Ehud Helft - GK Investor Relations Erez Antebi - President and Chief Executive Officer Alberto Sessa - Chief Financial Officer.

Alex Henderson - Needham & Company Joseph Wolf - Barclays James Kisner - Jefferies George Iwanyc - Oppenheimer and Co.

Ladies and gentlemen, thank you for standing by. Welcome to Allot Technologies Second Quarter 2017 Results Conference Call. All participants are 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 website, www.allot.com. I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr.

Helft would you like to begin please?.

Thank you, operator. Welcome to Allot’s second quarter of 2017 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 line today are Mr. Erez Antebi, President and CEO, and Mr. Alberto Sessa, the 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 call may contain projections or other forward-looking statements 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 securities 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 like now to handover the call to Erez. Erez, go ahead please..

Thank you, Ehud. I'd like to welcome all of you to our conference call and thank you for joining us today. During the previous earnings calls I laid out the basic strategy for growth that we plan to follow. I would like to start by reiterating it briefly.

I believe the main growth engine for Allot going forward will be providing network security products that communication service providers or CSPs can use and provide as a service to their customers both consumers and businesses.

This will be based primarily on our WebSafe Personal or product which is currently providing services for Vodafone and is currently being installed in Telefonica. Our interaction was the market over the past few months has served to strengthen our belief that this strategy is in line with where CSPs are heading.

Several CSPs in different regions are showing a growing interest in network based security such as Allot offers. While it is too early to provide any specifics or any timelines we are encouraged by CSP interest in network based security. WSP is not our only security product for the CSP market.

In addition, we have an excellent product that can protect the CSP networks against distributor denial of service or DDoS attacks.

Our product has the capability to defend networks against very high volume attacks from outside the network and to defend others by blocking attacks originating from within the network, all this in a matter of a few minutes while at the same time protecting servers from crashing.

Another element we will be providing to the CSPs is of course, visibility and control of their network. This is currently where our core is. We have a strong product in this domain and we will continue to develop it. Although CSPs are our primary market, we will continue to pursue the enterprise market with our multiservice platform.

We believe our product combining network visibility, security and anti-DDoS protection has a valuable market within a sector of enterprises and we plan to expand our success, here as well. Over the past few months, we planned and executed some changes within the company with several objectives in mind.

One, align the company better to execute our strategy, as I outlined. Two, become a more customer-centric organisation. Three, focus our teams was very clear and measurable roles and responsibilities and four, create a base for growth. Various changes have already been accomplished and others are currently being implemented to achieve these goals.

I will mention a few, restructuring of the sales and delivery organisation. We have created several customer facing units that have integrated sales and delivery functions focused on specific customer groups.

For example, all our enterprise sales and delivery is now on a single worldwide enterprise unit and all other customer facing units will focus on CSPs only. We believe this change makes our sales and delivery units much more aligned towards the customers, whom they are serving.

Also, as I had indicated in the previous earnings call, we created a security strategic account team. This team will function as a professional overlay sales team for potential large network security customers. It will also ensure we leverage experience from WebSafe Personal sales in one market to help us and the service providers succeed in another.

To lead this new team; we have brought on board Hagay Katz. In addition, resources were shifted to the security area from other areas to better align with our major growth engines. We also modified some of our internal processes, such as how we issue proposals to customers and how we manage demos.

I believe, this will help us do a more professional job with faster response to customer needs. On top of this, we are also making some changes in non-executive management levels, to allow us to better execute on our plans.

As I said before, I believe that a significant part of our role as management, is to improve on the company’s execution and to realise its full potential. I am confident that the changes I discussed and the additional changes we are contemplating will help us achieve that.

While we expect our OpEx in 2017 to remain at a similar level to that of 2016, we expect to spend one-time amount of under $2 million in this restructuring. Now, I would like to briefly touch on our second-quarter results.

Our revenues grew compared to the first quarter of the year and in addition, it is the second consecutive quarter we have a book-to-bill ratio larger than 1. This is a positive indication for us going forward.

The number of consumers enjoying our security technology is continuing to grow steadily, another indication that our strategy is aligned with market needs. Our Telefonica projects are also moving ahead as planned.

In the current quarter, we started working to deploy our solutions in some entities in Europe and South America, where Telefonica plans to launch services soon.

We see Telefonica's choice to launch a consumer oriented security service offering with Allot as both a strong validation of the market for network-based security and the evaluation of Allot, as the leading vendor in this market.

The unified Security product we are developing jointly with McAfee, achieved generally availability status a few weeks ago. While I cannot get into the details or any projections, I can say we are working with McAfee on several customer opportunities. In summary, I want to repeat what I said previously.

