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

George Iwanyc - Oppenheimer and Co Dan Park - Needham & Company Marc Silk - Silk Investment Advisors.

Ladies and gentlemen, thank you for standing by. Welcome to Allot's Fourth Quarter 2017 Results Conference Call. All participants are at 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 company's Web site at www.allot.com. I would now like to hand over the call to Mr. Gabriela Toren of GK Investor Relations. Mr.

Toren, would you like to begin?.

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

During the year, we made quite a few changes at the company. We refocused the company and are rapidly transitioning to become a security focused company. We made significant changes to the management team. We restructured the sales and customer success division into customer facing units or CFUs. We modified and approved many of our internal processes.

We restructured some of our operations and shutdown some offices. And, we replaced Allot's custom hardware with standard commercial off-the-shelf or COTS hardware in many of our product lines. This is part of our transition to become a more software centric company.

While we continue to improve on our execution and operations, the results of what we did are starting to be seen. We grew revenues quarter over quarter. We met our revenue targets for the full year 2017. We grew our backlog and we grew our revenues from security by over 40%.

I am convinced that the changes made during 2017 build a solid base for Allot to return to growth and profitability. I would like to take a step back and examine the relevant security market as we see it. Think of the mass market of people, consumers, and small businesses constantly accessing the internet. We access the internet all the time.

We access the internet over a wide range of devices, be it our mobile phones, computers, or tablets. We have an ever growing number of IoT devices in our home, cameras, Smart TVs, loudspeakers, and more accessing the internet by themselves. We know the threats on the internet just keep growing.

More malware, more phishing attempts to steal our information, more ransomware to steal our money, and more offensive content we would like to protect our children from. Who takes responsibility to protect us from this? Well, actually it is the responsibility of each and every one of us.

While in our businesses we have a professional IT department to protect us, at home we are individually responsible. But we as individual consumers don't have the knowledge to do this. We don't know which way is better, what security service is good, or how to make sure the camera in our kids room doesn't stream the pictures to someone else.

I believe that the communication service providers or CSPs have a big role to play in filling this void. Studies have shown that consumers look at the CSP to protect their access and many of them are willing to pay the CSP 10% or more in addition to connectivity charges to do so.

CSPs are starting to realize that providing secure internet access rather than plain internet access can bring them significant incremental revenue with very high penetration rates and very high customer satisfaction. There is a unique potential for CSPs to start offering "Peace of Mind" secure connectivity services to the mass market.

Secure access anywhere, anytime from any device. This is a huge revenue potential. CSP access revenues in the 18 top ARPU countries alone from mobile devices alone topped $270 billion. If we include consumer fixed broadband access in other countries, the access revenues of ARPU customers are at least double.

Market studies show consumers willing to pay 5% to 10% extra for security leading to a market opportunity that may be worth $40 billion annually for the CSPs. While some CSPs like Vodafone, Telefónica and others have already launched or about to launch such services, we believe many more will join.

And this market opportunity will grow rapidly over the next few years. Allot is the leading provider of telco grade network based security products for CSPs. And we plan to be the leading provider of security technology and products that allow operators to provide secure connection to the mass market.

We believe that Allot can get at 10% to 15% of the additional revenues the CSPs can make on security, which means we are looking at a total addressable market of $4 billion to $6 billion a year for Allot. This is a much larger potential that exist in the visibility and control market which is still currently the majority of our revenues.

As I mentioned before, in this large and growing segment, Allot is the clear technology leader. With this vision in mind, we have built our Allot Secure platform. Allot Secure is the unified security service platform that enables CSP to secure the connectivity of their customers anywhere, anytime, and on any device.

It is designed for mobile, fixed and converged communication service providers as well as for secure IoT connectivity.

Like all good security measures, it is built with different layers of security, each protecting a different aspects; all elements work together under a single management layer that allows the CSP to offer similar security to the customer wherever they are all under the CSP brand and control. This platform has five main components.

