Rami Rozen - AVP Corporate Development Andrei Elefant - President and Chief Executive Officer Shmuel Arvatz - Chief Financial Officer.

James Kisner - Jefferies Matt Robison - Wunderlich George Iwanyc - Oppenheimer.

Good day and welcome to the Q1 2016 Allot Communications Limited Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Rami Rozen, please go ahead sir..

Thank you very much. And thank you all for joining us on our first quarter 2016 conference call. My name is Rami Rozen and joining me today are Allot’s President and CEO, Andrei Elefant; as well as our Chief Financial Officer, Shmuel Arvatz.

The press release announcing our first quarter results is available on the Investor Relations section of our website at www.allot.com. All results and expectations we review on the call are on a non-GAAP basis, unless otherwise described as GAAP.

Non-GAAP net income defined as GAAP net income after including deferred revenues related to the fair value adjustment resulting from purchase accounting and excluding stock-based compensation expenses, amortization of acquisition-related intangible assets, deferred tax asset update and acquisition-related expenses.

Please note that all earnings per share amounts are on a fully diluted basis. A reconciliation of each non-GAAP measure to its nearest GAAP equivalent is available in the press release containing our first quarter results.

Before we begin, let me remind you that certain statements made on the call today may be considered forward-looking statements, which reflect management’s best judgments based on currently available information. I refer specifically to the discussion of our expectations and beliefs regarding our pipeline and funnel of potential future business.

Our actual results may differ materially from those projected in these forward-looking statements. Certain material factors or assumptions were also applied in drawing the conclusion or making the forecast or projection as expected in such forward-looking information.

I direct your attention to the Risk Factors contained in the Annual Report on Form 20-F filed by Allot with the U.S. Securities and Exchange Commission, and those referenced in today’s press release, both of which, detail factors which could cause our actual results to be materially different from those projected in the forward-looking statements.

With that, I would now like to turn the call over to Andrei..

Thank you, Rami, and thank you all for joining us today. In today’s call, I will highlight Allot’s results and share with you some of the achievements of the first quarter of 2016. Before going into the detail of the quarter, I just want to give you an overview of our ongoing strategy and plan.

We are executing on our long term plan to leverage our growth engine and security services which continues to validate itself as the growing sector in our industry. On the product front, we continue to invest in our virtualized product planning.

Earlier in the quarter, we announced the launch of our SG 9500, a service delivery platform with switch functionality packaged on a common off the shelf platform and efficient and small footprint appliance. The SG 9500 platform enable us to extend our addressable market and offer service gateway capabilities to every network.

While we are unaware of the challenges that a communication service provider face today, these challenges provide Allot with an opportunity to enable our customers to deliver innovative services, increasing the competitive advantage and create greater value to their customer offering.

After I complete my part, I will hand over the call to our CFO, Shmuel Arvatz for a short review of our financial performance for the quarter. Now for the quarter’s results. Revenue for the first quarter of 2016 came in at $23 million, down 22% year-over-year and 10% on a sequential basis.

While these results are somewhat below expectations, they do reflect the breakdown we discussed in the previous call off a slower first half and then picking up as we move into the year. Important to remember we are still dependant on large projects and while we increased our backlog over the last year we see slower conversion into revenue.

We expect our strong backlog and funding to kick in and bring us back to our gross trajectory for the rest of the year. With that in mind, we reiterate our revenue guidance for 2016 and expect it to range between $102 million to $108 million.

Gross margin came in at 70% which is below our average and reflects a greater portion of platform in the revenue mix this quarter. More specifically, it represents two large projects in which we recognize a big chunk of the hardware portion during the quarter.

Based on the product mix we saw in our backlog and even have opportunities ahead of us we anticipate gross margin to trend higher during the year. Cash reserves at the end of the quarter totaled $1207 million with a negative cash flow of $1.4 million from operations. Now let’s look at our bookings.

Following record bookings in Q4, this quarter we recorded lower bookings resulting in book-to-bill below 1. Expanding [ph] of large orders impacted them to this number. Note that both for the last six months and for the last 12 months period book-to-bill is about one. This is in line with the lumpiness and bookings volatility we see in the industry.

