maybe too worthwhile emphasizing this, we didn't buy the business of Packeteer. A –Erez Antebi: Yes.

PacketShaper, we didn't buy the business, we don't support this product. Broadcom announced that its end of life, and they don't sell any more support and maintenance contract for this product. So the current customers, we expect them to move to our products, but it's a kind of a forklift upgrade. A –Erez Antebi: And the timing of that will be determined by each individual customer. So, since we're not familiar with these customers and we're only learning them now, we don't know yet what that will be.

Certainly understand. Thanks.

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

Thanks for taking my questions. With the shift of working at home, probably being a way of life for a percentage of the workforce worldwide going forward at the telcos started connecting the dots to understand that a service like yours is a necessity based on some of your recent conversations with potential new customers?

Look, in our discussions with operators there we are seeing increased awareness of the need to provide secure broadband connections, and we're even seeing -- so the answer is some of them. Yes. I hope there will be more of those that will like you say, connect the dots in the near future.

Okay. And then, the follow-on question is based also on the stay at home work or the more -- the stay at home work is going to more frequently access their employers’ cloud or server. Has there been any increased interest in your DPI products by the enterprise?

Enterprise, like I discussed previously, enterprise is a bit of a mixed bag. It's not one coherent, I would say, customer base. The larger enterprises like the ones that really look like CSPs, government -- local governments things like that with many, many employees in large branches et cetera, they are continuing more or less I would -- their level of interest is more or less like it was before COVID-19 hit. The smaller businesses are more hesitant. The smaller businesses are delaying projects. They want to conserve cash. They want to conserve expenses. And they are delaying projects, and then comes this new inflow of potential customers from the Broadcom deal which is something we didn't have before. So, it's sort of a mix -- I would say it's a mix bag. Overall, I think in the long term, the business should grow, but I think it's a bit too early for me to analyze, okay, how much is doing what and which of the subsectors.

That sounds good. I guess I was premature on the not pushing you on the share buyback because it looks like you could have retired some stock in the 7th in March, but that's okay. Anyways, good luck going forward, and thanks for taking my questions.

Thank you.

[Operator Instructions] There are no further questions at this time. Mr. Antebi, would you like to make your concluding statement? Mr. Antebi, there is a further question. The next question is from Shawn Boyd from Next Mark Capital. Please go ahead.

Thank you, gentlemen. Just one quick follow-up and that is on the deferred revenue. We are seeing some great growth there, and I wanted to make sure that we are all clear on exactly how that -- what's driving that. That would be entirely on the Allot Smart business as opposed to the secured revenues in any of those beginning revenue starting to ramp. Is that correct?

This is correct.

Okay. Okay, thank you. That's it from me.

Mr. Antebi, would you like to make your concluding statement?

Yes. Thank you, Operator. So on behalf of myself and the management of Allot, I want to thank you all for your interest and long-term support of our business. As we are currently not traveling, we will be happy to hold virtual meetings with investors. If you would like us to do that, please be in touch with our Investor Relations team. I look forward to talking to you in the next quarter and hopefully meeting some of you personally as travel restrictions will be lifted hopefully. Thank you again and have a good day.

Thank you. This concludes the Allot first quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.