Network Secure, previously as Web Safe Personal or WSP, this component delivers the network based security layer. Currently, Network Secure is focused on mobile networks, but we are expanding it to fixed networks as well. This is the component that is used by Vodafone and Telefónica and provides security while on the CSP network.

Endpoint Secure, this component is based on client endpoint security for mobile devices or computers. We do not intend to develop an endpoint client software, but rather partner with others who are experts in this. This is what we did in our agreement with McAfee.

This layer of security provides security for customers off net, for example, when they connect to the internet via public Wi-Fi. Home secure, this component provides security for consumers at home, protecting home IoT devices, smart appliances, and computers in the home. It is based on security software that will reside in the home gateway.

Netonomy is a company that develops such security software. And the acquisition of Netonomy that we announced in January will form the basis for our home secure component.

IOT secure is a network based solution that is positioned primarily for mobile operators to offer IoT security to the business customers such as connected cars, vending machine, industrial uses et cetera. DDoS Secure is a component that protects the CSP network and the end user from creating or receiving DDoS attacks.

It resides in the core part of the operator's network. Common to these components, Allot will provide a unified security service management system that provides central management for all the platform components. One of the key advantages of Allot Secure is our customer engagement tool.

Using these tools, we show the consumer that he is protected and periodically report on what malware or other problems we successfully defended against. This shows the consumer the value he or she are getting for the extra service payment and helps drive penetration and increase customer loyalty.

We believe that these tools and close customer engagement are a major contributor to achieving current security service subscription rates of up to 50%, and high NPS scores of 28 and more. I would like now to add some details about the rationale of the Netonomy acquisition that was announced in January.

Netonomy develops an innovative security software app that can be downloaded to existing home gateways, and are centrally-managed. When combined with network secure, it enables a fifth CSP to extend security from within the network into the smart home with additional security capabilities.

The additional security layer provides visibility on the individual-connected devices that previously were matched behind the router at the home edge. Home secure enables Allot to address the fixed CSP market more cost effectively, and address the growing market of smart homes that require a network-based security.

Since IoT devices are notoriously insecure and many times cannot be protected by an add-on client, we believe that any solution for IoT Security and home network security requires an element with end home network.

I would like to point out that in our offering to the CSP security market, we are making significant efforts to change our business model from a one-time CapEx-based model to an OpEx recurring revenue model. We expect to see the beginning of that in 2018.

Side-by-side to the deployment of our security strategy, Allot is continuing to be a leading vendor in the Visibility and Control domain. Our price line is growing in this market as well. While traditional DPI market is not growing much and has strong competition, Allot is today addressing new and growing used cases, in which we are investing efforts.

Among these are, smart truck Experian to collectively handle congestion and reduced connectivity costs, regulatory compliance to allow governments to block malicious or illegal sites like the U.K. government is requiring of U.K.

CSPs, quality of experience, where CSPs can understand what the real user experience on their network even on encrypted traffic, such as YouTube or Netflix, and analytics to enable the CSP to get significant, detailed, and actionable analytics on their network to properly plan network build and configuration.

I would like now to provide some outlook for 2018. We expect revenues to grow in 2018 compared to 2017. Looking ahead, we expect revenues in the $91 million to $95 million range for 2018, with the second-half of 2018 better than the first-half. We expect most of this growth to come from our security offerings.

Our goal is to have a similar double-digit growth -- of rate of growth to continue into 2019. We ended 2017 with a backlog of $55.6 million compared to a backlog of $42.3 million at the end of 2016. In 2018, we expect book-to-bill ratio to be above one, which means the backlog will continue to grow also in 2018.

As booking in Allot is lumpy in nature, going forward, we will be reporting on the backlog number at the end of each year. As we mentioned in the past, our goal is to bring Allot to solid growth in the coming years and eventually to profitability. As a result, it is important to invest in these areas that serve our growth strategy.

