Allot Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to the Allot Third Quarter 2020 Result 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 the Allot 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 at www.alot.com. I would now like to hand over the call to Mr. Ken Green of GK Investor Relations. Mr. Green, would you like to begin, please?

Thank you, Operator. Welcome to Allot's third quarter 2020 conference call. I would like to welcome all of you to this conference call and thank Allot's management for hosting this call. With us on the line today are Mr. Erez Entebbe, President and CEO, and Mr. Ziv Leitman, CFO. Erez will begin and 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 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 the impact due to the COVID-19 pandemic, changing market trends, Reduce 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'd now like to hand the call over to Erez Entebi. Erez, please go ahead.

Thank you, Kenny. I'd like to welcome all of you to our conference call and thank you for joining us today. Our third quarter was another quarter of solid growth. Revenues grew 26% year over year for the third quarter and reached $34.8 million. This is our 11th straight quarter of double-digit revenue growth year over year, and I am very pleased with the results we achieved during the third quarter. I believe it shows we are on track and successfully executing on our plan. The number of opportunities we see continues to grow. We continue to close new deals, win against competition, bring more business, and grow our revenues. Our revenue growth in 2020 accelerated so far compared to our revenue growth rate in 2019, and we expect this to continue in the fourth quarter as well. As we see our opportunities grow, we increased our investments to capitalize on the significant number of opportunities that we see. Ziv will provide more details on our financials and forecasts later. In order to allow better focus and faster response to market needs, we recently implemented an internal organizational change. Instead of having a single R&D group for all products and a single product management group for all products, we created two new product business groups, one for Alot Secure Products and one for Alot Smart Products. Each product business group will have its own R&D and its own product management. Sales and customer success will continue to be global and serve all product lines as today. To lead the Alot Secure business group, we are joined by Yael Vila. Yael is a cyber and data science expert. Among her previous roles, Yael was VP Security in Cisco, and General Manager and CTO of RSA Israel. Eyal holds a PhD in Mathematics and Statistics. Keren Rubanenko, who served very successfully in the past couple of years as our Senior VP for Customer Success, will now lead the Alot Smart business group. I believe this change, together with the new leadership, will create a stronger vision forward and will accelerate both product lines' success. I would like to take the opportunity to wish both Yael and Keren lots of success in their new roles. Like most everyone else, our way of working has been significantly affected by COVID-19 pandemic. I would like to update you on how we and our customers are adapting to the new situation. 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 for those in the office, are mostly held by videoconference to minimize physical contact. We continue to see high productivity across all departments. During the third quarter, R&D released several product releases in both Alok Smalk and Alok 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 installation many times without being physically on site. Our global service organization is continuing to solve problems and lower the number of open customer trouble tickets. These achievements to sell, deliver and service according to plan are a result of the spirit and dedication of all Allot employees worldwide. I want to take this opportunity to thank them for all their efforts and fantastic work. As I mentioned in the previous call, we do see that the current situation of working from home and lack of physical interaction is stressful for many of our employees. In an attempt to help, we maintain a policy where we fully adhere to all local rules and regulations but allow our employees personal freedom of choice whether or not to come to the office where and when this is allowed. 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. Overall, operators are adjusting well to the situation and for the most part have managed to handle the changes in traffic patterns. These changes have, for the most part, stabilized. 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. Overall, I think demand, depending on the product, has either remained as it was or grown. I believe, to a very large degree, we are all adjusting well to virtual meetings, replacing physical meetings, and saving much travel time and expense in the process. We are, however, losing some of the informal relationship building that is important to establish long-term trust. So far, the impact of this on the business is limited. As we discussed in the previous earning call, the more challenging part is establishing new relationships and generating new leads with operators and people we are not familiar with. To this end, we modified our sales approach to increase our lead generation by using targeted marketing campaigns. We started this with a security services campaign. The result of this approach looks promising as we have generated quite a few new leads for CSPs interested in promoting security services to their customers. 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 better 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. Many 4G and fixed networks already have a DPI system, either from a lot or a competitor. Usually, stickiness with a DPI product is high and operators do not tend to replace their current provider easily. During the third quarter, however, we were selected by a large tier one operator in EMEA to replace our competitor system. We are currently involved in several processes with other operators considering to do the same. While we cannot be assured of success in these processes, we view them as encouraging opportunities. In addition, there are also new RFPs for DPI systems in operators that do not have such systems in place. As we discussed in the last earning call, 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. The growth we see in this use case is worldwide, and we are very encouraged by the growing pipeline we are creating. In the enterprise market, larger enterprises, which are the