Welcome to Allot’s Fourth Quarter 2019 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. Ziv Leitman, the 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 would, 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 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 over the call to Erez. Erez, go ahead, please.

Thank you, Ehud. Welcome everyone to our conference call and thank you for joining us today. I’d like to start with some key financial parameters for the fourth quarter and the full year 2019. The fourth quarter was another quarter of solid growth. Our revenues grew 14% year-over-year for the fourth quarter and 15% year-over-year for the entire year. Our bookings for 2019 was significantly higher than in 2018 and the result is that we finished 2019 with a backlog of $138 million, double the backlog we had at the end of 2018. This growth came from strong bookings in both the Allot Smart product line for visibility and control as well as CapEx booking in the Allot Secure product line for security. This is our eighth straight quarter of double-digit revenue growth year-over-year. I am very pleased with the results we achieved during the fourth quarter and in 2019 as a whole, and I believe it shows that 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 Tier 1 business and our revenues are growing. We expect revenue growth to not only continue into 2020 but to accelerate. As we see our opportunities grow, we are continuing to increase our investment to capitalize on the significant numbers of opportunities we see. As we work with more Tier 1 operators worldwide, we take upon ourselves additional commitments that expand product development, delivery and customer support. This is the reason we are investing further in our R&D and customer success organizations. I believe this is the right thing to do as this investment enables us to fuel our growth, catch up on certain product gaps we still have and create…

Thank you, 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 measurement when discussing operational results, which is what we usually internally to judge the ongoing performance of our business. Non-GAAP financial measurement differ certain aspect from the generally accepted accounting principle and exclude share-based compensation expenses, revenue adjustment due to acquisition, restructuring expenses, expenses related to M&A activity amortization of certain intangible assets, exchange rate differences, changes in taxes related items and changes in deferred tax. And now regarding the financial results. Revenue for the fourth quarter of 2019 were $30.6 million, growing by 14% in Peru with those of the fourth quarter of 2018. Revenues for 2019, as a whole, were $110.1 million, growing 15% compared to 2018. This is already the second consecutive year with significant revenue growth, representing a CAGR of 16%. Our backlog increased significantly during 2019. We increased it by $69 million from the end of last year, bringing our 2019 year-end backlog to a record high of $138 million. Now I would like to give you some more color regarding the revenue breakdown and diversification. The geographic breakdown for the fourth quarter of 2019 was as follows: Americas with $6.3 million or 21% of revenue, EMEA with $15.6 million or 51% of revenue, and Asia Pac with $8.7 million or 28% of revenue. For the full year of 2019, geographic breakdown was as follows: Americas with $16.7 million or 15% of revenue, EMEA with $50.4 million or 46% of revenue and Asia Pac with $43 million or 39% of revenue. Regarding the breakdown between product and services for the fourth quarter, it was as follows: product…

Thank you. Ladies and gentlemen, at this time, we will begin question-and-answer session. [Operator Instructions] The first question is from Alex Henderson of Needham & Company.

Hey, thank you. This is Roger Boyd on for Alex. Congrats on a nice quarter. Wondering if you could talk about the strong 2020 revenue guidance? And what gives you confidence in that? Is it a stronger demand in DPI or quicker ramping OpEx deals that you signed last year or maybe more CapEx deals or a combination of the three?

It’s a – I think, it’s like we said. It’s a combination. We’re entering 2020 with a very strong backlog. We have a very strong pipeline for additional deals. And we are going to – we expect to start seeing a few million dollars from the recurring security revenue deals that we signed. So it’s a combination of all those that lead us to our guidance for 2020.

Okay, great. And then one follow-up. With recruiting, am I thinking about – am I thinking about it right in that it’s a CapEx deal that was mostly recognized in 2019? Or is that shifted with the delay in their network? And then I think you talked about a potential OpEx component of that after the network goes live?

I’m sorry, could you repeat the question? I couldn’t hear you well.

Sorry. It was about Rakuten. Am I right in thinking about, it was a CapEx deal that was mostly recognized in 2019? Or is there an OpEx component that you benefit from after the network goes live?

It’s basically a – if I remember correctly, it’s a term license deal. So we recognize this– we recognize revenues in 2019 from Rakuten. And as the network goes live, there will be additional upsides later on or we expect at least to be.

Okay. Thank you very much. Nice quarter.

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

Congrats on just great progress and great guidance. So the product for the internet security is like something, me as an American consumer would love to see. Can you kind of talk about, like, if you’ve talked to, like, U.S. carriers and kind of what the conversations are?

