Allot Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Allot's second quarter 2020 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 Investors and Public Relations at 1-646-6888 or view it in the news section of the company's website at www.alot.com. I'd now like to hand the call over to Mr. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin, please?

Thank you, Operator. Welcome to all of you to ALOT's second quarter 2020 conference call. I would like to welcome all of you to the conference call and thank ALOT's management for hosting this call. With us on the call today are Mr. Erez Entebbe, President and CEO, and Mr. Ziv Leitman, CFO. Erez will summarize the key highlights, followed by Ziv, who will review Allot's financial performance of the quarter. We will then open the call for the question and answer session. Before we start, I'd like to point out that this conference call may contain projections or other forward-looking statements regarding future events or the future performance of the company. These statements are only predictions. and a lot cannot guarantee that they will in fact occur. A lot does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of the impact due to the COVID-19 pandemic, changing market trends, reduced demand and the competitive nature of the security systems industry, as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission. and with that, I would now like to hand the call over to Erez. Erez, please go ahead.

Thank you. I'd like to welcome all of you to our conference call and thank you for joining us today. Our second quarter was another quarter of solid growth. Revenues grew 23% year over year for the second quarter and reached $32.8 million. This is our tenth straight quarter of double-digit revenue growth year over year and I am very pleased with the results we achieved during the second quarter. I believe it shows we are on track and successfully executing on our plan. The number of opportunities we see continues to grow and we continue to close new deals, win against competition, bring more business and grow our revenues. We expect revenue growth in 2020 to accelerate compared to our revenue growth rate in 2019. As we see our opportunities grow, we are continuing to increase our investment to capitalize on the significant number of opportunities that we see. Ziv will provide more details on our financials and forecasts later. Like most everyone else, over the last five to six months, our customers, our employees, and our way of working has been affected by COVID-19 epidemic. I would like to discuss how this is changing the way we operate and then turn to see how we see our customers reacting. As the pandemic and restrictions started, we set for ourselves two primary goals with equal importance that have remained our goals throughout. One, to maintain and safeguard the health of our employees and their families, and two, to continue to meet our commitments to our customers in a timely manner and achieve the goals we set for ourselves. Most of our employees worldwide are continuing to work from home. While the numbers change from country to country as rules and conditions differ, in Israel, for example, approximately 25% of employees work from the office and the rest work from home. Meetings, even those in the office, are held by videoconference to minimize physical contact. We continue to see high productivity across all departments. For example, on July 31st, R&D released several product releases in both a lot smart and a lot secure product lines. They were released on time with the required content and quality. Our customer success group continues to deliver, install and pass acceptance on new installations. Our global service organization is constantly lowering the number of open customer travel tickets. Our ability to continue to sell, deliver and service according to plan is a testament to the spirit and dedication of all Allotte employees worldwide. I want to take this opportunity to thank them all for their efforts and fantastic work. We do however hear from our employees that the current situation is stressful for them. This is a result of working from home, lack of physical interaction, and also due to the fact that communications are very structured in video conference meetings. The lack of the informal coffee room quote unquote and corridor type interactions is starting to show. This is an issue we plan to address over the next few weeks as the holiday season will come to an end. As I mentioned in the previous call, ALOT has not laid off people as a result of COVID-19 nor have we forced any of our employees to go on vacation with or without pay. In fact, we are continuing to invest in our products and capabilities and we are taking advantage of opportunities to hire talent as they present themselves. It is worthwhile to note that while some companies are laying people off, voluntary attrition is lower these days both in Alot and from what we can see in other companies as well. Voluntary resignations in Alot during the second quarter were about half of those in the first quarter and were also lower compared to 2019. I would now like to turn our attention to our interactions with our customers worldwide and share with you a few broad observations. CSPs are continuing to provide services to their customers, even though many of their employees are working from home. While initially