In 2018, we are going to invest in the Allot Secure Platform, including further development efforts in Netonomy, our home secure product. And now, I would like to hand the call over to Alberto Sessa, our CFO. Please go ahead..

Americas, with $3.1 million or 13% of revenues, EMEA with $15.16 million or 67% of revenues and Asia-Pacific with $4.5 million or 20% of revenues. Product revenues for the quarter accounted for 57% while service and maintenance and professional service revenues were 43%. This is compared to 65% and 35% split in the previous quarter.

GSP revenues were 80% in the fourth quarter compared to 84% as reported in the prior quarter. It is important to note that revenue breakdown whether geographically or by product segment 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 62% of our revenues. Book-to-bill ratio in the quarter was above 1 for the fourth consecutive quarter.

Gross margin for the quarter was 68.4% compared to 68.2% in the prior quarter, while we saw an improvement versus the previous quarter the current level of gross margin reflects an increased weight of hardware in our revenue mix as the initial order from the subsidiaries of Telefonica Global tend to be mainly hardware-related.

Operating expense for the quarter were $17.1 million, compared to $15.5 million as reported in the prior quarter. Our higher level of non-GAAP operating expenses was due to changes in headcount including the additional some more experience employees as well as the impact of the very strong shackle which represent a large portion of our expenses.

During the quarter, we made a comprehensive analysis of our tax position. Included the impact of best regulations, as a result of that we are doing two things.

First, we are changing in 2018 an behind the operating margin in some countries to work more correctly going forward and second we recorded on a GAAP basis during the fourth quarter 2017, a one-time non-cash charge in connection to the changes in tax-related items of totally $1.5 million.

Non-GAAP operating loss for the quarter was $1.3 million compared with an operating loss of $1.3 million in the prior quarter. Net loss for the quarter was $1.5 million or $0.4 per share compared to a loss of $1.3 million or $0.04 per share in the prior quarter.

Net loss for 2017 was $8.6 million or $0.24 per share, compared to the last of $0.7 million or $0.02 per share in 2016. Turning to the balance sheet, our cash reserve comprised of cash, cash equivalents, and investments as of December 31, 2017, totaled $110 million.

The company recorded a positive operating cash flow of $1.1 million during the fourth quarter. In terms of guidance, as Erez mentioned, we expect revenues to be in the range of $91 million to $95 million in 2018, representing continued year-over-year revenue growth throughout 2018. We also expect our book-to-bill ratio to be above one for the year.

We expect our gross margin in 2018 to be similar to that in 2017. Our OpEx in 2018 will grow compared to 2017 for three main reasons. One, additional investment in R&D; two, additional investment required in Netonomy for the home secure products; and three, significant changes in the foreign exchange rates.

We expect our OpEx in 2018 to be approximately in the range of $70 million to $71 million. I do want also to note that we plan on opening a R&D center is a low cost location to help the effect of additional R&D investments and foreign exchange rates in the years to come. That concludes my remarks. We would be happy to take your questions now.

Operator?.

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] First question is from George Iwanyc of Oppenheimer and Co. Please go ahead..

Thank you for taking my question.

Looking at full-year 2018, can you give me a sense of the visibility you have into the second year with the increased growth that you expect then?.

Yes. First of all, our growth in 2018 is based on two main things. First of all, the backlog; we mentioned we are stuck in the year with a backlog of approximately $55 [ph] million. Generally, we are able to recognize our backlog over, I mean, 80% of our backlog over a period of one year.

And on top of that the second reason is the way that we are looking at our pipeline. We do believe that our pipeline, first of all, is healthy and it comprise of quite a lot of opportunities, with different sales cycle. But based on those two elements, backlog and the pipeline, we do believe that can achieve our goal in terms of growth in 2018..

Okay.

And with all the changes that you had with the sales force, can you give me a sense of productivity levels that you are getting from the new additions and with the new alignment of all the teams?.