Well, I can talk to it to a certain degree. First of all, we would like you to see this internet security as well as a U.S. customer, and we’re working to make that happen. Look, we’ve announced previously that we have signed deals with the two U.S. Tier 1 operators, one of them in the DPI area and the other one was IoT security, which obviously will not be relevant so much for consumers. So we’re – I think – I can say that we’re actively engaged with those operators and with additional operators in the U.S. These– if operators in general, take time. U.S. operators take a longer time, mostly due to their size and the complexity, but then the fruits of being successful there are larger. So we’re continuing to engage with them. I think we’re making progress, and I’m optimistic.

Okay. And so, one thing to clarify on your product on the internet security, so if I’m a customer, I don’t need to download an app, your application is basically on the network. So basically, if I was like, let’s say, a Vodafone customer, Vodafone, all they have to do is flip a switch, and it’s already there for me. So the customer doesn’t really need to do anything. Is that – can you clarify that for me?

Yes, you’re absolutely correct. Our – the software sits in the core of the operator’s network. So you as a consumer, if you were a Vodafone customer, and you wanted to sign up for their, what they call SecureNet. That’s the brand that they give this service in various countries, all you would have to do is agree to pay. You would not have to download anything, configure anything or anything of that sort. Vodafone would flip a switch, speaking virtually, in the network. And you will – and your traffic will be filtered and secured from the network itself.

So that’s very important because, like as consumers, sometimes they have a download an app or they have to do something. It really affects penetration because sometimes they can’t figure it out or like no, I’m too lazy. So this is really kind of a game changing technology. So having said that – you can comment on that. Because I think that’s really important, which it just makes this even a more compelling investment.

I think you are right that it is very important. We know from many operators that we talk to that resale security apps that could – that users have to download onto their phone or computer and configure it and so on. That a typical penetration rates for apps that are downloaded is about 5% – 3%, 5%, if they get to 5%, 6%, they’re really happy. And one of the big advantages of having a network-based security that is provided by the operator to the consumer or a small business as a pure service without the consumer or business having to do anything other than agreed to pay for it, of course, is that penetration rates become very high. It’s a primary reason, together with our – the engagement tools and how we show the value and so on, but it’s a primary factor in getting penetration rates into the 20%, 30%, 40% and even 50% for different operators. I agree with you on that.

Okay. So now, I know you’re going to have a vast amount of customers for the – again, sticking with the internet security. Are you – are they able to like access your information, like Vodafone, you say, has a 50% penetration rate. Even though we don’t get the recurring revenue, at least you’ve learned a lot. So do these carriers, kind of, pick your brain and say, what do we need to do to get that 50% penetration? Or they, kind of, have their internal, like we know what we’re doing type of attitude?

Well, as you can imagine, it varies from operator to operator. But what we’ve setup – in our marketing team, we’ve setup a specific group that is specializing on understanding what is the right way to market these kinds of services to consumers and small businesses. And when we sign up with an operator such as Hutchison Drei in Austria, such as MEO in Portugal, a part of the package, part of the value that we bring them is this is the knowledge that this group has, to sit with their marketing teams with the operators’ marketing teams and show them what kind of go-to-market schemes work better, what kind of work not as well, what is the experience from other operators and so on and help them design their go-to-market processes, help them design their campaigns and so on to achieve higher penetration rates.

So now that you’re hitting new highs, and you were a value stock and turning to a growth stock, have you basically been talking to other analysts as far as coverage?

We have been talking to other analysts. As you may – as you probably know, getting additional analyst coverage is challenging. We would welcome any help you can give us on that.

Well, the Silk Investment Advisers has you as a strong buy, how’s that. And I know because you need investment banking money, but with your balance sheet, I get it. So if you remember, a few conference calls ago, when your stock was $7, and I said, it kind of makes sense, you could use a little bit of money to buy back shares at 7%. I think now that the stock where it is now, I think that offer’s off the table. I think you just sit back and see what happened. So I was supposed to meet you in Boston, but I met Ziv about a month ago. So this is for Ziv. Ziv, I know you really don’t even need this job because you’ve been successful in your previous jobs. Why did you decide to come to Allot?

As I told you, it’s because of two reasons. First of all, I believe in the market and I see huge potential for growth for the company. And the second reason is the people. I met many of the management and the board member before I joined and I came to the conclusion that with these kind of people, we can be a winning team. And Allot can be a huge success story.

Maybe, Erez, one day, you’ll get to Boston. But I think you guys are going in the right direction in an environment where there’s not many growth companies. This is going to be an exciting next – this decade should be very exciting for Allot. So congratulations on the progress and continued good luck.

Thank you very much.

The next question is from [indiscernible]. Please go ahead.