As I mentioned, Q1 bookings are often lower than the other quarters in the year, but I do want to point out that this quarter they were higher than Q1 last year. In the value-added services business, VAS reached 30% of bookings during Q1 with securities taking the lion’s share.

To remind you, our VAS category is divided into four groups or category; Security, Personalization, Analytics and Optimization. To clarify what we now call personalization includes our monetization category and engagement tools, which facilitate personalized services.

The security signals alone reached 62% of VAS booking and personalization accounted for 30%. Last quarter, we introduced a new method to measure and analyze our booking. We allocate the dollar value of each order to the main catalyst that initiated the transaction. This analysis accesses [ph] product orders only.

Based on this new specification, security bookings for the quarter was 48% of total product booking compared to 30% in all of 2015. As security represents our main growth opportunity we continue to invest in this segment both in R&D and sales, leveraging our core technology and enhancing our offering.

Large deals reached 11 in total, six of which came from mobile operator or from fixed line service providers and one from a cloud operator. On the office side, we continue to keep out a close watch and maintain tight control on expenses while investing in our growth engine. Going forward we expect to see this level throughout the year.

Now for some product updates. With the introduction of the SG 9500, we are capable of providing services including visibility, security and personalized growth and experience to millions of users.

While it transforms in a common off the shelf platform, it does not comprise carrier grade requirement as it delivers industry leading throughput, resiliency and additional carrier grade functions.

As I mentioned, the SG 9500 expense proven service gateway capabilities to every network thereby increasing our addressable market which opens up growth opportunities with enterprises and cloud operated. We started shipping SG 9500 towards the end of Q1 and have already shipped to six customers.

In addition, last week we launched the Allot Secure Dome, which enabled mobile service providers to extend security beyond natural boundaries. This extends our security as a service platform capability.

Before that WebSafe Personal and WebSafe business now protect growth and users from malware, ransomware and other online security threat anywhere, anytime. It protects users as across to any mobile fit or Wi-Fi network.

The Allot Secure Dome is a significant addition to our security portfolio enabling service providers to increase customer loyalty and engagement by providing the end user a consistently secured experience over any network. Moving on to 2016 guidance.

Although the year started off lower than expected, backlog remains from and our funnel includes interesting growth opportunities in our growth growing sector to security. We reiterate revenue guidance and expect revenue to be in the range of $102 million to $108 million.

We anticipate security and personalization segment to continue to lead the growth and finally we expect second half revenues to be higher than the first half. Before summing up, I would turn the call over to Shmuel to reveiew our financial results..

Thank you, Andrei. As Andrei mentioned, revenue came in below our expectation, however we are encouraged by the fact that a greater portion of our business is generated by our security solutions.

During the quarter we made good progress in the security segment, as well as with launching new innovative solutions that we believe will enable us to increase our addressable market.

Before I begin reviewing the financial results for the quarter, I'd like to inform everyone that on this call, unless otherwise noted I will refer entirely to the non-GAAP financial measures while discussing operational results.

Non-GAAP financial measures differ in certain respects from generally accepted accounting principles and exclude share-based compensation expenses, amortization of acquisition related intangible items, differed tax asset changes and acquisition related expenses.

Turning to our first quarter results, revenue for the first quarter was $23 million, down 10% sequentially and down 22% year-over-year. Our book-to-bill ratio this quarter was below one resulting mostly from its slow start to the year in our Telco-related business.

As Andrei mentioned, it is worth noting that in the first quarter of 2016 we had a record booking and measuring the booking over the last six or 12 months our book-to-bill ratio was above one for each of this period.

The geographical breakdown of our revenues was as follows; EMEA $12.2 million or 53% of revenues, APAC $7.2 million or 31% of revenues and Americas $3.6 million or 16% of revenues. Product revenue for the quarter accounted for 63% of total revenues while support and service revenues accounted for 37%.

This is compared to a 68/32 [ph] mix in the third quarter of 2015.

