Allot Ltd (ALLT) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Allot's Fourth Quarter and Full Year 2018 Results Conference Call.

(Operator Instructions) 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 at www.allot.com.

I would now like to hand over the call to Mr. Gavriel Frohwein of GK Investor Relations.

Mr. Frohwein, would you like to begin, please?

Thank you, Operator.

Welcome to Allot's Fourth Quarter and Full Year 2018 Conference Call.

I'd 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 in 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 forward-looking statements regarding future events or 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 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 like to now hand over the call to Erez.

Erez, please go ahead.

Thank you, Gavriel.

I'd like to welcome all of you to our conference call, and thank you for joining us today.

I would like to start with some key financial parameters for this quarter and the full year 2018.

The fourth quarter was another quarter of solid growth.

Our revenues grew 16% year-over-year for the fourth quarter, and 17% year-over-year for the whole of 2018.

Our non-GAAP gross margins improved to 70% for the fourth quarter and 71% for the full year 2018.

Our operational loss in the fourth quarter 2018 was significantly improved over that in the fourth quarter of 2017.

Our book-to-bill ratio was larger than 1 for the fourth quarter, and for the full year 2018 as well.

Our backlog increased during 2018 by approximately $13 million, bringing our 2018 year-end backlog to $69 million.

I am very satisfied with the results we achieved in 2018 and I think the main message is that we are on track with our plan.

We see a growing number of opportunities.

We are continuing to win deals and grow our revenues, and we expect this trend to continue in 2019.

While Alberto will provide more details on our financials later, I did want to start with our financial performance because it shows that we are successfully continuing to execute on our plan.

I would like to turn now to a discussion on our business, starting with the visibility and control domain.

We are seeing an active market here with a growing pipeline of opportunities.

Overall, we see similar use cases to what we saw in the previous quarters: smart traffic steering and optimization to effectively handle congestion and reduce connectivity costs; quality of experience where communications service providers or CSPs can understand what the real user experience on their network is, even on encrypted traffic such as YouTube or Netflix; analytics to enable the CSPs to get significant detailed and actionable analytics on their network to properly plan network build and configuration; and regulatory compliance to allow governments to block malicious or illegal sites.

In the fourth quarter, we won competitive bids for visibility and control systems for operators in all regions -- EMEA, North America, Latin America, and APAC -- some with Tier 1 operators.

These wins are important for several reasons.

We are expanding our customer base and we are entering new territories in which we were not present in the past.

Also, they show that we are successfully taking market share from the competition and new wins with new operators provide a base for potential future revenue in expansions, renewals and services.

The visibility and control domain grew nicely in 2018 and in fact was the major source of revenue and bookings growth.

This is good news, as it enables us to continue growing even before the security domain comes into full effect.

Our growth in this domain comes primarily from better sales and delivery execution by Allot.

Looking forward, I see several areas where I believe the market is creating new opportunities for us in this domain in addition to the areas I noted we are already growing in.

First, transition to NFV.

As operators decide to transition their core networks from appliance-based to NFV, there is a need for them to look at DPI as well.

We expect many operators in the developed world to go through this transition over the next few years, and the change creates a disruption event which is an opportunity for us.

And second, 5G.

Operators in the U.S. and Korea are pursuing a path to roll out 5G systems with European operators expected to follow later.

5G networks are in need of traffic management and analytics, and this too is an opportunity for Allot.

We are currently participating in several bidding processes to deliver a DPI solution for 5G networks.

I will note that while the outcome of these bids will not be known for a while, they show that a new market opportunity is occurring.

Overall, we see a very healthy pipeline for visibility and control deals.

We are continuing to capture market share from our competition and I believe the visibility and control domain will continue growing for Allot in 2019.

Let's turn now to the security market, which we believe is our longer-term main growth engine.

As I mentioned in previous calls, we see a growing number of CSPs who see the value in providing secure broadband services at a premium and understand that this is a combination of three elements: one, an important enhancement to their brand value; two, a potentially very large new source of revenue; and three, a key element in their customer satisfaction.

