Allot Ltd.

Thank you, Sandy, and thank you, all, for joining us on our first quarter 2012 conference call. Joining me today are Allot's President and CEO, Rami Hadar; as well as our Chief Financial Officer, Nachum Falek.

We issued 2 press releases this morning. [indiscernible] first announcing the acquisition of Ortiva Wireless, as well as our first quarter results plus.

Both -- and both press releases are now available on our website at www.allot.com.

All results and expectations we review on the call are on a non-GAAP basis unless otherwise described as GAAP. Non-GAAP net income and non-GAAP net income per share exclude stock-based compensation expense as well as amortization of intangible assets and certain onetime charges incurred related to M&A activities and compliance with regulatory matters.

Please note that all earnings per share amounts are in fully diluted basis.

Before we begin, let me remind you that certain statements made on the call today may be considered forward-looking statements which reflect management's best judgment based on currently available information. I direct your attention to the risk factors contained in today's press release and in the annual report on Form 20-F filed by Allot with the U.S.

Securities and Exchange Commission last year.

With that, I would now like to turn the call over to Rami.

Thank you, Jay, and thank you, all, for joining us today.

In the first quarter, we completed a steady growth on both the top and bottom line. For the first quarter, revenues grew 41% over last year and 10% over the fourth quarter and reached $24.2 million.

Net profits reached $5 million or $0.15 per share for the quarter. Our operating profit for the first quarter continued to grow and reach $4.6 million on a non-GAAP basis and we increased our operating margin to 19%.

The book-to-bill ratio was over 1 for the quarter and the backlog continues to grow.

During the quarter, we received large orders from 17 large service providers, 5 of which were from new customers. 7 of these orders were from mobile operators.

On the operational side, we had 2 sets of [indiscernible] customers here in the quarter.

During the quarter, we announced an initial $4 million order from a Tier 1 Latin American fixed-mobile operator, which we hope to expand going forward. This was a very competitive process and also demonstrates that fix operators represent a significant opportunity to follow.

I've been saying that NT represents another area of expansion for us and we demonstrated further success here with a follow-on order from an Asia and Tier 1 mobile operator to support an LTE network rollout.

Let me take a few minutes to discuss some of the additional trends I'm currently seeing in the market.

For quarter one, we have spoken about over-the-top services threat to service providers. This has now become a reality.

For example, [indiscernible] and similar applications are severely impacting service providers revenue from text messaging as subscribers now have a way to send free text rather than have to pay on a per-message basis.

Ovum, a technology resources consultancy calculated in the report released in February that operators lost $30.9 billion in SMS revenues last year. It is looking more and more likely that voice services will be up next under over-the-top [indiscernible].

The real question is what will next generation voice services do to voice minutes and revenues?

However, you look at it, OTC services are a threat to down side.

As a result, service orders are becoming increasingly aware that the need in network intelligent platform to either introduce intelligent quota to manage the increasing OTT traffic volume or introduce revenue-sharing plans. Either outcome represents opportunity for Allot.

We are excited to see movement in the U.S. market, and as I indicated previously, during the quarter, we recognized initial revenues from a large U.S.

mobile service provider for initial commercial deployment.

Due to our agreement with the customer I'm not allowed to disclose any names, but we are encouraged by this order, and I believe that the markets realities in U.S. will lead to increased activity over the mid to long term.

We’re seeing a lot of recurring business in addition to the inflow of new customers, when we introduced the Service Gateway class from almost 5 years ago, our goals as a company was to increase the number of customers as well as deepen penetration into our customers network. I firmly believe that we are winning these goals.

Now I would like to take a few minutes to discuss today's announcement regarding the acquisition of Ortiva Wireless. This acquisition adds another important piece to the Service Gateway strategy and allows us to offer customers a leading video optimization solution and join other value-added services such as WebSafe service protector or MediaSwift and CellWise.

We have said it repeatedly that video is the growing concern for our customers both in the near and long term. The acquisition started into video over mobile broadband networks.

We are now uniquely positioned to offer service providers a comprehensive video suite which includes both video caching and video optimization.

Why did we choose Ortiva? I believe that we acquired the best pure-play video optimization solution on the market today.