Moving on, gross margin for the quarter was 70% of revenues compared to 76% in the third quarter of 2015 and 74% in the previous quarter, a reduction in gross margin was mainly attributable to lower gross margin generated by two large projects due to higher context of hardware and timing of recognition.

We expect to improve our gross margins in the upcoming quarters. Operating expenses during the quarter were $18.1 million, similar with the previous quarter and 7% down year-over-year. We expect this level of quarter OpEx to prevail throughout 2016.

Net loss for the quarter was $1.8 million or $0.06 per diluted share compared to net income of $2.9 million or $0.09 per diluted share in the same quarter last year. Turning to the balance sheet, our cash and cash equivalent totaled $120.7 million. During the first quarter we recorded a negative operating cash flow of $1.4 million.

DSO was 91 days which is in line with our typical range. We continue to execute on our buyback program. During the first quarter we acquired approximately 225,000 shares for a total of approximately $1 million. We plan to continue with the buyback program in line for initial plan. With that, I'll turn the call to Andrei..

Thank you, Shmuel. Our security strategy is proving [Indiscernible] both in the interest we are seeing in the market and with the segments growing share of our business. We continue to maintain tight control of OpEx while shifting resources for our growth engine.

SG-9500 sales are picking up as we anticipated enabling us to deliver service gateway functions into more networks. And lastly we continue to execute on 2016 plan and reiterate our guidance. With that, I will open the call for Q&A.

Operator?.

Thank you. [Operator Instructions] We will turn to our first question from James Kisner from Jefferies. Please go ahead..

So, thank you.

So, you said that you saw a slower turning backlog in the orders, do you insight into why that's one has occurred and was the slowness more pronounced in which you get a region versus your expectations?.

So, referring to the slower conversion of our bookings into revenues, we talked about it also in the previous calls. We have few large projects and one particularly large in our backlog from new customers that we won last year.

And the nature of this project is that the first initial deployment can take six to 12 months and we are in line with progress in this project. We anticipated that these projects will take the time to turn into revenues, but as we progress during the quarter it seems that we are on-track with the progress in these projects.

And as we said, we expect that these projects will materials in the next quarters. In general I would say, that over the last year we are seeing that executing the projects pace longer with – mainly with the large projects and mainly with new customers, in most of cases its mainly because of internal resources in the carriers is tight..

Okay. Thank you for that. Just step -- just on gross margin, I appreciate your comment there, but I just wanted to verify that pricing isn't having any impact. I think you said that the hardware recognition is the primary factor, but again I want to verify that pricing has really changed.

I guess, I'm also just wondering that given that you recognizing a lot of hardware revenue up fronts, does that mean you might see a quarter where you might see above average gross margin as a remaining software if these deals are recognize without hardware content?.

We expect to see the gross margin increase, so this low level from our point of view is and point of event, in general the main reason for that is as I said its because of a greater portion of hardware we recognized in this quarter and in the backlog the average that we have is higher than that of course. And we attribute that mainly to this factor.

In general I would say, even if you look back into last year, you will see that gross margin changes based on the product mix in a particular quarter, so I don't think that you can derive from particular quarter at trend.

Overall, I would say in high level, we see two main fronts on the gross margin, one is the fact that sell bigger pieces or bigger part of our revenues that's coming from software which increases the gross margin, but on the other hand we are involved in larger project, we are selling more services, which typically has a lower gross margin.

So, there are two trends walking here and on a very high level. Specifically for this quarter, a very unique event of the product mix..

Just a last follow-up on that. I mean, do you still think that your full year gross margin will be in that 74% to 75% range, we know that was your to prior guidance, with the service here we have any impact at all. Thanks. And I'll pass it..

We are not giving guidance on the gross margin.

What I can say is that we expect it to be higher in the next quarter as compared to this quarter?.

Thank you..

We will not take our next question from Joseph Wolf, Barclays..

Hey, guys. It's Brian on for Joe.

Just quick question on the bigger picture and about your expectations on customer spending, has that changed at all since the start of the year? And then, are there any regions that you're seeing particular strength or weakness that's worth noting?.

