Welcome to Allot's third quarter 2018 conference call. I would 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 may contain projections and 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 changing market trends, reduced demand and the competitive nature of the security systems industry as well as other risks identified in the documents filed with the Securities and Exchange Commission. And with that, I would like to now hand over the call to Erez. Erez, please go ahead.

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. Our third quarter was another quarter of growth. Revenues grew to $24.2 million, a 16% increase compared to the third quarter of 2017. Our non-GAAP gross margins improved to 71% compared to 68% in the third quarter of 2017. Our R&D expenses grew this quarter. We see significant opportunities in the market and we are investing in our products to take advantage of these opportunities and generate substantial growth -- excuse me, sustainable growth. I would note that part of the growth and R&D is a result of staffing up in our new low-cost center in Belarus, which will enable us in 2019 and beyond to increase product development capabilities at a lower cost. Our book-to-bill was less than 1 this quarter, mainly due to some delays in closing orders due to the summer months. However, our book-to-bill for the first nine months of the year is above 1, and we expect our book-to-bill for the year to be above 1 as well. The main message here is that we are on track with our plan. We see a growing number of opportunities. We're continuing to win new deals and grow our revenues, and we expect this trend to continue. 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 a growing pipeline of opportunities. We continue to see the…

Before I begin reviewing the financial results for this quarter, 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 judge the performance of our business. Non-GAAP financial measure differ in certain respect from the Generally Accepted Accounting Principles and exclude share-based compensation expenses, revenue adjustment due to acquisitions, restructuring expenses, expenses related to M&A activities, amortization of certain intangible asset, change in tax related items and change in deferred tax, with regards to the financial results. Revenues for the third quarter of 2018 were $24.2 million, growing by 16% compared with those of the third quarter of last year. In the first nine months of 2018, revenue was $69.0 million compared to $58.8 million in the same period in 2017, an increase of 17%. Now, I would like to give some details regarding the revenue breakdown and diversification. The geographic breakdown of revenues for the third quarter of 2018 was as follows. Americas with $2.2 million or 9% of revenues, EMEA with $16 million or 66% of revenues, and Asia-Pacific with $6 million or 25% of revenues. Product revenues for the quarter accounted for 57%, while service, maintenance, and professional services revenue were 43%. This is compared to a 64% and 36% split in the third quarter of last year. Communication service providers or CSPs revenue was 83% in the third quarter compared to 84%, as reported in the third quarter last year. I note that revenue breakdown, whether geographically or by product segment or other, may fluctuate from quarter-to-quarter depending on the specific revenue and deals recognized in the specific quarter. In terms of customer concentration, we see increased diversification compared with last year. Our…

[Operator Instructions] The first question is from Alex Henderson of Needham & Company. Please go ahead.

I apologize, but I didn't catch some numbers you throughout. I think it was 69 million in the quarter, up 17%. What was that referring to?

That was the year-over-year growth in revenue, I think, the 9 months, yes, year-to-date.

Is that product revenues?

No, it's total revenue.

The second question I had was just book keeping question. Can you tell us what the fully diluted share count would be if you were profitable currently for evaluation purposes?

It's approximately $33.6 million, but I will get back to you with the exact numbers. It slightly above the number that share we have right now, I mean, there's no big difference between the current status and the status in which we are fully profitable.

I thought it was more like 36., is that the right ballpark?

Let me back -- get back to you with that number.

And then you made a comment, you're still getting hurt by the shekel, shekel the 52 weeks low, obviously, that's a functioning of your hedging policies. Can you remind us, what your hedging policies are?

Yes, we're hedging on our declining scale actually four quarters ahead, while the first quarter is, of course, the quarter in which we hedge most of our expense and that is declining over the four different quarters. Overall, on an average, I would say that we're hedging approximately 50% of our revenue in the next 12 months.

And if you were to hold the exchange rates steady at these current levels, that would be a significant positive to your cost structure, would it not?

Yes, that is correct, but you have to take into consideration the difference in interest rates, which right now, if I want to add -- if I want to buy a forward, I will have to provide the difference -- I would have to pay the difference interest rate and which make almost impossible to keep the current rate.

And so in terms of the tax line as we go out in the 2019. Should we be assuming a little bit of an increase in the tax rate over the -- tax paid over the year? Obviously, you're -- most people are not forecasting it to be profitable, so I assume that's local outside of Israel?

