Gabriela Toren - GK IR Erez Antebi - President and CEO Alberto Sessa - CFO.

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

Ladies and gentlemen, thank you for standing by. Welcome to Allot Communications Third Quarter 2017 Results Conference Call. All participants are present in a 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 the call over to Mr. Gabriela Toren of GK Investor Relations.

Mr.

Toren, would you like to begin?.

Thank you, operator. Welcome to Allot’s third 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 call 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 hand the call over to Erez. Erez, go ahead please..

Thank you, Gabriela. I'd like to welcome all of you to our conference call and thank you for joining us today. In the third quarter of 2017, we again saw our revenues grow compared to the preceding quarter and for the third quarter in a row our book to bill ratio was larger than one.

I expect both these trends to continue into our fourth quarter as well. As I shared with you in previous calls we are making some changes that we believe will lead to continued improvement in our results. I would like to explain some of the internal changes that we have already made and are still making.

One, during the third quarter we reorganized our sales and customer success teams into customer facing units or CFUs. This enables us to focus both the sales and delivery teams on the customers understand their needs better and serve them more efficiently.

Two, also during the third quarter we closed some product lines that were based on a lot designed hard work and replace the product to deliver enhanced performance using commercial after shop hardware or cost. This is part of our last ongoing transition to a software company. Three, we replaced some key people in management and sales.

During the third quarter our new Senior Vice President of R&D, Nir Pery joined us. Nir joins us from Verint, where he was the Senior VP Global R&D and Senior VP of the Product House. In addition, we were also joined by several new regional VPs heading up CFUs globally.

Four, we modified and improved our sales processes and the way we handle tenders and customers. We are in a continuous process to enhance our execution and internal processes as well as bringing on board strong people in all departments and as all levels within the company. This is an ongoing activity.

The expenses due to the restructuring in the third quarter were approximately $2.2 million, and Alberto will discuss this later in the call. I would like now to turn to the market and talk about what we see there.

As I have stated before we believe that communication service providers or CSPs will play a growing and significant role in providing security services to their customers. CSPs are in a primary position to secure customers access to the Internet and prevent customer and devices from being infected by malware, ransomware and other threats.

A loss position as a technology providing company that enables CSPs to provide such services puts us in a great position to grow as CSPs delivered these new services and expand their footprints.

The engagement tool that a lot has developed, enables operators working with our technology to reach penetration rates of 40% and even higher of their customer base who will sign on to the security service. As we look at the CSP security market I'm encouraged by what I see.

The number of subscribers using our network security and Vodafone continues to grow in almost all countries where it is deployed. Telefonica is nearing the launch dates of network-based security services in several countries in both Europe and Latin America.

And we are seeing growing interest in major CSPs to provide network-based security or unified security to increase their revenues and create differentiation. As a result, we see a growing pipeline of CSP security deals. While these can take some time to close and generate revenues, it is a further validation of our strategy.

Our network security is expanding it will shortly be linked to the IoT world. As part of our transformation to become a major player in the security market we identified a major market need for the security of IOT devices.

Although IoT is becoming prevalent in all areas of business and life IoT device security remains a major concern both in the enterprise world and [ex-home]. By their nature of being low resource devices IoT devices are usually not secure and on many of them it is difficult to place effective security software.

We believe that CSPs as owners of the communication channel are best positioned to provide IoT security and a lot has a big advantage and providing network-based security for IoT devices connected to the operator's network. As we discuss these possibility with various CSPs we see a keen interest in what we have to offer.

Moving to our more tradition market for CSP visibility and control or what is also called DPI, we see a growing pipeline here as well. These potential deals cover various use cases such as analytics and bandwidth management. These results give us confidence that the decisions we have made to date are moving us in the right direction.

In summary this has been a quarter in which we focus on the restructuring of our organization and implementing our plans. Our confidence in the company's growth strategy is continuously increasing and I believe that we will see the results in 2018 and beyond.