The technology, which came out of UCSV has several major technological advantages.

Ortiva solution has been optimized for wireless networks and were designed on the same ATC architecture as our Service Gateway.

The technology is highly scalable and is unique dynamically optimizes for real-time natural conditions and for each mobile connection.

This means that each individual subscriber is assured the highest quality of experience possible even if network [indiscernible] conditions are changing.

By leveraging the Service Gateway application and network capabilities, we are redirecting only congested video traffic to the video optimization function, therefore, making the solution much more cost effective.

In summary, we are pleased to report another great quarter. With another steady rise in top and bottom lines, as well as in all financial metrics.

The market demand for our solutions remain strong and data traffic such as bandwidth intensive OTT services are forcing carriers to take both defensive and offensive spend to stabilize and increase revenues.

The addition of Ortiva video optimization is another piece in the service gateway strategy of operating the most comprehensive intelligent platform in the market. We believe that this puts even more further distance between our leading Service Gateway platform and the integrated router solution.

I will now hand the call over to Nachum for a short financial review. Nachum, please go ahead.

Thanks, Rami, and good morning, everyone.

Let me take a few minutes to review the results we published earlier today. And we do discuss in non-GAAP numbers, which excludes stock-based compensation, amortization expenses and certain onetime charges incurred related to M&A activities and compliance regulatory matters.

Full reconciliation of the pro forma results discussed on this call to GAAP results is currently available for review on our website and in the press release issued today.

Now let me walk you through the results for the quarter. Revenues for the first quarter increased to $24.2 million, up 41% over the first quarter of 2011 and 10% over the fourth quarter of 2011.

As a percentage of follow-on revenues, sales in Americas accounted for 14%; EMEA, 73%; and Asia-Pacific, 13%. We had 10% customers during the quarter.

We are seeing increased momentum in the Americas, both with the North American mobile operator, which Rami mentioned, as well as with a Tier 1 operator in Latin America.

As an indicator, 36% of bookings in the first quarter came from the Americas. Out of total revenue, during the quarter, products were 76%, and services, 24%.

Gross margin for the first quarter was 71.8%, similar to the fourth quarter level. Our operating expenses increased to $12.8 million and in line with our expectations.

During the quarter, we recruited 18 new employees, many to the R&D and sales and marketing development.

For the quarter, we were happy to report earnings per share of $0.15 as compared to $0.14 in the fourth quarter. Keep in mind that we closed the secondary offering on November 15 so that EPS reflect an additional increase of 3.2 million shares in the weighted average for this quarter.

This now fully reflect the total number of new shares issued during the offering, including the green share.

As a percentage of sales, total OpEx went down from 54% in the fourth quarter of 2011 to 53% in the first quarter. As a result, the operating margin continued to improve, increasing to 19% from 17% in the fourth quarter.

On the balance sheet side, cash balance have increased to $165 million. During the first quarter, we generated $4.4 million in cash from operating activities.

Our DSO went up to 62 days from DSO level of 50 days we had in the fourth quarter of 2011. Inventory was $10.7 million, similar to the level in the fourth quarter.

Deferred revenues went up by $1.2 million during the quarter, reaching $23 million at quarter end.

With regard to the Ortiva acquisition we announced today, here are a few financials aspect of the deal. On a non-GAAP basis, we currently expect that the transaction will be accretive on a quarterly basis by the end of 2012 and we generate between $3 million to $5 million in revenues for the second half of 2012.

Gross margin should be similar to Allot current level and operating expenses are estimated at approximately $2.5 million per quarter during 2012.

In terms of headcount, currently, Ortiva has 41 employees. When we consolidated Ortiva's financial results starting from the date of the closing.

The acquisition has been approved by the Board of Directors of Allot and Ortiva and the stockholder of Ortiva and is expected to close by the end of the second quarter after the satisfaction of customer closing condition.

That concludes my remarks, and we will now open the call for questions.

Rami I had a few questions on Ortiva. I think you've talked about video optimization for sometime.

So congratulations on finally achieving this. And I guess the question is, when you look at that market, can you give us a little bit more color on what you think is the addressable market for this?