This interest is across the breadth of the Allot secure product family, including NetworkSecure, IoTSecure, HomeSecure, DDoS Secure, and the combination with our partners, EndpointSecure.

I would like to remind you all that Allot's ability to provide protection at several locations in the network while seamlessly providing the same service across customer location and platforms, is one of Allot's key advantages.

I wish to note that we are participating in several opportunities that combine two or even three different products of the Allot Secure family.

This is a strong testament that our strategy of enabling operators with the capability to provide "anywhere, any device, any threat" protection to the consumer and SMB market is gaining acceptance with operators.

Last week, we announced a deal with a Tier 1 European operator with approximately 2-1/2 million subscribers.

This operator plans to launch a Security-as-a-Service offering to its residential and SMB customers starting in the second quarter, and is based on the Allot NetworkSecure product.

This deal is a revenue-share deal where Allot invests in setting up the required hardware and software to enable the service and where we will share in the monthly revenues that will be generated from customers who join the service.

While the service is an operator-branded service to its customers, we will be working with the operator on their marketing plans to achieve together high penetration.

During the fourth quarter, we announced an IoTSecure deal with a Tier 1 operator in the U.S. to protect enterprise IoT devices on the operator's network against infection and rogue IoT device activity.

It is important to note that this solution is deployed in the operator's NFV core network.

I am pleased to inform you that we recently signed a deal with an operator in EMEA to deploy our HomeSecure product to protect the operator's fixed-line residential customers.

While the deal itself is a CapEx deal, it is important as it will be our first deployment for the product we acquired in an autonomy acquisition.

In Vodafone, our largest security customer, penetration rates and the number of paying subscribers continues to grow.

I am glad to let you know that Telefonica launched in December their service in Spain based on the Allot NetworkSecure product.

Telefonica decided to launch a bundled service where they bundle speed, capacity and security together.

While the initial reception has been positive and the number of subscribers is steadily growing, it is too early to analyze results and penetration rates.

Telefonica plans to launch similar services including security in Brazil, Argentina and Peru in the coming months.

I remind you that both Vodafone and Telefonica deals were based on sales of perpetual licenses per subscriber.

We are striving to change this model with future customers and are offering OpEx or recurring revenue-based deals.

While not all operators will accept this model, we are encouraged to see that more and more operators are open to such a model and that this offering is meeting a positive response in most cases.

Examples for this are the deals we signed with the Tier 1 European operator announced recently, with Telefonica Spain for the SMB market and with Swiftel to provide DDoS Secure services.

Deals like this contribute little to bookings and revenues in the short term, so security bookings and revenues may appear not to grow enough.

However, it is these type of deals that will ensure potential long-term revenue growth and success for the business overall.

Our goal is to build a substantial base of CSPs with whom we have OpEx or revenue share security deals, and then work with them to grow the number of end customers subscribing to the security service, thereby generating a significant amount of recurring revenues.

We are engaged at various stages with quite a few additional operators for more security deals on all the elements of the Allot Secure family, and I am very encouraged by the size of our pipeline and the interest within the CSPs to launch such security services for the mass market.

Looking at the initial security office deals we've signed, the growth in tenders and RFPs that were issued, and the healthy pipeline we have in hand, I am confident that we are heading in the right direction and are very optimistic about this market segment and our future growth in it.

As you know, working with CSPs takes time, with sales cycles typically exceeding 12 months, so it still takes a bit longer than we would like to close these deals.

To help us measure the potential of the aggregated security optics deals we sign and our progress in this area, I would like to introduce a metric we use internally that we call Maximum Annual Revenues, or MAR for short.

This number reflects the annual revenue Allot will receive should 100% of the CSP's relevant customer base sign up for the security service.

Of course, we do not expect 100% of the operator's customers to sign up for the security service, so the actual revenues Allot will get are expected to be the MAR multiplied by whatever the penetrations will be.

In Vodafone's case, penetration rates of the service after 3 years vary from 15% up to 50%, depending on the go-to-market strategy and the emphasis put on the service.

To clarify, by way of a hypothetical example, assume we sign a deal with a hypothetical mobile operator that has 5 million post-paid customers and we target the security service for all post-paid customers.