While the deals we are pursuing in our pipeline may take time to materialize, I believe they are a good market validation for our strategy. I believe in the fourth quarter we will see further sequential growth in our topline as we have seen throughout this year.

I would like to reaffirm our guidance for 2017 expecting full-year revenues of between $80 million to $84 million, trending towards the middle of the range. This obviously implies sequential growth in Q4. Regarding operating expenses, we expect and 2017 was a total yearly level similar to that of 2016.

We are working on a detailed plan for 2018 and we will share our guidance plan with you in the Q4 results call. We can't share that we plan for 2018 to be a year of growth. And now I would like to hand the call over to Alberto Sessa, our CFO. Alberto, please go ahead. .

Americas, with $5.6 million or 27% of revenues, EMEA with $12.1 million or 58% of revenues and Asia-Pacific with $3.2 million or 15% of revenues. Product revenues for the quarter accounted for 64% while service and maintenance and professional service revenues were 36%. This is compared to 55% and 45% split in the third quarter of last year.

GSP revenues were 84% in the third quarter of 2017 compared to 81% in the third quarter of 2016. It is important to note that driving your breakdown whether geographical or by product segments or other may fluctuate from quarter-to-quarter depending on the specific revenue in deals recognized in the specific quarter.

In terms of customer concentration, our top 10 customers made up 67% of our revenues. Our top three customers made up 54% of our revenues. Book-to-bill ratio in the quarter was above 1 for the third consecutive quarter.

Gross margin for this quarter was 68.2% compared to 67.6% in the prior quarter, while we saw an improvement versus the previous quarter the current level of gross margin reflects an increased weight of our growth in our revenue mix update initial or differences specifics subsidiary of Telefonica Global than to be our growth.

Additional order of software license is expected later once the product would be deployed and launched. Operating expense for the quarter were $15.5 million, are on the same level at $15.6 million as reported in the prior quarter. On a GAAP basis we had $2.2 million in restructuring expenses.

These were primarily related to closing some of our customer -- hardware product lines, employment termination costs and extra commission we expect to pay due to the ray assignments of deals as part of the sales restructuring. Operating loss was reduced compared to the previous quarter.

Operating loss for the quarter was $1.3 million, compared with an operating loss of $2.4 million in the prior quarter. Net loss for the quarter was $1.3 million or $0.04 per share, an improvement from a net loss of $2.3 million or $0.07 per share in the prior quarter.

Turning to the balance sheet, our cash reserves comprise of cash, cash equivalents and investments as of September 30, 2017 totaled $109.9 million. The company recorded a negative operating cash flow of $1 million during the quarter.

In terms of guidance as Erez mentioned we have reiterated the revenue guidance for the full year of between $80 million to $84 million, trending more towards the middle of that guidance range. That concludes my remark. We would be happy to take your questions now.

Operator?.

[Operator Instructions] First question is from George Iwanyc of Oppenheimer and Co. Please go ahead..

So, looking at Vodafone ramp can you give us a sense of the pace of that ramp and which regions are seeing the largest attach rates and how much growth do you expect over the next couple of quarters?.

While the exact subscriber numbers and how many are taking every month and so on really Vodafone proprietary so, so I can't really share that.

I can tell you that we are operating the security services now in -- I think it's over eight different countries, and almost all of them there maybe one where it's not growing but now installed and its growing. All of them are in Europe.

very high rates that we achieved, are in the countries that started first which are Spain and Italy, they have started over two years ago. So, we are reaching penetrations there that was public information maintenance in Spanish newspaper that Vodafone put out that they reached -- that they exceeded the 40% penetration rate there.

And rest of the countries started out later and they are now growing..

Are those new countries matching the type of ramp that the Italy and Spain did for this same point of time of the ramp?.

It’s a bit hard to say because some are going faster some are going a bit slower I would say that on average its similar. But I can't tell you that really tracking on a monthly basis..

Can you give us a sense of how close we are to Telefonica launching and how many countries are involved in the initial wave?.

