Welcome to Allot's Second 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 of GK Investor Relations. Mr. Green, would you like to begin, please.

Thank you, Operator. Welcome to all of you to Allot's second quarter 2020 conference call. I'd like to welcome all of you to the conference call, and thanks 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 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. I'd like to welcome all of you to our conference call. And thank you for joining us today. Our second quarter was another quarter of solid growth. Revenues grew 23% year-over-year for the second quarter and reached $32.8 million. This is our 10th straight quarter of double-digit revenue growth year-over-year, and I am very pleased with the results we achieved during the second quarter. I believe that shows we are on track and successfully executing on our plan. The number of opportunities, we see continues to grow. And 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 revenue growth rate in 2019. As we see our opportunities grow, we are continuing to increase our investment to capitalize on the significant number of opportunities that we see. Ziv will provide more details on our financials and forecast later. Like most everyone else, over the last five to six months, our customers, our employees and our way of working has been affected by COVID-19 epidemic. I would like to discuss how this is changing the way we operate, and then turn to see how we see our customers reacting. As the pandemic and restrictions started, we set for ourselves two primary goals. With equal importance that have remained our goals throughout. 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 achieves the goals we set for ourselves. Most of our employees worldwide are continuing to work from home. While the numbers change from country-to-country as rules and conditions differ. In Israel, for example, approximately 25% of employees work from the office and…

Thank you, Erez. Before I begin reviewing the financial results for the quarter, unless otherwise noted, I will refer entirely to the non-GAAP financial measure when discussing operationally results, which is what we use internally to judge the ongoing performance of our business. Non-GAAP financial measures differ in certain respects from the generally accepted accounting principles and exclude share-based compensation expenses, expenses related to M&A activities, amortization of certain intangible asset, exchange rate differences and changes in the sales tax. And now to the financial results. Revenues for the second quarter of 2020 were $32.8 million growing by 23% compared to those of the second quarter of 2019. I would like to give you some more color regarding the revenue breakdown and the diversification. The geographic breakdown for the second quarter was as follows. America was $2.8 million, or 9% of revenues; EMEA was $23.6 million or 72% of revenues; and Asia PAC with $6.4 million, or 19% of revenue. The breakdown between product and services in the second quarter of 2020 versus the comparable quarter last year was as follows. Product revenue was $22.3 million compared to $16.8 million last year. Professional Services revenues were $3.4 million compared to $2 million last year. And support and maintenance revenues were $7.1 million compared to $7.8 million last year. The portion of communication service providers revenues out of total revenue in the second quarter were 84% compared to 86% in the comparable quarter last year. I know that revenue breakdown may fluctuate from one quarter to another depending on the specific revenue to deals we recognize in a specific quarter. Our Top 10 end customer made up 71% of our revenue in the second quarter of 2020 at a similar level towards [Indiscernible] 0:23:06.7the second quarter last year. Gross margin for…

[Operator Instructions] First question is from Alex Henderson of Needham & Co. Alex, please go ahead.

Thank you very much. So I wanted to drill down a little bit on the OpEx line commentary, you suggesting that you're going to accelerate the R&D spend, was the most of that acceleration captured in the near $10 million number that you posted in 2Q? Or should I be expecting moderate acceleration again in the September and December quarters? And if that's the case, to get to profitability, should I be assuming fairly modest spending on sales marketing and G&A given the lack of travel? And then finally the kind of stringing those three thoughts together, as we look out into 2021, you commented that OpEx for R&D would be down year-over-year, would that imply that the offset would be a rebound in sales, marketing and T&E travel expenses that would offset that decline. So you're flattening out the overall spend sequentially. Can you talk a little bit about how those interact?

So, initially, our guidance will -- the OpEx this year would be between $95 million to $98 million. And now we are saying that it will be few million dollars more than this range. So you can expect that there will be increasing the OpEx in Q3 and Q4. But having said that, we still stand by the guidance that will be profitable in Q4. Regarding 2021, we didn't prepare the plan yet. So we cannot share with you the numbers of objects that we are expecting for 2021.

