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Allot Communications Ltd (ALLT) Q4 2018 Earnings Conference Call Transcript

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Allot Communications Ltd  (NASDAQ: ALLT)
Q4 2018 Earnings Conference Call
Feb. 05, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen thank you for standing by. Welcome to Allot's fourth quarter and full year 2018 results conference call. All participants are at present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded. You should have all received by now the company's press release. If you have not received it, please contact Allot's Investor Relations team at GK Investor and Public Relations at 164-688-3559 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.

Gavriel Frohwein -- Investor Relations

Thank you, Operator. Welcome to Allot's fourth quarter and full year 2018 conference call. I would like to welcome all of you to the conference call and thank Allot's management for hosting this call. With us on the call today are Mr. Erez Antebi, President and CEO; and Mr. Alberto Sessa, CFO. Erez will summarize the key highlights, followed by Alberto, who will review Allot's financial performance for the quarter. We will then open the call for the question-and-answer session.

Before we start, I'd like to point out that this conference call may contain projections or 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 would like to now hand over the call to Erez. Erez, please go ahead.

Erez Antebi -- President and Chief Executive Officer

Thank you, Gabriel. 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 of 2018 was significantly improved over that in the fourth quarter of 2017. Our book-to-bill ratio was larger than one 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 conductivity costs, quality of experience, where communication service providers or CSPs can understand what the real user experience on the 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 planned 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 ones 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 and expansions, renewals and services.

The visibility and control domain grew nicely in 2018 and in fact with 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 a client base 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 US and Korea are pursuing a path to rollout 5G systems with European operators expected to follow later.

5G networks are in need of traffic management and analytics and this two 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 and 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, IoT secure, HomeSecure, DDoS secure and the combination with our partners endpoint secure. 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 services 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 threats" protection to the consumer and SMB market is gaining acceptance with operators. Last week we announced a deal with the Tier 1 European operator with approximately 2.5 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 network secure product. This deal is a revenue share deal where Allot invest 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 joined 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 IoT secure deal with the Tier 1 operator in the US to protect enterprise IoT devices on the operators network against infection and rogue IoT device activity. It is important to note that this solution is deployed in the operators 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 Netonomy 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 the Telefonica launched in December. Their service in Spain based on the Allot network secure products. Telefonica decided to launch a bundled service where the 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 they 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'm 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 OpEx deals we signed. The growth and 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 I'm 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 face a bit longer than we would like to close these deals. To help us measure the potential of the aggregated security OpEx deals we signed and our progress in this area, I would like to introduce a metric we use internally that we call maximum annual revenues or AMR for short.

This number reflects the annual revenue Allot will receive should 100% of the CSPs relevant customer base sign up for the security service. Of course, we do not expect a 100% of the operators, customers to sign up for the security service. So, the actual revenues Allot will get are expected to be the AMR multiplied by whatever the penetrations will be.

In Vodafone case, penetration rates of the service after three 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 have 5 million postpaid customers, and we target the security service for all postpaid customers.

Assume further that based on the agreement with the operator, Allot expects to receive $0.5 per subscriber per month. The MAR of this hypothetical opportunity will be 5 million times $0.5 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 as a result of the significant changes we've made during the past couple of years in our execution capabilities, which included management changes, restructuring sales and customer success and to see a few are customer facing unit, 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 one.

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 CSPs.

And now I would like to hand the call over to Alberto Sessa our CFO. Alberto please go ahead.

Alberto Sessa -- Chief Financial Officer

Thank you very much, Erez. Before I begin reviewing the financial results for 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 measure differ in certain respects 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 provides us good visibility into 2019 revenues.

I would like to give you now some details 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 2018 was as follows. America with 14.4 million or 15% of revenue, EMEA with 15 with 59, sorry, 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 of 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 remained flat 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 and customers made up 53% of our revenues in 2018 compared with the concentration of 57% in 2017. Book-to-bill ratio in the fourth quarter of 2018 and for the full year 2018 was above one.

Gross margin for the quarter was 70.3% compared to 68.4% in the fourth quarter of 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 31st, 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 equivalents and investments as of December 31st, 2018 were $103.9 million compared to $104.7 million at the end of last quarter and $110 million in December 31st, 2017.

For the three months ended December 31st, 2018. The number of basic share was 33.9 million and the number of fully diluted share for the same period was 35.4 million. In terms of guidance, as Erez mentioned, we are expecting revenue to grow to be between $106 million and $110 million in 2019 representing continue year-over-year revenue growth.