Again, it’s a service launched by Telefonica, so I think I'm not familiar that they have released the date that they plan to launch so I don't want to release it for them. But it's pretty soon I would say within, let's say a month or something. And it will be gradual across the various countries. We are talking about five or six different countries..

And looking at the pipeline with CSP at this point how many significant yields are you working right now are we looking at a six to 12-month type of timeline for the deal work or is it extending beyond that?.

Some -- look CSPs intend to have very long sales cycles, so some of them will be six to 12 months, some of them could be even longer than that. We are working on quite a few deals that are for us significant. And I'm not sure I can share much beyond that..

Just overall pricing trends, competitive environment how do you feel about the current landscape?.

This is a telecom business so in a lot of senses there is always pricing pressure but I don’t see anything extraordinary or different than usual..

On the OpEx levels are we at a sustainable level when we look into 2018, is first blush from 2018 year-over-year kind of flattish or do you anticipate growth in any significant amount?.

From an OpEx point of view I mean first of all regarding this year, as we said before I mean we expect 2017 to be very similar to 2016 level. Regarding next year we are currently working on our [indiscernible] operating plan and of course we will be able to give some guidance in the next call.

However, we can expect some slight increase in our OpEx level towards the 2018..

The next question is from [Horowitz] of OS Capital. Please go ahead..

It's very encouraging the progress you're making.

I was wondering if you could talk about the breakeven level for the company in terms of cash flow?.

Regarding breakeven at the quarter yearly OpEx level and if I assume a gross margin of 68% which we talked what is the average year-to-date in 2017. I mean the breakeven point is approximately around $95 million I would say. So that’s actually what we do believe breakeven should be. .

Okay. And given that I guess your focus is on software.

Should we – will 2018 what we see a higher gross margin potentially because of the software focus?.

I think that gross margin has many things that contribute to debt. I mean one of those as you mentioned is the software portion which we do believe that will grow, we want to be a software company and our software portion probably will grow. On the other hand, we have also to take into consideration the product mix and new deals coming in.

So, it’s very difficult at this point in time to see any trend for 2018. And as I said before I mean we’re right now working on the plan and we will be able to share with you soon some guidelines also regarding that. .

Okay.

And just in terms of recurring revenue, would it be fair to say that on the certain level you now have recurring revenue coming into the company?.

I would say the recurring revenue that we have coming into the company is related to maintenance and services, it’s not yet a OpEx model deals that we would like to have in the future. .

But aren’t people going to renew, isn’t the anticipation that every year there going to be renewing the security features that your providing?.

I think we talked about this in previous calls, but I can repeat that both Vodafone and Telefonica which are the two main security deals that we’ve talked about om both of them these are from customer perspective, these are CapEx based deals, where they buy perpetual license on a per subscriber level.

Now, those licenses although there is perpetual do come with an ongoing recurring maintenance fees, support fees and so on. But, they are not recurring revenue -- so there is an element of recurring revenues, but it’s not that they are paying the same amount every year to sustain the license.

Because they have initially bought a perpetual license for that subscriber. .

Okay. Thank you..

Hope I was clear..

Yeah. No, no thank you.

And just on in terms of restructuring charges, do you feel that – we see in Q4 restructuring charge or is this pretty much it’s we’re restructuring?.

It’s pretty it, I mean all there is actually transits are included in this quarter in Q3..

Okay, wonderful. And just the cash -- sorry..

Sorry, I do want to add one thing to my response, we are under recurring is that we do want as a company to move more towards an OpEx based model or if you like Software as a Service type model.

So, we are offering that to customers not all of them will be interested, it will take some time while we do want to transition from CapEx onetime perpetual license deals to recurring payments for those licenses..

Just on that note either others that are doing that on a recurring revenue basis or SAAS model right now in that space?.

No, well you know the traditional security companies that like McAfee, Symantec, those guys definitely yes, that’s the way much of the pricing is. Our direct competitors in our legacy area like [indiscernible] not to the best of my knowledge..

And just finally the 100 million plus $109 million of cash that you have on the balance sheet can you use that for acquisition or is that right now more important for you to show the cash on your balance sheet given the kinds of customers that you're getting currently?.