Yes, I just add to that, Alex, let me add a couple of comments. Okay. Yes, like Ziv said the OpEx will still grow a little bit in Q3 and Q4. But also look at the revenue line, right? Where, if you look at our first half revenues, and we're guiding to total year revenues of $135 million to $140 million means our revenues in the second half, we expect them to be higher than those are the first half. So that's why we believe when we run all the numbers, we believe that we will be profitable in the fourth quarter. And like Ziv said, I mentioned in my comment that what we're doing in increasing R&D this year in 2020 is we're using subcontractors on a temporary basis to accelerate some developments and close some gaps. And we expect those to go down next year. And hence we believe that year-over-year in 2021, we will have lower R&D expenses. As for the rest, we can't comment any further because we didn't really build yet the plan. The annual operating plan and budget for 2021. And we'll be giving guidance on that as usual beginning of February next year.

Okay, so one of the questions I get fairly frequently is, it was great that you guys came in with such a big backlog increase into 2020. I think the book-to-bill, if I remember correctly, was up 1.6. It was 1.6 in the prior year. And I think that was the second year in a row of building your backlog. Are you able to sustain that? Are you refilling the backlog pipeline as we go through the year or is part of the growth here coming from a work down of a building the pipeline, the backlog that will leave us with less visibility? Because obviously you had the year in hand in your backlog coming into this year. Can you talk a little bit about whether you're in fact able to deliver enough orders to hand them out that as opposed to could be working down backlog go over the course of the year?

Sure. I believe we even guided to that in the beginning of the year. We said that we're coming in with a very strong backlog and then booking off of 2019, like you've mentioned, but we also said that we expect that this year in 2020, our bookings will be lower than our revenues and we guided to a book-to-bill of under one for the year but still maintaining a higher booking level in 2020, versus the revenue level of 2019. And I still believe that's the case.

Right. And then one last question, and then I'll cede the floor. When you looked at the security transactions that you've done, I was actually expecting you would be lowering the MAR numbers because of the inability to get deals done in the COVID world that we find ourselves in. It sounds like what has happened is you've actually found it pretty normal to get deals done, but the execution is the primary issue, which means that the timeline from the time you close the deals to the time you revenue recognize them in the ramp of existing deals is a little slower. Is that the right spin to what you're seeing here that you're still able to get a pretty, pretty hefty attention around closing deals, but it's just an execution issue on ramping them?

First of all, definitely there is an execution issue on rapid ramping them which is pushing out a couple of the launches that we have already signed. And it's pushing out a couple of the launch dates where the execution actually begins and revenues start flowing. But it's also pushing out actual closures the deals themselves. Now, despite that, the pipeline is growing and we're seeing more interest and we're getting more and more operators involved. And given where we are and looking at what we've signed so far this year. And what we expect to sign in the coming months. I feel confident it was meeting or exceeding the $150 million MAR number this year -- $140. So the different -- I am sorry $140 million MAR a target for this year.

Next question is by Eric Martinuzzi of Lake Street. Eric, please go ahead.

Yes, Erez, I also wanted to visit the delayed sale cycles and the delayed launches. Are we talking about issues where the -- because of maybe facility closures, customers aren't available to maybe run proof-of-concepts or aren't available to install equipment? And that's what's delaying here or is it something beyond that?

That's part of it. But I think it all stems from the fact that the operators, they're not working from the offices and from their facilities as usual. So now they prioritize things a bit differently than they would have 6 or 12 months ago. So that means that and honestly what they prioritize as they should is being able to deliver the current services, the current products and so on into the market doing that as best they can. And then new things while they're definitely getting back to new projects, they're signing new deals, and getting new products out to their customers. They're getting a slightly lower priority when they have to prioritize. Some of that means, okay, when they send people to the labs, what are the projects that those people deal with? When they have people go and test things, what are the things that they test et cetera, etcetera. So I think a lot of it has to do with not being physically on site, but I wouldn't say that's 100% of the picture. However, the other side of it, I think what we saw in the first month like in March, April, we saw really them telling us, guys, we're focusing on what we've got now. And we'll deal with new stuff later. And now we're seeing much less of that now. They're trying to get back to business. They understand I think like most of us around the world understand that this COVID-19 situation in one flavor or another is here to stay for a long time. It's not going away in the next few weeks. And we have the best to do things and we have to do everything we used to do before in a different way. So deals are getting delayed a bit; implementation is getting delayed, but the interest is there. The necessity to do it is there, so I think we will be able to meet our targets and sign-up the deals, but it will just take us a bit longer than we expected.

Okay and then diving a layer deeper on your outlook for the third quarter. You did and you spoke in general that you do anticipate sequential growth in the third quarter versus the second quarter. Curious to know right now consensus is at $35.1 million, that would imply about a 7% sequential growth rate. Do you view that as realistic?