No, I mean, you have to understand that this tax line is mainly withholding tax that we're paying due to the fact that we're working in country, which with all tax, is not the income tax since -- I mean we are losing money. And this number may fluctuate, depending on the deal that are recognized in a specific quarter. On an average, I would assume that the level will remain the same, but again, it's very much depending on the specific deals recognized.

Just wanted to go back to the comment in the press release about 2x the orders. I assume that is only relating to the DPI segment of your business and not including the security side, is that an accurate statement?

First of all, it's not 2x of the total order, the saving was 2x on the new -- on the orders that we have from new customers, that was the comparison that was made. So, we're getting a lot more orders from new customers and yes, it's primarily on the DPI.

So it's referring to both DPI and to the security piece then?

Yes, primarily on the DPI.

And that's against the -- so that's not against your total orders, would not be indicative of a doubling of revenues, but rather, just sort of - what is the base of that on? Can you give us a sense of -- is that meaningful portion of your total bookings?

It's a significant portion. And again, it's not indicative of doubling revenues or anything like that. And we don't mean to incur anything like that. It's -- it merely says that, we're bringing on board many more new customers with significant deals than we were in the past. And we're building a stronger base going forward. That was the -- first of all, that’s the fact and that was the intent of the statement.

The next question is from Georgia Iwanyc of Oppenheimer & Co. Please go ahead.

Erez, if I remember correctly, I think you had previously talked about maybe four to five new carrier deals in 2019. Is the pipeline still at that type of level? Or is it starting to add more breadth and more regions?

I think that I was asked if that's a reasonable number and I said that is reasonable. But I think we're definitely talking to more than that. Our pipeline is much larger than four or five operators, I would expect something in that vicinity to actually close in 2019.

And when you look at the visibility, it seems like you have a lot of confidence in that double-digit growth. How much is coming from new security business? And how much is little bit stronger visibility into the visibility area?

I think the visibility from a visibility perspective, we're seeing a lot more -- I feel more confident in the numbers and the actual numbers for growth in the visibility and [indiscernible] because we see the funding of deals, and when we book a deal there, we book a deal in a certain time and within, I don't know, three, six, nine months, whatever, we recognize revenue depending on the deal. In the security area, where we're moving to an OpEx based deals, that even though, I see a very healthy funnel and I’m very confident that we’ll start closing deals, we will take bookings and incur revenues as subscribers actually sign up to the service and start paying, and that's a gradual increase over time. So I think the -- when we look at the forecast and say, okay, pretty confident of double-digit growth into 2019. it's a primarily based on the DPI, even though, I see strong foundation for security OpEx deals and security area as well.

And this might be a question for you Alberto, maybe two ways of asking it. One, when you're look at your OpEx expectations for next year, are you expecting another quarter or two of building out Belarus facility? And then kind of stabilizing at that level? And then, kind of looking at the sales and marketing, you added a lot of headcount there, are you expecting to add more? And what type of productivity levels are you seeing from the new hires over the last several quarters?

So, in terms of operating expenses for 2019, we do expect those to be higher than what was on a yearly basis to what was in 2018. We are currently working on the detail of our annual operating plan, and I'm sure that during next quarter, we will be able to talk a little bit about that. We did increase a little bit, as you said, both R&D and sales and marketing, especially in R&D. As we mentioned before, we open our low-cost center in East Europe, so there is additional headcount and we are investing in the product and from a sales point of view, we are actually cover more and more territory, so we did increase. We do believe that again, in 2019, operating expenses will grow a little bit, at this point of time, I don't have a number to thrown on the table.

And a last question for me, just on the gross margin side. Are we kind of looking at a stable number at this 70%, 71% mix that you have right now?

Look, as I said, I mean, gross margin may vary significantly from quarter-to-quarter, depending on the deal that are recognized in the specific quarter. But overall, on a yearly basis, I do believe that 70% should represent the average number. Regarding next quarter, I do believe that the numbers should be between 69% to 70%, having a total of 2018 around 70% again.

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

This maybe longer term, but just based on some of the positive commentary you made. As you think about the potential per subscriber base profit sharing or revenue sharing, what's the right way to think about what that target should be or mix that you're thinking about? Or is it even too early to be thinking about that on a 12- to 24-month timeframe?