Assume further that based on the agreement with the operator, Allot expects to receive half a dollar per subscriber, per month.

The MAR of this hypothetical opportunity will be 5 million times half a dollar, times 12, equals $30 million.

If we reach in any given year an average penetration of 20% of the subscriber base, the actual revenues for Allot in that year will be 20% times $30 million, equals $6 million.

While we will not report on this metric every quarter, we will provide yearly guidance on what is the total MAR we expect to sign for the year, and starting end of 2019 we will report on what we achieved.

I would now like to summarize the overall picture and the key messages.

We are proceeding according to plan and growing the business.

Much of our growth is a result of the significant changes we made during the past couple of years in our execution capabilities, which included management changes, restructuring, sales and customer success into CFUs or customer-facing units, revised processes, and the move in R&D to agile methodology and automated testing.

Our products are improving in both functionality and quality, as evidenced by winning a growing number of deals and deploying NFV product in the field.

In the visibility and control area, we are growing in absolute terms and our market share is growing as we win over the competition.

We also see longer-term opportunities as operators move to NFV and as 5G networks are deployed.

Based on the pipeline, I expect growth to continue in 2019.

In the security area, which we see as our major long-term growth engine, we have signed initial deals for all Allot Secure products including several security OpEx deals.

Our pipeline of security OpEx deals is very encouraging.

It is expanding and most operators are accepting of the OpEx or revenue share model we offer.

I expect we will sign additional security OpEx deals throughout 2019.

From a product perspective, we are progressing well and achieving advantages over our competition, such as in NFV capability.

We are also investing more in artificial intelligence and machine learning technologies to create further technological differentiation in both visibility and control and security domains.

Based on our results so far, and on the growing and strong pipeline of new deals, we expect 2019 revenues to be between $106 million and $110 million with the second half of the year higher than the first half.

We expect book-to-bill for the full year 2019 to be above 1. Using the MAR metric I described earlier, our goal is to sign security OpEx deals with an aggregate MAR of $100 million during 2019.

I feel that Allot can further accelerate growth if we acquire the right company, and we are now strong enough to do this successfully.

Therefore, we will explore opportunities to acquire companies with technology or market reach in support of our strategy while taking care to maintain a strong cash position on our balance sheet to enable us to sign deals with large CSVs.

And now, I would like to hand the call over to Alberto Sessa, our CFO.

Alberto, please go ahead.

Thank you very much, Erez.

Before I begin reviewing the financial results of this quarter and for the year, I would like to inform everyone that on this call unless otherwise noted, I will refer entirely to the non-GAAP financial measure when discussing operational results, which is what we use internally to judge the performance of our business.

Non-GAAP financial measures differ in certain respect from the generally-accepted accounting principle and exclude share-based compensation expenses, revenue adjustment due to acquisitions, restructuring expenses, expenses related to M&A activity, amortization of certain intangible assets, change in tax-related items, and changes in deferred tax.

Now, with regard to the financial results, revenue for the fourth quarter of 2018 were $26.9 million, growing by 16% compared with those of the fourth quarter of 2017.

Revenue for 2018 were $95.8 million, growing 17% compared to 2017.

Our backlog increased during 2018 by approximately $13 million, bringing our 2018 year-end backlog to $69 million.

Since we expect to recognize between 70% to 80% of our backlog as revenue in 2019, this provide us good visibility into 2019 revenues.

I would like to give you now some detail regarding the revenue breakdown and diversification.

The geographic breakdown of revenues for the fourth quarter of 2018 was as follows: Americas with $5.5 million, or 21% of revenues; EMEA with $15.4 million, or 57% of revenues; and Asia-Pacific with $6 million, or 22% of revenue.

The geographic breakdown of revenues for 2019 was as follows: Americas with $14.4 million, or 15% of revenue; EMEA with $59.5 million, or 62% of revenue; and Asia-Pacific with $21.9 million, or 23% of revenues.

Product revenues for the quarter accounted to $16.6 million compared to $13.3 million in the fourth quarter of 2017.

Professional services revenue were $1.6 million compared to $1.1 million in the fourth quarter 2017.