In the high level we don't see any significant change in the environment and I think that if saying based on one quarter whether there is a significant change, I think it's too early to judge. We had our best quarter in bookings in Q4, so naturally we could get in more orders in Q4 and probably it’s a matter of timing between the quarters.

So, I wouldn't take the first quarter, the low booking in the first quarter as an indication of something that happened in the industry. And in terms of geographies, I would say, e-mail [ph] continues to be a strong region for us, we continue to execute well often revenues than on bookings we had a strong quarter there.

We had fairly good or okay quarter in APAC. And we had slower the leverage in quarter in the Americas. We do see opportunities in the Americas mainly in South Security, but it hasn't yet matured into significant orders..

Okay, great. And then, just a last question on cash, how should we think about potential for M&A versus just continuing with the buyback and then what level of cash are your comfortable sort of running the company at? Thanks..

So, in order to run the Company in our environment I believe we need between $40 million to $60 million and we are doing the back – the buyback program as we discussed. On the M&A front we are very cautious about that. We do look into the different opportunities, but we are patience to identify a good opportunity.

I believe that the acquisition that we did last year contributes very nicely to our business and to our strategy and the full identify potential acquisition that can save our strategy. We have the cash to do that, but we are not in a hurry to do that..

Thanks, guys..

Thanks, Brian..

We will not take our next question from Matt Robison, Wunderlich. Please go ahead..

Hey, thanks.

How much backlog do you have?.

I would say that the backlog that we have today compared to the same point last year is significantly higher. We're not disclosing the exact number, but we do have the nice backlog based on the fact that our book-to-bill over the last six and 12 months and also six months was above one and we feel comfortable with the guidance that we've provided..

Is your backlog more than two quarters of revenue at the current – at the first quarter rate?.

Again, we are not giving indications on the backlog. I would again say that it's higher, even significantly higher than it was at the same point last year..

Do you feel this has struck [ph] more than overall revenue? Is your largest customer are they no longer purchasing your products?.

Actually, we had a very good quarter with our key customers, and we had very nice orders coming from them. And overall we had a good quarter on the booking side in the EMEA, so I don't see any slowdown there..

Okay.

Shmuel, what was the non-GAAP adjustment for other income about?.

For other income?.

Yes..

What do you mean?.

I just [Indiscernible] that?.

Yes. The main adjustment of the non-GAAP is the stock based compensation, amortization of intangible assets. And then, adjustments for the deferred tax this quarter..

Thanks..

We will now take our next question from George Iwanyc, Oppenheimer. Please go ahead..

Thank you for taking my questions. Just looking at the mere bookings questions again. Given the book-to-bill below one for the last quarter, do you believe that your visibility into order trends allows you to have a bookings level higher exiting this year than you did coming into the year..

You mean whether our bookings in this year will be higher in compared to last year?.

Yes though exiting 2016 going into 2017, do you believe it’s possible that you are booking with the level will continue to increase, your backlog level?.

Yes we believe that it can increase. We said that Q1 bookings Q1 this year compared to Q1 last year we had high bookings this year and it’s still early to judge whether we’ll be above the number but we definitely believe that we can be there..

And which areas do you think we are the most confident in building momentum this year?.

I believe that the security segment we see very nice traction we are involved in multiple processes to run that so we see a lot of interest on that front. And these processes take time with the carriers to mature through all this and revenues.

But in terms of interest we do see that the interest from the security services that we offer today and I believe that most of the growth will come from there and from the personalization services that we deliver. And these are the two main areas where we definitely expect to see growth this year..

Great.

And looking at your OpEx level, how should we look at that ramping through the rest of the year?.

I believe that over the year we expect to see more or less the same level that you see today and this is our plan for the rest of the year. We believe that we have got today is needed to support our growth engine and build up our bookings and revenue..

Okay, and just one last question, was there much of an FX impact during the quarter?.

The FX, the year-over-year on revenue was about zero, and in the OpEx it was positive about $0.5 million year-over-year..

Okay. Thank you very much..

Thank you, George..

[Operator Instructions] As we have no further questions that will conclude today’s call. Thank you for your participation..