I'm not sure, I fully understood the question.

Meaning not all of your deals are going to be subscriber, but some of them are. And what you think the business mix looks like when you've got a few good wins under your belt?

Well, I would -- it's a bit early to say because after we've got five or six deals, I can be more confident on that mix. I would say that as I would expect that to have long term more than half our deals on the security OpEx basis. And to -- just to qualify that, that's security OpEx deals, right. In DPI segment, visibility and control, we will remain with CapEx deals as it was. We're not looking to change that.

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

Just on the sales execution front, I think you thought that you were sort of under earning in a couple of geographies and that could be improved upon. Where are we in that process?

I think you can see that from the revenues split, you can see that we're seeing growth in APAC. And I think we're doing very well there. I think we are not yet seeing the growth we would like to see in the Americas, and I would expect that that -- I would hope and expect that will change during the next year.

And I'm just curious on the U.S. market in terms of the use of traffic shaping or QoS. Any change there with net neutrality or just in general is there, you think there'll be any catalyst overall for traffic shaping and QoS from 5G et cetera?

Well, there is no dramatic change in the U.S. market despite the reversal of net neutrality. We are talking to operators about Traffic Shaping, there is -- I would say, there's more discussions around them, there is more thinking around that, but I don't see any dramatic change to run and implement it. I think that in 5G that may change, we are seeing RFIs come out now with questions and sections about traffic management in 5G, but that will take more time to materialize, these are longer-term processes.

We have a follow-up question from Alex Henderson of Needham & Company. Please go ahead.

I just wanted to go back to the new customer's orders for a second. So, I mean, clearly, the base of your business is predominantly from existing customers not from new customers. Is it reasonable to think that new customers represent relative to the orders not the reported revenues, something under 25% of your revenues in any given period?

Honestly, I don't know to answer that. I'd have to look at the numbers and get back to you on that.

Sounds like that's at least in the general ballpark now?

I really would prefer to look at the numbers and get back to you with a responsible answer.

So in the comments post my prior question, I thought I heard you imply that you felt comfortable with double-digit top-line growth in 2019, did I hear that correctly?

Yes.

So, within that mix, if we see a sharper acceleration of OpEx related deals that are more SaaS oriented, would you expect that even under that scenario you'd still be able to achieve that? Or would that be a headwind to that target?

The security OpEx deals that we're aiming at are a new base of new additional revenues, they're not replacing any of the existing revenues that we're seeing. So, when I'm looking at growth into 2019, I could separate that into several parts, one is, okay, what can we grow from the existing installed base, be it security or DPI, mostly DPI and a little bit of security like Telefonica and Vodafone both behaving as CapEx, and what can we expect to grow on that. Working what additional new revenues will we see from new customers as we go into 2019, that are CapEx type deals in the DPI sectors. And how much of the security OpEx deals that we sign up. How much of that will translate into actual bookings and revenues in 2019 and this is on top of the other two that I mentioned. So, yes, I think we -- it's not one at the expense of the other. So, looking at all those together, I do see double digit -- I do feel confident in looking at double-digit growth in 2019.

And going back to the DPI segment, visibility segment for a second. Obviously, the merger between Sandvine and Procera has altered the competitive landscape. You've talked in the past about picking up bars and distribution. Can you update us on where we are on that? Whether that's starting to level off? Or you're still seeing meaningful gains? How -- what's the trajectory look like there?

We're still seeing meaningful gains for us. We participated and are participating in quite a few deals where we compete head-to-head with Sandvine, and we're taking market share from them. We're seeing bars and distributors continuing to come to us and say, okay, look guys we're looking for an alternative, we're seeing customers come to us saying that they're looking for an alternative. Sometimes they chose us, not always, but it does give us additional revenues and it is working in our favor.

And how are they reacting over there, I know now that's in the private equity hands. Are they holding the line on pricing? What's the competitive environment feel like from that perspective?

I'm a bit hesitant because, obviously, I'm not privy to their internal decisions and discussions on what they do. There is a -- I would say that there are places where we see a strong competition from them, and there are places where we would have expected stronger competition and we see less of it.

So, pricing is generally stable then?

Yeah, I don't think that there's -- I don't see any material change in the pricing levels.

That's what I was looking for.

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