Support and maintenance revenue were $8.7 million compared to $8.8 million in the fourth quarter of 2017.

For the full year 2018, product revenue accounted $56.2 million compared to $48.9 million in 2017.

Professional services revenues were $6.3 million compared to $4 million in 2017.

Support and maintenance revenue were $33.3 million compared to $29.2 million in 2017.

Communication service provider or CSP revenues were 81% in the fourth quarter of 2018, compared to 80% as reported in the fourth quarter of 2017.

For the full year 2018, CSP revenues accounted for $76.2 million, or 80% of total revenue, compared to $65.5 million, or 80% of total revenue in 2017.

Security revenue in 2018 were $24.5 million compared to $24.2 million in 2017.

Revenue from security remains less year-over-year due primarily to the late launch of service in Telefonica.

The security OpEx deal with Telefonica Spain for SMB and Swiftel as Erez mentioned, take time to ramp up and therefore contribute little to 2018 revenues.

I note that revenue breakdown, whether geographical or by product segment or other, may fluctuate from quarter-to-quarter depending on the specific revenue and deals recognized in the specific quarter.

We continue to diversify our customer base and our top 10 end customers made up 53% of our revenues in 2018 compared with a concentration of 57% in 2017.

Book-to-bill ratio in the fourth quarter of 2018 and for the full year 2018 was above 1.

Gross margin for the quarter was 70.3% compared to 68.4% in the fourth quarter 2017.

Gross margin for 2018 increased to 70.7% compared to 68% in 2017.

Operating expenses for the quarter were $19 million compared to $17.1 million as reported in the fourth quarter of 2017.

For the total year 2018, operating expenses were $72.6 million compared to $64.4 million in 2017.

The total number of full-time employees as of December 31, 2018 were 524.

Non-GAAP operating loss for the quarter was reduced to $99,000 compared with an operating loss of $1.3 million in the fourth quarter of 2017.

Net loss for the quarter improved to $455,000 or $0.01 per share versus $1.5 million loss or $0.04 per share in the fourth quarter of 2017.

Net loss for 2018 improved to $5.1 million or $0.15 per share, versus $8.7 million or $0.26 per share in 2017.

Turning to the balance sheet, our cash reserve comprised of cash, cash equivalent and investments as of December 31, 2018 were $103.9 million compared to $104.7 million at the end of last quarter, and $110 million in December 31, 2017.

For the three months ended December 31, 2018, the number of basic shares was 33.9 million and the number of fully-diluted shares for the same period was 35.4 million.

In terms of guidance, as Erez mentioned, we are expecting revenue to grow to between $106 million and $110 million in 2019, representing continued year-over-year revenue growth.

We also expect book-to-bill ratio for the year to be above 1.

Going forward, on a quarterly basis, we will update on our expectation for the yearly book-to-bill ratio but we will not give the specific quarter relation.

We will continue to provide at the end of each year the backlog for the year.

We expect gross margin for 2019 to be approximately 70%.

However, it is important to understand that we expect gross margin on a quarterly basis to fluctuate, even significantly, as a result of recognition of certain hardware-intensive deals we already have in our backlog.

As we continue to invest in system marketing and R&D to facilitate our growth in the company, we expect 2019 operating expenses to be in the range of $79 million to $81 million.

In the security domain, our goal is to sign security OpEx deals with an aggregate MAR of $100 million during 2019.

We will update quarterly on our expectation to reach this target, however, we will not -- we will only report on the MAR achievement on a yearly basis.

This concludes my remarks.

We will be happy to take your questions now.

Operator?

(Operator Instructions) The first question is George Iwanyc of Oppenheimer & Co.

Erez, can you give us maybe a little bit more color about how you feel the year will progress?

I know you expect the second half to be stronger than the first.

Is it a linear progression, and a big uptick at the end?

Or could there be some lumpiness as the deal flow flows through the year?

I don't know.

I would expect it to grow basically, and that's why we said second half stronger than the first half.

But you know, based on individual deals and the timing of recognizing the revenue and the timing, the exact timing of when the deals come in and so on, it could be lumpy.