And second, have you been working with other video optimization vendors that you think could potentially now stop working with you because of this? I'm trying to understand if there's some conflicts that we should be aware of because of this acquisition.

And for Nachum, you haven't disclosed how much you paid for this deal or your book-to-bill. If you could give us a little bit of color on that, that would be appreciated.

Sure, Ittai. So it's Nachum.

So I'll start and then Rami will follow up in your question. The terms of the acquisition was not disclosed, but if you're asking about whether it was an affiliate transaction, I can say that Allot will pay Ortiva stockholders a cash payment at closing, which is less than 10% of our current total cash position.

Okay. So that's on the size of the deal side.

Regarding total addressable market, I sincerely believe that putting much any mobile operator deploying at 3G and above a technology would be interested in deploying video optimization and solution. Obviously, we've seen early deployments of such technologies in the past say 12 to 18 months so there are some deployments out there but it's a very initial.

Obviously, we believe that given that this product is deployed right next to -- to our service in Gateway's decision-makers, the same team, the same customers that is highly complementary product to ours, and together, we have a more complete holistic solution and increases outcome altogether in only all together. Regarding other vendors, in the past, we cooperated on an opportunistic basis with other video optimization solutions, but it's quite clear in the market as we see this technology as being part of Allot.

So none of these deals ever generated any revenue and therefore, there's no negative impact if from loss of partnership.

Very good. And Nachum, can you follow up on the book-to-bill as well?

What was it then in the quarter?

Book-to-bill in the quarter was above 1.

A couple of questions. So, it sounds like if I heard you right, you've got 2 mobile operators in the U.S.

now, is that right?

No, I didn't mention a number. What I did say is that revenue we recognize meaningful revenue from a large U.S.

mobile operator, as I indicated in the past.

Oh, okay. I'm wondering, last year and the year before, you guys spent about 12% of your cost of goods sold were for services, you reported on an annual basis, not on a quarterly basis, it was a little less than that in 2011.

Do. You expect a meaningful increase in that expense category as you do more business in the U.S.?

Nothing we figured right now but on the ground. But I would say in general, OpEx and the part of [indiscernible] part of the quote should be with the growth that we experienced in the past.

We've got 30 people in the U.S. With Ortiva, we've got more than 70 so I don't see any meaningful change with all the comments that Rami mentioned.

What's your total headcount now before Ortiva?

In Americas, we have roughly 30 individuals, mostly our customer facing either sales managers or technical sales. Obviously, that number will grow as we add Ortiva.

So we feel the Americas team is the right size for the opportunity. Obviously, we increase revenues.

And moving to execution, we might need to add some headcount on the process side, but that will come as incremental revenues and profits coming.

And Matt, again, with Ortiva, right now, we've got 375 employees in Allot altogether.

Have you worked with Ortiva to -- up to now? I know a couple of your competitors have done some business with them and some adjacent companies.

Can you kind of comment on what your experience has been and how many customers you might have served with them already?

We have cooperated with Ortiva on 1 specific mobile opportunity in Latin America. That opportunity is still open so it hasn't converted into revenues.

Besides that, to the best of our knowledge, although Ortiva had some recooperations from competitors, all of their current sales are all direct sales.

And what's -- what was the mix like -- you had pretty strong commentary looks like you've gone from reporting on large service providers kind of with the numbers you used to report on all service providers you do business with, so it's kind of a nice trend there. But can you talk about your mix between mobile and fixed and how much enterprise contributed?

So in terms of the positioning, I can mention that on the booking side, it was more or less a typical end quarter around 18% for enterprise, so it's up 20 -- about 42 -- 40 plus for mobile and around 40 minus for fixed. So typical in quarters follows.

I have a question. First of all on where or what additional avenues or technologies you would like to add to your capabilities?

It seems like you've already acquired this video optimization tool. So I maybe too early just after an acquisition, but just trying to understand what additional opportunities you see in the market place right now.

So first thing, we would probably spend the next few months busy integrating the Ortiva operations into ours. Having said that, our strategy hasn't changed.

We see the Service Gateway product as essential and element to providing intelligent [indiscernible] functions into mobile and fixed packet cores. The Service Gateway is a national point to launch these services.