we saw significant traffic growth in the networks, traffic has now stabilized and even come down somewhat. However, we now see the networks experience higher than normal traffic surges as conditions in the countries change. Overall, operators are adjusting well to the situation and for the most part have managed to handle the change in traffic patterns. Most CSPs are continuing not only with the regular business but with new projects as well. While delays in processes and decisions continue, we do see accelerated efforts by CSPs to get back to business as usual despite not physically returning to their offices. Interactions with existing customers and people we know is continuing and I think to a very large degree we are all adjusting well to virtual meetings replacing physical meetings. This is going very well and we are able to actually do more than we used to as we are saving significant travel time. The more challenging part is establishing new relationships and generating new leads with operators we are not familiar with. To this end, we are modifying our sales approach to increase our demand and lead generation. We are also increasingly transitioning our demo and proof of concept capabilities to the cloud to enable us to show our customers more with less physical presence. This approach is evolving, but we are already seeing new opportunities coming from it. I will now try to briefly address each of the different market segments we are active in and provide a bit more granular color on what we see in the market. AlotSmart traffic management is used to provide operators visibility on their networks and manage their traffic. We are seeing growing interest by CSPs to gain visibility on the network as well as manage traffic surges and congestion on both mobile and fixed networks. I believe AlotSmart is well designed to address these needs and this gives us an advantage. Given the increase in time spent on the internet, we are seeing a growing need for governments to protect their citizens from malicious or illegal activity. As a result, we are seeing growth in the number of opportunities for our digital enforcement use case. For example, The Department of Internal Affairs in New Zealand recently awarded us a bid to enforce the prevention of child exploitation by blocking sites that contain exploitative contents. The growth we see in this use case is worldwide. In the enterprise market, larger enterprises, which are the focus of our business, do not seem to be significantly affected by the COVID-19 pandemic. In smaller businesses, we do see larger delays in projects and hesitancy to spend money now. We are seeing very positive signs from the agreement we signed with Broadcom to serve packet shaper customers. In the few months since signing the agreement, our enterprise pipeline has seen a strong double-digit growth as a result of the agreement. I am very optimistic about the growth in this I am very optimistic about the growth this deal may bring to our enterprise business. While some deals take longer to materialize, and it is a bit more challenging to bring new deals into the pipeline, some use cases are showing strong demand growth. So overall, on balance, I think the market demand for AlotSmart product family is similar to pre-COVID-19 demand. To summarize, I believe demand for the Allot Smart product line, including congestion management, traffic management, steering visibility, digital enforcement, and enterprise use cases, will remain solid for Allot in 2020 and beyond. I would now like to turn our attention to the security segment. We see a significant increase of cyber attacks, most notably phishing attacks, on both consumers and SMBs . This is giving rise to growing awareness on behalf of consumers and SMBs of the need for protection. It is also contributing to a growing awareness on behalf of operators that they should provide a secure broadband connection. Our security segment is seeing good traction. Since the previous conference call, we signed several security expansion deals Two of which are recurring security revenue deals with operators in APAC and EMEA that already had recurring security revenue deals with us and decided to expand them. These operators saw the commercial benefits from providing security services to their customers and decided to go ahead and provide additional services to an additional customer base. This is very encouraging indeed. We are also seeing new projects initiated and new RFPs published during the pandemic and even after lockdown started. Interest by CSPs to deliver secure broadband connectivity to their customers looks to be growing worldwide. We see new opportunities in EMEA, in APAC, in North America, and even in Latin America despite the COVID-19 situation there. Our pipeline for recurring security revenue deals is growing and I am very encouraged from it. However, at the same time, we are seeing some projects getting delayed as operators are more focused on delivering existing services rather than new services. I remind everyone again that working with CSPs takes time, with sales cycles typically exceeding 12 months and the time from signature to launch of the service around 9 months. The current COVID-19 pandemic may delay some sales cycles by even a few months more and even delay the launch of some of the deals we already signed. As I discussed in the past, Allot is endeavoring to sign