But I don't have to say more than that.

Okay.

And can you give us a sense of how many Tier 1 new carriers are out there that you're working on, and how many are second-tier and third-tier that are kind of fast followers in this market?

I don't have a number off the top of my head, but I would say that we're actively engaged probably with at least 10 or 15 Tier 1 operators that -- new ones that we're talking to.

But I don't have an exact number off the top of my head.

Okay.

And shifting a little bit, you mentioned M&A as something that you could be looking at right now.

What type of technologies or companies do you feel would be a good fit, and are you looking at primarily technology tuck-in, or are you looking at companies that maybe could provide some market share at the same time?

I think that there's several criteria here that we're looking at.

We will be looking at technology tuck-in, similar to what we've done with Netonomy, which is an excellent example.

We've expanded the Allot Secure platform and we -- by acquiring Netonomy, we allowed ourselves, we gave ourselves access to a security product for the home router market and for -- in general to improve our securities capability for fixed broadband networks.

So we'll be looking at other companies that can help augment and increase the type of security offerings that we are able to enable operators to take to the mass market.

And we may also look for companies that provide us a faster time-to-market in specific markets that we want to grow in, such as the United States, for example.

However, I will repeat again that we are very conscious of our balance sheet and the amount of cash in our balance sheet, and it's important for us to maintain a strong cash position on the balance sheet because we are selling to Tier 1 operators and it's important for us to be able to show them that we have a strong balance sheet in the process of making that sale and closing the deal.

So we intend to keep it that way as well.

All right, and just a couple of final questions for you, Alberto.

When you look at the full-year guidance that you gave for OpEx, can you give us a sense of where you expect the bulk of the increases to come from, or is it balanced against -- or across R&D and sales and marketing, or will you be heavier in one of the other areas?

As I said our guideline for 2019 are that operating expenses will grow up to $79 million to $81 million.

We want to continue to invest in those areas which contribute to our growth, mainly as you mentioned, product-wise that we will increase our investment in R&D.

Since the marketing in those areas in which we believe that we can increase our penetration in that market, and customer success in order to be sure to deliver all the deals that we were able to achieve.

All right.

And my last question on the gross margin, can you just tell us how mix impacts the guidance?

If you have a heavier security, if you hit the MAR numbers, how does that change your full-year gross margin outlook?

Well, first of all, it's difficult to say at that point.

But the assumption right now is that the gross margin for security deals will be very similar to that of DPI.

So a change in mix at this point of time will not impact significantly our gross margin.

And for 2019 with the new guideline, a gross margin of approximately 70%.

I will add, perhaps, to as Alberto said, and emphasize again what was said, that it -- while we sign the security OpEx deals, it takes them time to ramp up.

Even a deal we sign today will hopefully be launched quickly, that is, say in the summer and then customers will start ramping up throughout the second half of the year.

So security OpEx deals that we sign in 2019 will not have -- or are not, at least, expected to have a very significant impact on revenues and bookings for 2019.

They will have much more, or I expect them to have a much more significant impact in 2020 and beyond, of course.

The next question is from Alex Henderson of Needham & Company.

This is Roger Boyd on for Alex Henderson.

I know you mentioned you're continuing to take share in the DPI space.

Can you give any more color on the competitive environment there, what you're seeing in terms of channel dynamics?

In terms of, I couldn't hear the last few words, sorry?

In terms of channel dynamics within the DPI space?

Look, I think that we're -- if I look at the DPI market in general, I would say that we're seeing -- we're seeing the large network equipment providers such as Ericsson, Huawei, companies -- Samsung, companies like that -- that are providing core networks.

They also have a DPI component in their -- as part of their offering.

They typically, when they can, they bundle that with the rest of the core network product that they provide to operators, and I would say as a very, very broad sentence, I would say that operators that are willing to suffice with a more simplistic and less-capable type of DPI product, we'll tend to buy from the [net bundle] product.

Those operators that see the value in having a higher-end, more sophisticated, higher capability DPI product, will typically buy from either Allot or our direct competition which today, quite honestly, is primarily Sandvine.