I'm not sure I have a fixed parameter for you off the top of my head, but I think you can understand that if books-to-bill in 2016 was under one for all the quarters, while we build backlogs throughout 2017, then you can understand that our bookings went up significantly.

And since we didn't change the headcount itself by much, I would say the productivity in terms of booking per headcount definitely went up..

Okay.

And the new R&D, I know that you are looking at adding; is that included in the $70 to $71 million OpEx number for the year, or would that be additional headcount additions given the timing?.

I'm sorry; I didn't get the new -- I didn't get the start of the question, the new what?.

The new R&D center that you are investing in, is that fully included in the OpEx guidance for the year?.

Yes. I mean, as I mentioned before, the main reason -- one of the main reason for the increasing OpEx in 2018 is additional investments in R&D. So yes, the answer is yes, it is included..

Okay, thank you..

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

Hi, good morning. This is Dan Park on for Alex. Congrats on the great quarter.

So, I just wanted to clarify a few things; first of all, just wondering what the headcount was post-quarter?.

Yes, the headcount at the end of the quarter was 477, simply..

And also -- sorry if I missed this, but if you can just tell what your service provider versus enterprise breakdown was for the quarter as well?.

Yes. Service provider was 8% in the last quarter compared to enterprise, which was strange [ph]..

Okay.

Also, in regards to some of the OpEx investments that you are going to be making in 2018, is the right way to think about it -- it should be more back-half weighted versus front-half?.

It will be somewhat more back-half weighted. I think yes, the answer is yes, but by some measure..

Okay, great. Thanks for taking my questions..

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

Thanks for taking my question.

The first question is obviously in the U.S., they are taking us -- eliminating net neutrality; I know you are doing a company shift, but can you comment on that if that becomes a reality, what that could mean for Allot going forward?.

Okay. I think at this point, the decision was already made, and basically in terms of regulation, neutrality, my understanding is behind us in the U.S. I think that right now we are talking to the major operators, the Tier 1 operators in the U.S.

They are still not looking at doing any dramatic change in terms of the services that they provide their customers. So, I think right now they're still spreading lightly. There was very, very significant discussion in the U.S.

on what could potentially be bad about reversal net neutrality, and I think that from what I see, the Tier 1 operators are still hesitant to go ahead and show that they are making any differential treatment either to different sources or customers, or applications, or whatnot. That may change in the future.

And if it does change, it could present a nice opportunity for Allot. We're not in anyway shying away from the Visibility and Control segment; it's still a majority of our revenues. We plan to go ahead and continue to invest in that, and to the extent that the market allows for, we would like to try and grow that piece of our revenue as well.

So, yes, if the U.S. operators decide that they do want to take advantage of reversal of net neutrality and start doing things differently, and it will be placed for our technology, we will be more than happy to provide that. Having said that, our focus on -- our focus growth is really on the security, like I said before..

That's a great answer. Also, since the U.S.

has changed their tax for corporations, have you seen any maybe different interest from customers, maybe increasing their spent?.

I think the sales cycles was large operators, typically take you know, from a one to two years. So, I think that we haven't seen anything into that -- reacted that fast to the change of the tax. So, it may come, I hope it will, but at this point I can't tell you that I have seen this..

Okay.

My last question on Netonomy, were there revenues involved to this, or this is just to enhance your offering, number one; and number two is, were you have another price you paid, do you have to file that eventually?.

I understand that we do not have to file that. And there were no significant revenues involved..

Okay. Thank you, and good luck going forward..

Thank you..

Thank you..

[Operator Instructions] There are no further questions at this time. Mr.

Antebi, would you like to make your concluding statement?.

On behalf of the management of Allot, I want to thank you for your interest and long-term support of our business. And I look forward to talking to you next quarter. Thank you very much. Bye-bye..

Thank you. This concludes the Allot's fourth quarter 2017 results conference call. Thank you for your participation. You may go ahead, and disconnect..