I think it's can we use it for acquisition -- I think we can definitely use some of it, it's you correctly stated that it's very important for us to show down our balance sheet, given the kind of customers that we are going after they want to see a stable company that’s going to be here for the long run.

And this is from their perspective a very important metric for that. But as I have stated before I think we will need to do acquisitions after we put our house a little bit more in order and we get into good organic growth and will look more seriously at other options for the cash..

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

I just wanted to clarify few things.

Could we start off what's the headcount is post at the end of the quarter post to restructuring?.

Yes, our headcounts at the end of this quarter post restructuring is 475 people..

So as a result of the restructuring actions taken and completed during the third quarter is there a sequential decline in operating expenses or you essentially saying OpEx is flat at these levels sequentially into the fourth quarter?.

I would say that its approximately flat. And we do not see any decrease or re-increase significantly in OpEx..

So, is it just a matter of the people that have left in the cost cuts that were made -- that are being reinvested in areas that are focusing on your future growth is that the right way to think about that?.

First, I would like to make a note regarding my previous answer regarding OpEx, the one important thing that we have to take into consideration is the exchange rate, because I mean while the dollar compared to the shekel is changing, [indiscernible] the shekel is becoming stronger and stronger, I mean these had some impact in our OpEx and we will have to take this into consideration, I mean the exchange rate is going down, we did edge some of our expense in 2017.

And if this trend of exchange rate will continue so we may see some impact on our OpEx level. .

So, assuming a flat dollar you have some hit to exchanges as a result of the hedges rolling off?.

Yeah. This is correct. .

All right. Okay. When I look at the guidance on the topline, just as I understand the mechanics around it, you’ve typically had a seasonally strong fourth quarter, if I look back overtime.

Is it reasonable thing that we’re kind of add a $20 million to $21 million portfolio run-rate as we sit here today and this a little bit of a seasonal pop in the fourth quarter that will go back to a seasonal weakness in 1Q.

Just trying to get some sense of the structure of the revenues based on the current business conditions that you’re looking at?.

I think definitely there is a seasonal element in Q4, because Q4 is traditionally stronger as you correctly noted. But, I think you also have to look at it that Q4 comes on the back of three consecutive quarters with a book to bill ratio what we want.

So, we’re building backlog through the quarters and part of that will show itself in Q4 as well irrespective of the seasonality. And as for how we should expect whether this is a typical quarter or not, really first two through our guidance for 2018 which I prefer to hold up on until the next earnings call..

Right.

But, I mean just seasonally we should be still thinking the first quarter seasonally weak and this is seasonally strong is the right way to think about it?.

Yeah. In general, you’re right because we still to communication service providers and their budget plans are usually on the yearly basis and they tend to spend a bit more towards the end of the year than they do at the beginning. .

So, as we shift to a business that’s driven off of subscription sales. Does that -- what I’m trying to get at is does that change the seasonal pattern as the revenue start to accrue based off of new subscribers adds as opposed to large capital expenditure timing frameworks.

And the second question is you did indicate that you’d eliminate from product areas that were more legacy and not consistent with where we’re moving away from hardware.

Is there any reduction in the revenue business associated with those products that we could quantify to understand the baseline?.

Okay. On the first question regarding what happens when we start getting more subscription based revenues. First of all, that’s going to take time to build up, we have to not only purpose the deals we have win them and then the number of subscribers has to start growing.

So, it will take time for that to impact our numbers, that’s something will be anytime soon. And it will grow overtime and that portion that once it starts growing that portion will probably not be subjective to seasonality, because it simply a number of subscribers which hopefully is going to trend upward continuously.

Regarding the products that we have discontinued and replaced in -- I think from revenues perspective I don’t think this should make any material change because what we have essentially done is our product -- think of our product I think it may be a bit oversimplified just so it's more clear, think about our product as really a software package, and until now it was running for certain applications it was running on a lot designed and built customized hardware.