Now, I think that what we're seeing is that we're seeing companies that are -- that either do not have DPI and are looking to add that.

We have several instances where operators have been working without DPI for years, and are now looking to add that capability to their portfolio so they come look at what their options are.

And we see operators that have run with a certain platform for a number of years, and are either not so content with maybe the product they've got, the service they have, or even for corporate governance reasons need to go and issue a bid, a new bid to check what's out in the market after a certain number of years.

And then we get -- then we have -- sorry, then they in either of these cases, they will put out some kind of RFP or RFR or something, to look at the opportunity.

And that creates an opportunity for us.

I'm glad to say that we are winning many deals, and we're doing this above our market share.

So that's a reason for us to grow in this market.

And then a quick housekeeping item, do you have a tax rate in mind we should be using for '19?

Tax -- can you repeat your question?

Yes.

I'm just wondering if you have a tax rate in mind that we should be using for modeling 2019?

I think that from a tax point of view, I think that modeling 2019 you should use the 2018 figure and then [bump] the rates according to the increase in revenue.

That's the way I would do that.

The next question is from Jeff Bernstein of Cowen.

You mentioned the opportunity in NFV and congratulations on winning your first deal there.

Any thoughts about how many vendors a carrier might have?

I think they second source some of the hardware-based DPI-type equipment, but in an NFV situation is it going to be only one vendor?

And also, how standardized do you think these implementations are going to be, or is there going to be a sort of learning that has to get done inside of each guy's NFV environment?

The big promise of NFV, at least if you ask the people who invented it and are pushing it hard, is that an operator can have a uniform hardware platform, many, many servers that are exactly identical and look the same, and so on, and then bring in software from multiple vendors whether it's a different vendor for his package, or a different vendor for DPI, different vendor for security, a different vendor for DDoS, whatever.

And there's the central orchestrator that orchestrates this whole thing and brings all the software together, and makes sure that each piece of software regardless from which vendor it comes, can work together and gets the resources it needs at any particular time.

So the big promise of NFV is that the operator will be able to bring in software solutions from multiple vendors, not from one, and will be able to change out a solution if he doesn't like it from Vendor A to Vendor B relatively easily because there's no hardware change, and everything should be running on the same machines.

So the promise is, actually, and the direction for operators, is to have multiple vendors and have best-of-breed for each and every function.

Now, that's the CRE and that's where the technology is supposed to take us.

As I think was similar, other major technology changes, the getting there will be a little bit more complicated.

It's not entirely standardized.

For example, you have two main NFV systems.

One is based on VMware.

One is based on OpenStack.

They're not the same.

So there are even different versions between these various alternatives.

I think there are multiple different orchestrators out there in the market today, and to the best of my knowledge, there is no clear market leader in orchestration yet.

So I see many operators talking about, or still considering, which orchestrator they want to use.

So there may be a phase where there will be less than -- a smaller number of vendors or software vendors participating in the NFV implementation of a specific operator.

And there definitely will be integration issues, compatibility issues, and so on.

And I expect that it's going to be a learning curve as these networks get rolled out.

Software packages will become more -- not just more integrated, but will become, will have more standardized interfaces.

Everything around it will converge to a more-standardized interface operating system and so on, and this will take some time.

I hope that (inaudible).

Yes, so it sounds like there is a significant competitive advantage to being an early mover here, and making this stuff work in the real world for carriers.

And if your competitor is a year or two or several behind, it's going to be much more difficult for them to then come in.

Yes.

There's definitely a competitive advantage to being early in the market with this, and we are, I think, early in the market with this.

The next question is from Marc Silk of Silk Investments.

So it seems like some of your DPI customers are potential security customers and vice-versa.

So could you kind of enlighten us about maybe your cross-selling strategy and opportunities?

Sure.

Yes, many of them can buy either or both.

Look, even though it's -- I'll preface it a bit.

Even though it's the same operator, the buying persona within the operator is different, right?

When we sell DPI solution to an operator we will typically sell it to the network engineering department, the CTO, the guys who are responsible for the network itself.