focus of our business, seem to be less affected by the COVID-19 pandemic than smaller businesses. While we see some delays in projects, overall our enterprise business is doing well and we see it growing. As you may recall, during the first quarter, we signed an agreement with Broadcom to provide allot products to enterprise customers currently using the Packet Shaper product, which Broadcom chose to discontinue. Since signing the agreement, our enterprise pipeline has seen a strong double-digit growth as a result of this agreement. We have signed new distributors that previously worked with a competing product, and we closed deals to replace our competitor's product. I am very optimistic about the growth our enterprise business may enjoy as a result of the Broadcom deal. While some deals take longer to materialize, and it's a bit more challenging to bring new deals into the pipeline, several of our use cases are showing demand growth. So overall, on balance, I think the market demand for Alot Smart product family is similar to or even a bit larger than pre-COVID-19 demand. To summarize, I believe demand for the Alot Smart product line including congestion management, traffic management, analytics, regulatory compliance, and enterprise use cases will remain solid for Alot for the remainder of 2020 and the years ahead. I would now like to turn our attention to the security market. We continue to see an increase in cyber attacks, most notably phishing attacks on both consumers and small medium businesses or 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. One result of this is that our security business is seeing good traction. During the quarter, we signed an agreement with a major Tier 1 operator in APAC to provide our HomeSecure product to protect the routers and Wi-Fi connected devices in customers' homes. When deployed, HomeSecure will protect millions of homes making this the largest home secure deployment till now. In addition, since the previous conference call, we were selected by several operators worldwide throughout EMEA, APAC and Latin America to provide them with our security products and launch services to their consumer and SMB customers. We are currently in contract negotiations with these operators and believe we should be able to sign recurring revenue contracts with most of them before the end of the year. Additional operators we previously signed with decided to expand the use of Alot Secure to either additional products in the Alot Secure family or to expand the service to an additional country in which they operate. Since the previous earning call, Mayo, Portugal, and another European operator with whom we previously signed recurring security revenue deals launched the service to the public. While only a short time has passed since launch, the penetration rates we see are very encouraging and consistent with the high penetration rates we see in other security services that were launched. We consistently see that customers are willing to pay a premium of 5% to 10% over the access charge to get security services, and we see the take-up rates are high. Another European operator who launched the service to customers physically entering stores recently sees the number of customers signing up for the services grow to a majority of those to whom it is offered. Yet another operator who is offering the service to SMBs reached over 30% penetration in a year and the penetration is continuing to grow month by month. These numbers are very encouraging and I believe they validate the value security services bring to customers and the willingness to pay for them. We are continuing to see more projects initiated and new RFPs published for security service for consumers and SMBs. Interest by CSPs to deliver secure broadband connectivity to their customers looks to be growing worldwide. We continue to see new opportunities worldwide and our pipeline for recurring security revenue deals is growing and encouraging. It is worth noting that we see a large growth specifically in the number of opportunities we have to provide security as a service to SMBs. While motivations vary, I think this is a result of operators viewing SMBs as part of the enterprise customers that see both growing cyber attacks and are willing to pay more. While our pipeline is growing nicely, 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 nine months. The current COVID-19 pandemic may delay some sales cycles by even a few months more and even delay the launch for 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 operators do accept it. Our goal, therefore, is to build a substantial base of CSPs who 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 services. These are the type of deals that will ensure the long-term growth and success of Alot. I would like to address briefly 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 Alot here. 5G networks have significantly higher bandwidth and we'll have a very large number of IoT devices on them as well as many breakout points connecting to the internet. This results in higher vulnerability of the network itself to cyber attacks. As I discussed in our previous call, 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 Ability to mitigate DDoS attacks in line very quickly and protect the network from rogue IoT devices puts us in a unique position to help operators secure their 5G networks. Allot 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. As I mentioned previously, we are currently active in several major opportunities, including in several Tier 1 carriers. In some of them, we passed POCs successfully and are advancing to commercial discussions. Overall, 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 despite seeing delays in different projects. In the AlotSmart product line, we see a strong pipeline. Some use cases such as digital enforcement, congestion management, and the enterprise business are growing. Overall, we see a solid demand for AlotSmart at similar or even higher 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. We signed a significant deal for our home secure product and were selected by several other operators for recurring security revenue deals. While these deals always take time to close, COVID-19 has pushed the closure of several deals a bit more. It is also postponing services, commercial launch, and a couple of the deals that were already signed. Overall, 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 demand 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, in addition to the $85 million MAR deals we signed in 2019. In addition, we expect to be 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.