security deals in a recurring security revenue deal model. While not all operators will accept this model, we are encouraged to see that more and more operators do accept it. Our goal, therefore, is to build a substantial base of CSPs will accept the recurring security services model which will launch security services to their customers. We will work with them to help a large number of end users sign up for the security service. These are the types of deals that will ensure the long-term growth and success of Alot. It is still challenging to accurately assess the impact of the epidemic and behavioral changes on recurring security services both in terms of number of operators and in terms of take-up rate of customers. Currently, we see a growth in our pipeline of operators looking to launch security services. And while there are delays in decisions and implementation attributed mainly to COVID-19, the pipeline growth is very encouraging. In services that were already launched, we initially saw some lower growth during the weeks of lockdown compared to the period before. However, as countries open up, we see a return to pre-COVID-19 growth rates. One of the operators that launched the consumer services to customers that physically enter their stores is reporting that more than 40% of the customers that are offered the service sign up for it. In another operator who launched the service to SMB, small and medium business customers, more than 30% of the entire SMB customers signed up for the service within a year of service launch. A third operator who launched the service to fixed customers is showing that 17% of the customers exposed to the service chose to sign up for it. These numbers are very encouraging. I would like to say a few words about 5G networks and where we fit in. An increasing number of operators are moving ahead with their 5G plans and are rolling out 5G services. We expect this trend to continue and we see a very large opportunity for a lot here. 5G networks have significantly higher bandwidth and will have a very large number of IoT devices on them as well as many breakout points connecting to the internet. When asked in surveys, telecom operators and industry experts overwhelmingly agree that security will be a bigger challenge in 5G networks, and most would say that core network security is very important. Allot has a unique position here to play in securing the user plane in 5G networks. Our combination of being able to analyze in real time the full traffic flow, Our ability to mitigate DDoS attacks in line very quickly and to protect the network from rogue IoT devices puts us in a unique position to help operators secure their 5G networks. Alok comes to the 5G world with a very strong telco-grade technology, products that scale easily to the 5G bandwidth requirements, and full multi-tenancy support to enable differentiated services. These abilities are key differentiators for us in future 5G deployments. We are currently active in several major RFPs and technical trials of 5G networks, including in several Tier 1 carriers, and we view 5G as a potentially significant growth engine for Alok. As I mentioned today, we see significant opportunities in the market across multiple products and use cases. We believe there is a market opportunity here we should take advantage of. Given the strong opportunities we see even in the current environment, we remain committed to leveraging our strong cash position to invest for future growth. As we work with more Tier 1 operators worldwide, we take upon ourselves additional commitments that span product development, delivery, and customer support. In order to take advantage of these opportunities, We are temporarily increasing our R&D investments this year by using subcontractors to help us close product gaps quickly. In 2021, we expect R&D expenses to be lower than those in 2020. I would now like to summarize the overall picture and the key messages. We are proceeding according to our plan and continuing to grow the business. In the Aloft Smart product line, We see a strong pipeline. While some deals take longer to close, some use cases such as digital enforcement are growing. Overall, we see a solid demand for AlotSmart at similar levels to pre-COVID-19. It is in the security area that we see our long-term growth. We are very encouraged by the pipeline growth we see and by the consumer and SMB take-up rates as they sign up for the service. While these deals always take time to close, COVID-19 has pushed the closure of several deals away by several months. It is also delaying services launch in a couple of the deals that were already signed. Despite these delays, the pipeline is robust and I am confident we will meet our goal for recurring security revenue deals this year. Looking at our backlog, the market demands as we see it now and the pipeline of deals that we are working on I would like to reiterate our revenue guidance for 2020 to be between $135 to $140 million. I would also like to reiterate our guidance for 2020 of new recurring security revenue contracts signed in 2020 to exceed an MAR of $140 million. This will be, of course, on top of the $85 million MAR deals we signed in 2019. In addition, we expect to become profitable during the last quarter of this year. And now, I would like to hand the call over to Ziv Leitman, our CFO. Ziv, please go ahead. ZIV LEITMAN Thank you, Erez.