So anything that is intelligent [indiscernible] above the solution that makes sense to the flow right next to our Service Gateway with its redirection and load-balancing capabilities and function as extension of our core product would be of interest for us. We have couple of ideas in mind, but it's a little bit premature to right now be more specific than what I just said.

Okay. That's fair.

And then on the -- it seems like you guys are having pretty good success so far in various regions. Is there a way to quantify where you are with the penetration with various customers?

I mean, how much -- or how many barriers already deployed -- has DPI solutions in a way that matches yours? What's the opportunity that you have there to expand beyond that level?

And is there -- and what are the additional growth engines? Is it around data growth and is it around subscribers or applications that may drive further growth from your perspective?

You were asking penetration of Ortiva specifically or video optimization in general?

No, I'm actually talking about deep pack inspection, metro traffic management in general. And obviously, Ortiva is a big -- could be a part of that, but I'm talking about the DPI penetration and traction so far and how much more we can expect from here.

Okay, well, I see. I guess the answer would not be homogeneous depending on geographies.

I can say that Europe is nicely penetrated and certainly much of the penetration is with Service Gateway solutions. And given our [indiscernible] Tier 1 there so Europe could be maybe -- I don't know, a 40% to 50% penetrated, at least Western Europe.

I think Eastern Europe is much less than that. U.S.

is almost not penetrated totally on the mobile side. Latin America, there is some penetration but very spotty.

So my guesstimate would be 20% to 30% penetrated. Asia-Pacific, all over the place.

Again, very proficient market, but I think very early I would say APAC is maybe 20%, 30%, more like 20% penetrated. So that's a DPI given that video optimization is fairly new solution in technology and has started commercially being penetrated maybe in the last 18 months.

I would divide the number that I just gave you by 2 to 3, say video optimization penetration.

Okay. That's helpful, Rami.

And maybe just default, you guys are not talking a lot about enterprise segment but it sounds like you guys maintained pretty much same penetration there. So what's the opportunity there?

How do you feel about that market's growth? Maybe it's less than the carrier business but it seems like it's holding on to its own.

So -- what was the trend there and what kind of growth can they go from here?

So yes. First thing, we are -- our strategy was always, given that our roadmap is 100% optimized for service providers.

That we always say we're successful in the high end of the enterprise play data center, managed services, large -- very large entities, which almost like privatized piece for example in universities, so governments. So that's kind of steady sailing.

I think the fact that enterprise managed to keep on a percentage basis around 20%, which means it actually grew at an absolute level, actually because of the cloud data center phenomenon, which had kept it growing on an absolute level. We have in certain cases leveraged our service provider relationship and some of our Tier 1 service providers, are actually reselling our equipment as part of a managed services or resell -- simple reselling relationship in -- we announced a deals deal with Korea Telecom in the past and Telefonica Brasil where these operators act as resellers to their enterprise customers or even in [indiscernible] as part of managed services in those data centers.

This is Sarah on behalf of Talyani. I have a couple of quick questions for you.

The strong growth in EMEA this quarter, is that primarily from existing customers or new customers? And then, to the extent that you can, can you provide any color on the regions for the 10% customers are located?

And then just a third one, in terms of the value-added services, did you guys disclose of the number as a percent of sales this quarter?

Okay, so regarding EMEA. Total EMEA was a very strong something quarter.

Remember that usually revenue ignition comes several months. Even sometimes several quarters after we actually get the orders.

I want to say, this quarter is in terms of the business, the traditional split of 60%, EMEA and then 20% and 20% in Europe and -- America's robust as APAC. The fundamentals of the business more or less in these ratios.

What we're seeing here in terms of revenues is just seasonal recognition of some large projects in Europe. And that's why you're seeing the jump in Europe.

To balance that, Nachum made a point that we typically don't discuss booking but we did make a point that this quarter bookings for Americas were actually 36% of revenues. So you could see how percentage can fluctuate between when we recognize revenues and when we actually get bookings.

What I can say is there's2% -- 10% customers this quarter actually comes from EMEA and thus, one of the reasons you're seeing this very large in EMEA as a percentage basis. Value-added services, we didn't mention that, but very roughly from bookings point of view, vast bookings were about 12% of total bookings in the quarter.