I see Allot as a company with much potential and I believe Allot will establish itself as an important player in the communication security market in the coming years.

As you can see in the past few months we have taken significant steps which will allow the company to better perform, execute, and grow, and I expect to see the results in the coming quarters.

As we look ahead we are reiterating our guidance for 2017 revenues in the range of $80 million to $84 million and expect the second half to be better than the first half with a yearly book-to-bill ratio larger than 1. And now, I would like to hand the call over to Alberto, our CFO. Please go ahead..

Americas, with $3.8 million or 19% of revenues, EMEA with $12.3 million or 63% of revenues and Asia-Pacific with $3.4 million or 18% of revenues. Product revenues for the quarter accounted for 61% while service and maintenance revenue accounted for 39%. This is compared to 55% and 45% split in the first quarter of 2017.

Enterprise revenue represents 22% of total revenue, both in the second quarter of 2017 and in the year-to-date cumulative calculation. In terms of customer concentration, our top 10 customer made up 61% of our revenues. Book-to-bill ratio in the quarter was above 1 for the second consecutive quarter.

Gross margin for the quarter was 67.6% compared to 67.5% in the first quarter of 2017. The lower levels of margin in the first two quarters of 2017 compared to 2016 are mainly a result of the decrease in the revenue level. In addition, the new deal that was announced with Telefonica Global in Q1 2017 creates some pressure on the gross margin.

Since initial orders are primary low gross margin hardware platform with the bulk of software licenses to be ordered later. Operating expenses for the quarter were $15.6 million, compared with $16.1 million in the first quarter of 2017.

The decrease in operating expenses compared to the previous quarter is mainly due to the fact that in the Q1 2017 we recorded marketing expenses for two major events. Looking ahead, we expect the full year operating expenses level to be similar to the level reported in 2016.

Operating loss for the quarter was $2.4 million, down from an operating loss of $3.6 million in the previous quarter. Net loss for the quarter was $2.3 million or $0.07 per share, an improvement from a net loss of $3.6 million or $0.11 per share in the first quarter of 2017.

Turning to the balance sheet, our cash and cash reserves comprise of cash, cash equivalents and investments as of June 30, 2017 totaled $111.3 million. The company recorded a positive operating cash of $0.9 million during the quarter. That concludes my remarks. We would be happy to take your questions.

Operator?.

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

Thanks, good morning. This is Dan Parker on for Alex. Just a couple of things first off, just around the visibility around gross margins, it sounds like there is a mix of fixed and variable costs that obviously change with revenue levels.

Now, as you start getting to the $20 million revenue levels, should we think about this, I guess being consistent with the 70%, 71%, 72% that we have seen in the past?.

Okay. Regarding the gross margin, what we forecast is a level which is a little bit lower than the 72% that you mentioned. There are couple of reasons, first of all the level of revenue is lower than what was last year, I mean we recorded this quarter revenue of $19.5 million which is lower than what was quarter in 2016.

On top of that there is initial deployment of the Telefonica. The Telefonica deal has been implemented, deployed actually now in several affiliating European income. The deal is comprised of software license, hardware, professional services and maintenance.

The gross margins are actually affected particularly in the first deployment by the outdoor supply. The margin on hardware is of course lower than on software. So, as the initial order from hardware mainly we see some pressure on the margin and this should be corrected as the service is launched and software orders will come in..

Okay, thanks, that was really helpful. Just one last question, so going down through the OpEx lines, it seems like OpEx as a percentage of revenues came down sequentially after the spike you had in the first quarter.

Should we expect you know similar range over the back half of the year? I know you mentioned the one-time restructuring efforts in sales and marketing, is that really a third quarter effort?.

Yes, as we said before, I mean first of all we do expect operating expense level to be very similar to what was in 2016, the reason why we saw this quarter a reduction compared to the previous quarters. Again, those two marketing events that we had in the first quarter, but again I mean we want to recreate our guideline.

Our operating expenses are very similar to last year in 2017. And on top of that as Erez mentioned before we will record due to the restructuring that we are doing up to $2 million one-time expenses..

Okay and that’s really going to be third quarter event?.

It’s probably mainly to be third quarter, yes, mainly third quarter..

Okay, perfect. Thank you very much, I will cede the floor..

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

Thank you.

Question about the product mix, how much color can you give us on the percentages or the trends within the security business? And if we think about the makeup of book-to-bill which your confidence stays above 1, what kind of product mix are we talking about, and how long would you expect that current backlog to be versus what you referred to what the book-to-bill, what is that indicative of the next 12 months of revenue, should most of that come out over the next 12 to 18 months, how should we be thinking about that given the mix of products?.