And our thing that same package with the appropriate adaptations and moving it on to a standard hardware platform that we can buy from HP or somebody else that they off-the-shelf hardware.

So, we would still in many cases, actually in most cases we would still be providing and applying with our software but it's no longer our appliance we can just go and buy it on the free markets, which illuminates our need to design hardware keep improving it because that happens anyway without our need to invest in and therefore performance keeps growing, without us spending the investments required there.

So, it makes for a better product, it makes a better upgradability but we will still be providing appliance-based devices to our customers because that’s what they still want. And we will be investing our R&D, our resources in software..

Just follow up on that line logic does that change the gross margin structure of the combined offering with the cuts hardware cost and you less to purchase and therefore more of a software mix to a gradual shift to higher margin is that the right way to think about that?.

I wouldn’t think about -- I wouldn’t think in those terms in the short-term. I think that longer-term that will probably be true but that will take time..

[Operator Instructions] The next question is from Joseph Wolf of Barclays. Please go ahead..

My question about the -- I guess you have talked about the book to bill in the sequential and some of the seasonality on the last question but could you give us a rough I guess rule of thumb given the current mix of product how long something would sit or long that greater than one takes to flow-through over the next couple of quarters.

I mean we have three quarters of visibility, four quarters, is it six quarters given the contracts that you are signing now..

Just speaking of your [indiscernible] regarding our backlog, that will how and in which we will be recognized. So, most of the backlog is recognized within the first four quarter and the there is a certain percentage certainly related to maintenance or mainly related to maintenance I would say, that its over debt period.

But I think that majority of our backlog is recognizable during the first whole quarter..

And then you touched on this with the -- I guess the goal of turning towards a more subscription based SAAS type of mode.

But as you -- can you walk us through you -- you have got Vodafone, you have got Telefonica what kind of products are they offering to customers and is there an opportunity for you to layer in another service that would be added to that and that you would get I guess there is still structuring, as a perpetual license that you would get two licenses per user from them or how you sell an update meaning you are protecting more you have got a new update.

How does that work with the current model and how that work for SaaS?.

With the current model a customer like Vodafone has is providing -- let's take Vodafone as an example, they’re providing network security to their customer. A customer signs on to Vodafone because they are customer of course pays them a certain amount typically €1 per month for the service.

They would buy a perpetual license from us and some associated hardware for that customer and they would pay us an initial -- some initial amount that was agreed upon.

And then over the next year they will pay us for a maintenance services, upgrades because we come up with a new software so they have the right to upgrade it, but they pay for that as part of their maintenance and renewal fees.

In a SaaS model, it will be different it will be that they will not -- any new operator that signs up to us with a SaaS model will just pay us on an annual basis for the use of the license for that customer, for that year and you will not pay us anything upfront.

Now, do we have a chance to offer new services to somebody like Vodafone and get additional license, I can’t say that there is no chance, but the key is in order to get a more revenue from an existing customer like Vodafone or new type of revenue, they would have to offer a new type of service to their customer.

So, it’s not – and that’s not true the fact that the service gets better and we offer better services in SaaS that’s part of the regular upgrade is that they pay for smoother review and maintenance fees. .

Okay. So, would it had to be something significant. .

Right. .

And then just geographically, you’ve got with these services right now with Vodafone and Telefonica you’ve got I guess European and LatAm exposure. Can you talk about the other regions, North America, APAC? If you look at the communication service provider and market.

Are you seeing the same kinds of pipeline for these kinds of product globally? Or do you expect your next couple of wins or is the pipeline is still a European and LatAm kind of focused customer base?.

No, we’re seeing the pipeline for these deals also outside of Europe and LatAm. But I will say immediately that since we’ve talked about in one previous question, these kinds of deals take time. And we reorganize the salesforce during third quarter, we brought new heads of sales to the regions during the third quarter, this takes time.

But we are definitely seeing deals like this or interest I would say more accurately, interest in deals like this outside those geographies. .

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

Yes, I just want to thank all of you on behalf of Allot and the management team for your interest and support of our company. Look forward to talking to you in the next quarter..