Let me see, I guess, I'll try this one first. Were there any 20% revenue customers for Q1?

Dan, we usually don't -- we only discuss above 10%. I think as Rami mentioned 2 above 10% maybe I can add and say that had the third one which was actually above 9% and below 10%.

That's fine, that's helpful. So let's just talk about Ortiva and I apologize if you covered some of this earlier in the call, I was not on.

Can you just describe the revenue model for Ortiva and whether or not you think that this represents an opportunity for Allot to perhaps grow its recurring revenue base faster or somehow differently? And I'm curious if this solution, I don't know why it wouldn't be, but this solution for video optimization would be as well suited to all screen cable operators as well as dedicated mobile carriers?

Is that correct?

Our potential -- so let's start with the last question. Could it potentially be applicable for a -- fixed/cable operators?

Yes, but given that the big paying points are really in mobile and given that video position really acquires very intensive competition of power. Right now, it can lead to traffic speed of mobile and network.

So it's not yet ready in terms of scalability for fix. Our strategy for the next at least 1 to 2 years is to make an offering and mainly on the mobile side of our mobile sales force.

Regarding up sell, our recurring definitely yes. We see that the low-hanging fruit for Ortiva opportunities is actually to introduce today it was an offset to our existing deployed base and vice versa.

On the smaller scale, they have penetrated 2 Tier 1 mobile operators and we hope that they could pull in our aim, our Service Gateway solutions. So the products are highly complimentary as they've said before.

Nachum, any quantitative indications.

No, I think, only if we mention if we are looking at the second half of this year. Ortiva should contribute between $3 million to $5 million into our top line.

And Nachum, I'm sorry, did you give the product revenue for Q1?

Yes. So for our products revenues for Q1 was 76% and services, 24%.

My question -- 2 questions. One, are you seeing a difference in deal size this quarter over last year or even fourth quarter?

And the second question is, can you disclose how many service providers Ortiva had and then the geographic split, if there's more Europe or North America or Asia-Pac?

Yes, thank you, Catharine. So deal size, the answer is definitely yes.

In fact, each quarter report amount of large deals with service providers. We used to classify that on deals which were over $100,000.

And this quarter, we upped the threshold to $0.25 million. So that's one indication that this size constantly goes up.

And in the past if we had maybe 1 or 2 about $5 million customers, which we consider strategic. Right now, we have about 1/2 dozen of these and growing very rapidly.

Great indication is this quarter where we have 2 10% customers and one 9% customer in one single quarter. So that's definitely yes on this side.

Your second question, Cataherine, was relating to? I forgot.

Ortiva. I'm just trying to understand geographically where you'll benefit.

Obviously, you will because you did say there were 2 Tier 1 North American customers, but how many customers do they have in total? And then, what roughly is the split between the geographies?

Okay, So I think there's a little bit of misconceptions. Ortiva did penetrate 2 Tier 1 mobile customers.

One in the U.S. and one in Europe.

The one in Europe is actually a property of a very large multi optical mobile service provider.

I had 2 questions. The first one is, is there any way to describe how the use cases for North America differ by maybe Europe or the rest of the world?

And then the second question is, you mentioned 2% -- two 10% customers in Europe, is one of them your legacy deployment that's been going on for the past several years?

Can you again expand your second question?

Yes. On the two 10% EMEA customers, was one of the 10% customers your legacy deployment that's been going on for the past several years and how is that deployment trending?

I see. So out of the two 10% customers, one of them is -- I wouldn't call it legacy, but I would call it on large Tier I operator in Europe is certainly one of the two 10%.

And then on the use cases for North America, are the use case in that region different? Is the motivation behind purchasing the solutions different than...

Yes, definitely yes. I can't go into exact specifics.

What I can say is that the use cases are defined to be very carefully go around network policy issue. That's only thing I can say right now.

So part of our strategy to expand our offering with value-added services and what not, our offering that some of them are -- do not read even remotely on net neutrality.

A couple of questions here, if I could. I really wanted to go back kind of the Q1 results and dive in to kind of the demand drivers that drove momentum here.

Revenue growth at 41% looks like it's the highest in a couple of years. If I look at the product revenue growth, it looks like it's closing in on about 50% growth.