Okay. I think that, - I think, I mean most of our revenues today are still in our core business. They come from the DPI market, the traditional market of Allot. And security is still the smaller portion of our revenues and also the smaller portion of our bookings, but I think it is growing.

We are seeing both in terms of number of subscribers that are enjoying this service and that requires of course licenses and product and so on. And we are seeing growing interest, which have not been translated to orders from other customers in the market.

So, I think that we’re seeing a trend of increasing, but I think it’s premature to talk about significant number changes or anything like that.

As to the book-to-bill of over 1, I mean these are the factual numbers as for the first quarter, second quarter like we said and we did indicate that most of our orders come from a product rather than services revenue.

Now, if you take a look at that typically we would recognize product revenues over a shorter period of time say typically less than a year probably. It could vary widely but it would be within two, three quarters, something like that and service revenues could take longer. I hope that addresses your question..

Yes, that’s helpful.

May be as a follow up as you consider the security business and maybe, I was hoping you could spend a little bit more time going into the, I guess the value side of the DDoS opportunity, mainly if is this going to be software approach or hardware approach, how you gets the people to either DDoS vendors or whether this is also - is it the security offering that you are talking about needs to be subscriber driven in terms of personnel mobile security offered by the service provider, but what would the DDoS be, is that something that they would also be offering to each of their customers sort of in a hosted way and how that would work? And do we, is it too early also to think about perhaps moving to a subscription model in the business model which would shift the mix of revenues and time?.

Okay. Obviously, the WebSafe Personal and the DDoS or the Anti-DDoS products are two separate products and they are marketed to different customers. I mean we sell them both to the communication service provider but they provide that in a different way.

The WebSafe Personal is a product where the operators such as for example Vodafone offers its customers consumers throughout Europe, offers them the ability to sign-on pay an extra say euro a month and get a clean pipe solution where Vodafone makes sure that their phones don’t get contaminated when they are on their network.

DDoS is something really that is there to help the operator. This communication service operator itself protect its own network, protects it either from attacks from outside or protect something originating inside their network from attacking somebody else and causing them to be God forbid, blacklisted or something like that.

So, the DDoS is really something that the network operations people in the operator buy and use and the WebSafe Personal is something that the marketing and sales arms of the operators sale and provide as a service to their customers. Now, regarding the model, I think we’ve indicated in the past.

We are working - currently our business model is really one where the operators pay us out of their CapEx budget. They buy upfront equipment. They buy licenses upfront, et cetera, of course they buy maintenance and so on. But primarily the current model is such that operators pay us out of their CapEx budget.

And we are in discussions with various operators to see how we can move that to both our benefits obviously to a more subscription based model or perhaps even a recurring type model but that is not in the numbers at this point..

Okay. And then just finally, I think I understood this but, I was hoping let me clear it with you,. It sounds like you are separating the sales force so that the enterprise unit takes care of itself and runs itself and it will be the larger service provider organization runs itself.

And so there is no overlap, did I understand that properly?.

Yes, I think, no overlap is always a very, very strong term, but I would say, yeah, you understood the principles very properly. The enterprise unit is going to take care of itself. Service provider units are actually there are several of them. It’s not one.

So, they are spread geographically and they are broken down, but they will focus only on service providers and not on enterprise customers, and there is only one unit global that deals with all the enterprise customers worldwide, and there is not going to be an overlap. There is always bound to be some boundary questions, but basically no overlap..

So, the change is that there used to be I suppose geographically certain people doing both, and you are stopping that, is that the change?.

That’s correct. Typically, until now, the way the sales organization was built was by pure geographical division. That meant that, no in any given country, a sales person and it is the pre-sale team that work with them would be working with both enterprise and service providers regardless.

When we've analyzed this we found that what we’re selling to enterprise customers and what we’re selling to service providers is very different.

The use case for service providers, the value that we provide to them for example, like I gave you the WebSafe Personal product protect the communication to your consumers, or even with visibility and control manage your network properly. The service provider has a very large widely dispersed network that he has to manage bandwidth.

He has to understand what’s happening there, but he has to an extent very limited ability to control either for regulatory reasons and so on. So, we are selling at different derivative of the product with different use cases and different value proposition. Enterprise customers look at it differently.

It’s really we have separate product that’s based on our same technology, but it is adapted to the enterprise world. They are lot more interested in control. They have a lot less capacity.