When we sell a security solution, the value of that security solution is enhancing the brand of the operator to becoming a secure provider of services, bringing in new [revenues], things like that.

So the buying persona typically is more as a CMO, the marketing guys, the value-added-service guys, the guys who own the P&L.

So it's different buying personas within the same operator.

However, there is no doubt if we are already in an operator and we're engaged with part of the organization -- say we sold them a DPI system and we're engaged with the network guys -- it is easier for us to get them to introduce us to the marketing people and start selling the value of security.

And we also have a good reputation in that customer.

They're using us, they trust us.

The network guys are comfortable with us.

So it's easier for us to sell into these customers.

Same thing in reverse, right?

Where if we are -- if we sell into a customer our security system and the network guys already accept our software and sometimes appliance to put in line, into their system, it is then an upsell opportunity to go to them and say, okay, we're already inside the system, here, take another software package or another license, and you have additional capabilities from the DPI side.

So yes, it's definitely an opportunity but it's very important for me to note that there are clear examples where we don't have both.

We for example, even in Telefonica, Telefonica has DPI from Sandvine and we're providing the network security.

So it gives us an opportunity.

It's an opportunity that, you know, we try hard to leverage off of but it's not a necessity to have both.

So I agree with you, it is important to have a healthy balance sheet when you go into these telcos, and I'm just encouraged by your continued success.

Good luck going forward.

We have a follow-up question from Jeff Bernstein.

You talked about being involved in some bidding opportunities on 5G.

Can you just flesh out a little bit more what the requirements are that people are looking at for 5G networks?

Well, it's -- fundamentally it's very similar to what they're looking at 4G network, right?

They want to understand what are the applications that are running in the network.

We're talking about DPI right now, yes?

So they want to understand what applications are running on the network, how much bandwidth, from whom, which customers, etc.

And to the extent that they can, they want to be able to exert some sort of control on it, to handle congestion better or to limit perhaps if somebody reached that individual's program max, to limit perhaps the speed of access, things like that that are typical for DPI implementation.

Now, on 5G it's the same but it's actually even enhanced, because what happens in 5G is that the 5G philosophy of the network is that the operator will be able to provide end-to-end services and control the quality of delivery of each and every service from end-to-end throughout the whole network.

In that sense it's very unlike a 3G or a 4G network where in a 3G or 4G network, if you have a certain site that is congested, a certain cell tower, all the applications suffer.

They're all -- they all get slowed down.

In a 5G network at least in theory -- we'll see how this rolls out as really 5G networks get massively deployed -- but the way they are designed is that the operator will decide, for example, on a certain quality that he wants to deliver, I don't know, voice traffic or a certain quality that he wants to deliver YouTube traffic, just to name two mundane examples.

And that will be the service level that will be guaranteed in the network from anywhere from the endpoint to the radio to the coordinate to [the transport] the coordinate of the whole thing, and has to control everything in the network to enable that quality of experience to be maintained throughout.

Now, DPI is going to have to be part of what will enable that, and this means similar, same functionality but some technological adaptations to working in a 5G network, such as we'll have to package our software in what is called micro services.

We'll have to have a tighter integration into the packet core that the operators are providing.

So, same functionality, a slightly different implementation, better integration with the other vendors.

And then lastly on the security side, it looks like in the U.S., the cable companies are using a company called CUJO, or a couple of them, at least.

It seems to be more of a local U.S. type company closely related to the cable industry, whatever.

Do you see other small guys out there as competition, or what does the competitive front look like?

On the home router security side, I would say that we're seeing really two competitors to us.

One is CUJO, that you mentioned, and the other one is McAfee.

So on some deals we're cooperating with McAfee, where we're combining our network security with their endpoint.

And on other deals we're competing with them, where they provide their home router security software and we provide ours.

(Operator Instructions) There are no further questions at this time.

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

Yes.

I'd just like to thank everybody on behalf of myself and the management of Allot.

Thank you for your interest and your support of our business.

I look forward to talking to you in the next quarter.

Thank you very much.

This concludes the Allot Fourth Quarter 2018 Results Conference Call.

Thank you for your participation.

You may go ahead and disconnect.