So as you look at the contributing factors to Q1 here, how much of it is just seasonal patterns and EMEA versus the timing of revenue recognition? Or are you seeing some sort of change in the underlying kind of demand for kind of DPI specifically?

So I wouldn't say that it -- well, seeing a hockey stick or anything where this is a -- we are experiencing a steady growth, enjoying for 2, 3 years momentum in the mobile space, and now reinforced by seeing how the fixed space tells us to grow as well. So I think this is what -- is the end result of grow as well.

So I think this is what is the end result of all of that. Again, I remind you that what you -- the revenue that we are recognizing today is totally from the service providers side of the house, our -- of the result of bookings that came 1, 2, 3 quarter ago as we go about implementing and achieve recognition revenue -- recognition.

So we're experiencing steady growth. Certainly, we are pleased with -- bit of accelerated growth this quarter.

And we hope to continue this pace if the market fundamentals allow us to do so.

Okay. Fair enough.

Then my second question really is tied to the -- it looks like to be a material change in bookings. 30% of the bookings were driven by Americas.

Is that also just kind of one large deal kind of driven that's influencing that? Or do you think we're at the beginning of a change in the demand profile for DPI in the Americas region specifically?

And that change in mix could the sustainable going forward?

So first, it was actually even higher, it was 36% of bookings were from Americas. Again, we mentioned specifically this number, so no one will read too much into the fact that Americas were only 14% on the revenue recognition side.

There was an element of one large deal in that 36% but was also several other medium and small-sized businesses that conceive this same number. I hope that this is a beginning of a trend, we're seeing some promising trends already in the first months of Q2.

But still, 2 points -- 2 quarter sales don't make a trend, so I'm cautiously encouraged by the trend, but it's not yet an official trend.

Rami, can you give us a sense of what's happening in the competitive landscape? It looks like at least 1 of your customers appears to be gaining traction not only in the U.S.

but also outside the U.S.? Give us a sense of where things are relative to where it was a quarter ago?

Yes, I'm not seeing any drastic in change. We have 3 major pure plays in the market.

We are now in the second quarter where we are -- we have #1 market share in our space. All in all, the space is good.

I believe that all 3 players are real players and if executed right, can enjoy the uproar in trends and with products related to DPI technology. Wish them a best of luck.

We continue to be more focused on differentiating ourselves when it comes to the -- on the mobile side versus those that [indiscernible] who claim they can do integrated GB sense. I'm less worried about the pure plays.

And not because we discount them but because there's plenty to go around for 3 pure plays and the main target is to take -- is to continue winning properties and opcos away from those who deployed integrated solution.

Alright. Nachum, question for you.

You seem to have incurred $1 million charge in M&A activities that you've just taken out on some GAAP to non-GAAP reconciliation, given that the size of your deal was less than $2.5 million, it appears -- can you give us a little bit color on why -- what made up the million dollars there?

Jay, what do you mean by $2.5 million this time? You said something about $2.5 million?

I thought you had said that your -- the deal size is less than 10% of the your cash position, which ...

[indiscernible] Cash position like -- so I mentioned less than 10% of the $165 million that we had. But I have to say that when we said the one-time, [indiscernible] there was 2 part of it, the part's that's related to M&A, it doesn't relate to Ortiva.

It relates to other M&A activities that didn’t conclude in the first quarter. So it's not part of the Ortiva M&A, that's the portion of M&A which relates to the onetime charges.

You might touched on this a little bit, but I think last year this time you had 2 10% customers, one which was fixed in Europe. Just wanted to know if it was a similar kind of a situation or perhaps they're both mobile?

And the other thing is, you mentioned regulatory compliance. Was that related to this desktop over the distributor in Scandinavia?

So to answer your first question, Matt, no, it's not the same. Obviously, the Tier 1 mobile name customer is but the other one is different than the one from last year.

Okay, I think that answers your first question. And your second question is, yes, part of this, the $1 million as I said went to tightening up our regulatory compliance program within Allot.

We thank you, all, for joining us today and for your interest in Allot. We look forward to meeting with many of you during the next quarter and hope to see you again on the call with -- in the next quarter.

Thank you very much.