Their use cases are different, so we think that it’s better to focus people on one type of customer to go after that customer, understand very, very well the competition, the use cases, the value proposition and so on and be more expert on that rather than try and do multiple things and that’s the rationale. But that’s only on the sales side.

I said in the same sentence I said that it’s not the only change we did there. We had totally separate sales organization and totally separate delivery and support organization.

In the customer facing unit we are putting both sales and delivery and support and what that results in is that there is a team of people that will now be aligned all through the process from even the initial contact with the customer, through getting the orders, through implementation and through further service and they will be very well familiar with that customer and not be in situation where they transition all the time and deal with similar issues across different customers around the world.

So, I think this is some more complex change, but I think it will make us a lot a lot more customer focused..

Thank you, that was helpful..

The next question is from James Kisner of Jefferies. Please go ahead..

Hi, thanks for taking my question, so just of course obviously, may I assume you have got a pro forma out at $2 million in restructuring, and you sort of hitting in Q3, but that’s not going to flow through the P&L is it?.

Right, that’s not going into P&L..

It’s a non-GAAP. From a non-GAAP volumes, of course on the GAAP point of view it’s going to be there, I mean when we are going to make our non-GAAP result, those one-time restructure will be taken out..

Okay.

So, separately here regarding your comments on margins and this deals that created lot of pressure in the near term, I wondered you may go to sort of quantify like is that 200 basis points, is that 100 like how much is that impact and when do you think that, that is going to abate like should we start to seeing improvements into Q2 and Q3 from that software licenses, as soon as that or is it going to take longer?.

I think that’s what we can see right now it's only the next quarter to end in those quarter I mean until the end of 2017 we do believe that the growth margin will be stable to the level that we're in Q1 and Q2.

This is the period in which we see the pressure coming from Telefonica deal and the deployment of the entity in Telefonia, so we do foresee in this short term period, I mean two quarters of 2017 to continue to have similar margin of what we had until now.

I think that later on during 2018 when the additional software order will come in then we will be able to see some improvement in margins..

So is that pretty much all that I'm looking three quarters ago or two quarters ago you were at almost 71% and three quarters ago 70% that is about 250 basis points lower right now is that pretty much all the deal or is there additional pricing pressure in the marketplace that you comment on just the, the competitive environment..

Yes, what I can say is that of currently we do not see any price pressure in the market and again as I said before, I mean the main two reasons of the reduction in the gross margin so far is due from the reduction and level of revenues and on the pressure from the Telefonica that’s all..

Maybe just to clarify the - there's always press pressure on the market right, it’s not there, but we don't see anything unusual..

Okay, that helps.

I guess lastly just regarding your comments about book-to-bill greater than one I mean you're also sort of comment here, you're talking a lot about no security solutions it sounds like that's pretty small and I'm kind of wondering you that's what you're the driving that the book-to-bill greater than 1 was really more of a broad you know demand improvements across the border or regionally like we insight into what's really driving that book-to-bill greater than 1.

Thanks..

I think it's a bit hard to, to really segregate it over a period of two quarters to really the exact rationale. I think it's a mixture. Some of it is just executing a little bit better. Some of it is getting more traction with security I think it's a bit really a mixture. .

Thanks very much..

The next question is from George Iwanyc of Oppenheimer and Co. Please go ahead..

Thank you for taking my question so, just following up on the book-to-bill on the type of ability. Last quarter you gave us a sense that you felt security could be a growth driver in 2018, do you feel that the pipeline is building where it could be a meaningful growth driver that at that point..

I think that yes, I think that this is in my opinion. This will be the main growth driver of the company and I definitely expect to see that starting in May 2018..

Okay and then do you feel as you add more CSP customers next year that they would follow in the Telefonica type of ramp where initial sales will be lower margin hardware sales and then follow on quarters would come with the software and services?.

Very hard to say, I think it will be, it will be each one will have his own way of wanting to do the deal. Like I mentioned before, we will try and offer more a more subscription based OpEx type deals.

We don't know to what extent that will, we will be successful in that and we don’t know do what extent it will catch and it will really be each deal I think will look a little bit different than perhaps as we add more deals we can share with you what they were, but at this point it's very hard for me to predict..

Okay, and when you look at, top 10 contribution do you expect that to tick down a bit and get a more diversified CSP customer base or will it typically be a bit top heavy?.

I honestly don't know to answer that. I don't think, I don't think I have that kind of forecast. I think, today we're doing the top 10 or….

61% it's not really that top heavy I think..

And then, just can you give us a sense of how the initial reaction to the, that the GA or the [indiscernible] product has been so far and how the enterprise sales force is positioning that product?.