As you know, we don't give guidance on a quarterly basis, but it seems realistic.

I'm sorry, I didn't catch it.

We don't give guidance on a quarterly basis. But relating to your question, it seems realistic.

Okay, and then lastly on the bad debt issue or the doubtful account write-down, just curious to know do we have any other exposures like that in the accounts receivables there, either Latin America focused or system integrator focused or do you feel like this is the house cleanings done for the near-term?

Of course, we have accountancy with open accountancy, well, you see it in the balance sheet, but I think that this case was really exceptional. It was a combination of the specific company, the specific customer, the geography. And I don't think that we have such an exposure in that scale.

Next question is by Marc Silk of Silk Investments. Mark, please go ahead.

Thanks for taking my questions. In the two recurring security revenue expansion deals that were signed with existing customers, what percentage of the customers will offer the service initially? And then and what percentage are being offered the service now?

I'm not sure I have a percentage number. I would -- as a broad comment, I would say it's a difference of 10s of percent, but I don't know to give you a more accurate number.

Okay. In the past, you've talked, you've talked about having discussions with U.S. based telcos, have these discussions intensified after the effects of COVID-19?

They've actually continued, I think, as they were before, obviously, remotely and without the physical meetings and so on because operators in the U.S. don't meet people on the general sense. I'd say they don't meet people face-to-face but beyond that they've just continued as they were before along the same track and I'm quite positive about that.

Okay, so if there's a new a new President in the United States in the fall, and they once again change the net neutrality laws, how will this impact the DPI part of your business?

The DPI part of our business in the U.S. is very small. So that's on -- that's one, and number two. Even the fact that they opened-up or rescinded net neutrality and allowed operators to put in DPI. Most operators in the U.S. did not change their stance and then didn't really install anything as a result of that, at least nothing significant. So, I don't see that -- I don't see any measurable effect on our business if there's a change on the net neutrality rules.

That's what I thought I just figured we get it out there just in case, there's no sell after the election. Can you talk more about 4G? Like, for instance, like when did you start having discussions with 5G? When did you start having discussions with 5G providers because obviously that's such a buzzword now and people want companies that are exposed to 5G? So maybe if you can talk more of that those opportunities, I think that would be interesting.

Well, we started talking to two operators, I think last year sometime but these things are they accelerate overtime, right? You start discussions in a broad sense. And then the operators start thinking about it more so. So discussions intensify; you get more into technical issues, and more into details and then they issue some modify and you respond to that. And they issue an RFP and you respond to that, then they run proof-of-concepts and you participate in that. And all the time the interaction is accelerating and intensifying. So this is a long process. This is not an easy one. It doesn't have a very, very definitive start. And hopefully, we'll have a definitive and positive end. We're seeing -- we're talking to operators today really that are launching 5G networks, either have launched or are planning to launch in the U.S., in Europe, in APAC. There's really -- there are more and more operators are committing to 5G now. Each one has very different timelines. U.S. is pretty much ahead of the game here. And you're installing faster than most other countries. I think that recognizing our value in delivering user plan security to the network, and not necessarily the traditional type of traffic management. I think that's been an important factor in the evolution of our discussions with the various operators around the world of what is the value that we could bring them. Because 5G is simply, it's not 4G on steroids. It's something different. Yes, it's much faster than 4G. And in that sense, you, one may think, okay, it's like 4G was faster than 3G. So, now 5G is even faster than 4G. But that's only one element. It's the architecture of the network is driven dramatically changing in 5G. Where previously in…

It sounds like an exciting opportunity, and I can't wait to hear more about that. I want to go back to my first question on the recurring security revenue, the expansion. So when you said, again, you didn't really have the number, but you're thinking about a 10%. So what you find analysis is even more --?

Marc, I said 10 and 12.

Okay. So, am I right to assume that there could be even more opportunities for those two customers beyond this one extension?

I'm thinking, yes, there could be. There could be, I don't know if it'll take them or not, but there could be.

There are no further questions at this time, Mr. Antebi. Would you like to make your concluding statement?

Yes. Thank you. On behalf of the management of Allot, I would like to thank you for your interest and support. As we are currently not traveling, we will be holding virtual meetings with investors. So if you're interested, please be in touch with our investor relations team beyond that. Thank you very much for participating. And I look forward to talking to you in the next quarter. Thank you.

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