Yes. Thanks for taking my call. Congratulations on the good year and the great guidance. Well, actually, you did talk about it a little before I hand Erez, to the guy who talk with you beforehand, I forgot his name. But maybe some – a little more clarification. Maybe if you can elaborate, you seem to have a lot of activity, and deals are mainly signed in Europe and Asia. And I wanted to ask, do you have any chance to penetrate the American market? Even – I mean, you have 15% or 14% of your revenues are from there, but maybe do you plan to have more? What are you doing to get it – to get there?

Well, like I said, we signed a couple of deals with two of the Tier 1 U.S. carriers, one for DPI and one for IoT security, both of which are not very large, but I think they’re an important start. We are definitely focusing a lot more efforts in the North American market. I think there’s a tremendous potential there. And from my perspective, I see it as a significant potential for growth for us, and we’re definitely investing resources to get there.

Okay. That’s great. It’s good to hear that. And keep up the good job.

Thank you very much.

Thank you very much.

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

Hi, guys. My congratulations on a great year and a great outlook. Just a couple of questions on competition. I think I heard you say that you had replaced or added on top of a competitor that was already in place with a DNS based product, and I wanted to understand a little bit more about that and how you see your technology versus DNS kind of playing out here, first.

Maybe I’ll clarify a bit more what happened there. This is a group of companies that in one of their operations, they have deployed DNS security. And then when they looked at us, they understood that the security level that we can provide with in-line security is significantly better than what DNS security can do. And therefore, they decided to work with us in other markets. Now it’s – the rationale is very simple, right? DNS security is a nice offering, but it’s very easy to buy pass and it doesn’t capture many cases of either fishing or bot attacks or things like that. So it’s – and our technology simply provides a much more secure and better service to the end users. And I think that many operators are realizing that. However, it’s still a lot easier to deploy DNS security. So as I said before, there are going to be operators that look at this and say, okay, I don’t care really if the level of security is good or bad. I just want it to be really easy for me. And we’ll use DNS security. But I see many operators that understand that you can’t do so-so security. You have to do something serious. And those operators will go with an in line solution like we provide.

Great. So it sounds like for the time being, we’re happy for DNS providers to raise the consciousness about security products and at some point, those folks will come your way, looking for more robust solution?

It’s hard for me to say if they will come our way. They won’t. I think we’ll continue to work with the market and explain and prove to them that our solution is superior. And I think that overtime, more people and more operators will understand that security is something very serious, and you need to provide a serious and good solution, and I believe in this direction.

Great. And then a question just on virtualization. Wondering if you have seen your competitor offer virtualization yet and sort of demonstrate at scale? And then on the 5G demands. It seems like it’s even more important. It does sound like your machine learning and AI capabilities become more important. Just talk a little bit about the defensibility of your technical position in that market versus what had become more commoditized in DPI for a few years in the past.

Look, I’ll start – the first question was whether our competitors are deploying a virtualized solution. And the answer is yes. I think we’re starting to see them. We’re definitely seeing them offer it. I assume they’re starting to deploy it. I’m not sure I’ve seen them deployed in a massive scale yet, at least I’m not aware. It doesn’t mean that they haven’t. It just means that I’m not aware of it. But everybody is moving in that direction. So they will get there as well. I think we have a leg up on them, and I think we’re doing a better job, but I think everybody is going out. So all our competition is going in that direction as well. Regarding – I’m sorry, your second question…

That was about 5G and sort of greater requirements?

Yes, yes. Look 5G – the 5G is going to be – many operators are starting to roll out 5G in the U.S. I think Verizon definitely is, AT&T is and other operators are starting to think about it. You’re starting to see operators in Europe think about 5G, even in Asia. So 5G is happening. And like I said, I think what we’re doing is, we have many elements that are very important and added a tremendous value to a 5G delivery, especially in security, but not only security, but really, most of it in security but also in DPI. Now what we’re doing with machine learning and artificial intelligence is just applying these techniques and this kind of technology to the problem of identifying protocols, identifying malware, doing things like identifying other things of interest in the telecommunication network. It’s not so much – you asked about defending it. I don’t think it’s so much an issue of specific patents around that. It’s simply putting in the work, providing a good product, focusing on the needs of operators in these fields. And delivering value to them on what we’re doing. And there are going to be many other people that are doing machine learning and artificial intelligence for a variety of means. Our focus is delivering it to operators to be used for both DPI and some visibility and security applications.

Great. Thank you.

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

Yes. I’d like to thank you all for listening in, and I’d like to thank you for your support in Allot. And I look forward to seeing you in the coming weeks and months, wherever we are. Thank you very much. Bye-bye.