Not at this point, like I said I don't really can't get into any specific at this point beyond saying that we're, we are out there. We are out there and talking to customers about it and I think that generally there is interest, but I can't say much more than that..

All right, just one last question on the headcount, can you give us where it is right now?.

Regarding to headcount the full time employee at the end of the quarter I mean there was no any major change compared to last quarter there are approximately 470 - comp..

Thank you..

The next question is a follow up question from Alex Henderson. Please go ahead..

Thanks.

Well I mean just asked on headcount side will the restructuring lower the headcount and if so what should we expect in the year at?.

Nothing material like we said we don't expect any significant changes in the OpEx level. It's really moving around people replay it changing responsibilities and in some instances changing the personnel but there's no material effect on the headcount itself..

Then can you identify what the impact of exchange rate was in the quarter and whether you, what you're assuming into the third quarter..

First of all as you know I mean in the second quarter of 2017 the exchange rate of shekel compared to the dollar. The shekel gets much stronger. We did add some edging which actually and we actually were able to mitigate some of the impact of this devaluation of the dollar..

So you’re fully hedged in the third quarter and fourth quarter then at these levels..

We’re not commenting on our hedge level. We do from time-to -time when we do believe that it's appropriate to make some edge, but we're not actually disclosing any detail regarding that..

Okay, can you talk about how many 10% customers you had in the quarter. I know you gave the, that the top 10 concentration but what about the number of top of the 10%..

So yes during Q2, 2017 we had just one thought more than 10% customer..

So going back to the question around gross margins and this large deployment of hardware that's causing your gross margins to be less, so generally speaking, as I understand it hardware revenues were larger than services and software revenues in these projects so as the hardware revenues roll off should we anticipate then that your revenue contribution will be less from these projects and the gross margins rebound or is there enough acceleration in the uptake of the product in the field that you're able to offset the mix shift back software which helps your margins to recover by having further growth?.

I don't think I fully agree with your assumption that the hardware revenues are the big piece our value as a company is in the software that we provide software and system of course and design so on. The general trend and a lot is part of that is to move away from a customized hardware that we develop ourselves.

To software that we do develop ourselves design and then provide and running on standardized hardware platforms. And as we go more and more into standardized hardware platforms to the extent that we deliver them, the margins are going to be tight for obvious reasons but they're going to be a low.

They're not going to be the primary reason for our, for our revenues so, I don't see it that way..

So, you did not expect our revenue to edge lower once the hardware is fully deployed as we go out over the next two or three quarters?.

Look over the next two quarters we told to you what is our guidance was which obviously necessitates our revenues to be higher to meet those numbers and so the answer is no..

All right, so going back to the, the deploy side of it as we go out into 2018 then we should expect the margins to rebound towards the normal 70, 71, 72 and then continue to see the benefit of these deployments driving some acceleration in revenue in 2018 is that the right thought process..

I think you're. Look I think that its, we said, I said that we're going we expect to grow in 2018. And I expect that to be an accumulation of several things.

Some of that is going to be simply executing better on what we need to do and driving more business and sounds that going to be a getting better numbers from what I believe is our growth engine and that's our security business.

So I'm not quite sure how to answer, how to answer your question but I do expect growth in 2018 and with that growth I would expect both because this Pacific hardware deal is going to probably be the, the hardware portion is going to be less, less important plus the fixed them, fixed COGS.

Fixed element in the COGS is going to be less significant that revenues go up I do expect and will have better margins but beyond that I'm not sure I know what to say..

Just one last question is to the floor.

The value-added services calculation doesn't seem to be something you guys are offering up on these calls anymore is that something that we should just stop tracking or is that are you still using that as a metric what should we be thinking about that and if, if you're going to continue to use or what was the number..

I mean we’re reporting the same measure that we are measuring the company side and this is not something that we're continue measuring inside so we're not supporting that anyone..

Okay thanks..

[Operator Instructions] There are no further questions at this time. Before I ask Mr Erez Antebi to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin in two hours. In the U.S. please call 18-666-276-1485, in the U.K. please call 0800-917-1246, in Israel please call 03-925-5928.

Internationally please call 972-39255-928. Mr. Erez Antebi would you like to began, would you like to make your concluding statement..

Thank you. I just want to thank everyone for participating in this call and taking interest and supporting of our company. Thank you very much and I look forward to talking to you again on our next quarterly earnings. Thank you and goodbye..

Thank you. This concludes the Allot Technology second quarter 2017 results conference Call. Thank you for your participation. You may go ahead and disconnect..