We also expect the book-to-bill ratio for the year to be above one. Going forward on a quarterly basis, we will update on our expectations for the yearly book-to-bill ratio, but we will not give the specific quarterly ratio. 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 base 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 sales and marketing and R&D to facilitate our -- the 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 deal with an aggregate MAR of $100 million during 2019.

We will update quarterly on our expectation to reach this target. However, we will only report on the MAR achievements on a yearly basis. This concludes my remarks. We will be happy to take your question now. Operator?

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instruction) The first question is from George Iwanyc of Oppenheimer & Co. Please go ahead.

George Iwanyc -- Oppenheimer & Co. -- Analyst

All right. Thank you for taking my question. 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 through the year?

Erez Antebi -- President and Chief Executive Officer

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.

George Iwanyc -- Oppenheimer & Co. -- Analyst

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 a past followers in this market?

Erez Antebi -- President and Chief Executive Officer

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

George Iwanyc -- Oppenheimer & Co. -- Analyst

Okay. In shifting a little bit, you mentioned M&A is 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?

Erez Antebi -- President and Chief Executive Officer

I think that you know there are several criterias 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 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 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 intent to keep it that way as well.

George Iwanyc -- Oppenheimer & Co. -- Analyst

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?

Alberto Sessa -- Chief Financial Officer

As I said our guidelines for 2019 are that operating expenses will grow upto $79 million to $81 million. We want to continue to invest in those area, which contribute to our growth mainly as you mentioned product lines that we will increase our investment in R&D, sales and 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.

George Iwanyc -- Oppenheimer & Co. -- Analyst

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?

Alberto Sessa -- Chief Financial Officer

First of all it's difficult to say at that point, but the assumption right now is that the gross margin for security, the deal will be very similar to that of DPI. So, change in mix at this point of time will not impact significantly our gross margin. And for 2019 with new guideline, the gross margin was approximately 70%.

George Iwanyc -- Oppenheimer & Co. -- Analyst

Thank you.

Erez Antebi -- President and Chief Executive Officer

I will add perhaps to what Alberto said and emphasize again what we said that it, while we signed the security OpEx deals, it takes some time to ramp up, even a deal we signed 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 signed in 2019 will not have or not at least expected to have a very significant impact on revenues and bookings for 2019. They will have a much more. So, I expect them to have a much more significant impact in 2020 and beyond of course.

George Iwanyc -- Oppenheimer & Co. -- Analyst

Great, thank you.

Operator

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

Roger Boyd -- Needham & Company -- Analyst

Hey, thanks. 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 or what you're seeing in terms of channel dynamics?

Erez Antebi -- President and Chief Executive Officer

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

Roger Boyd -- Needham & Company -- Analyst

In terms of channel dynamics within the DPI space?

Erez Antebi -- President and Chief Executive Officer

Look, I think, that if I look at the DPI market in general I would say that 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 the -- 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 will tend to buy from the mix of bundled products. Those operators that see the value and having a higher and 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 the companies 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 and 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 a not so content with maybe the product they've got, the service they have or even for corporate governance reasons, we need to go and issue a bit for a new bid to check what's out in the market after a certain number of years and then we get it, then we have, sorry, then they in either of these cases they will put out some kind of RFP or RFI or something look at the opportunity and that creates an opportunity for us. I'm glad to say that we are winning many deals and we are doing this above our market share. So, that's the reason for us to grow in this market.

Roger Boyd -- Needham & Company -- Analyst

Great. It makes sense. And then a quick housekeeping item, do you have a tax rate in mind that we should be using for '19?

Erez Antebi -- President and Chief Executive Officer

Can you repeat your question, Roger?

Roger Boyd -- Needham & Company -- Analyst

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

Erez Antebi -- President and Chief Executive Officer

I think that from a tough point of view, I think, that is modeling 2019 used the 2018 figure and then packed the rate according to the increase in revenue. That's the way I will do that.

Roger Boyd -- Needham & Company -- Analyst

Okay, thanks.

Operator

The next question is from Jeff Bernstein of Cowen. Please go ahead.

Jeffrey Bernstein -- Cowen and Company -- Analyst

Hi, guys. 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 the 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 sort of learning that has to get done inside of each guys NFV environment.

Erez Antebi -- President and Chief Executive Officer

Okay. The big promise of NFV at least if you ask those, 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 different, different vendor for as packet core different vendor for DPI, different vendor for security, different vendor for DDoS whatever, and they will and there's the central orchestrator that orchestrates this whole thing and brings all the software together and make 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 we'll be able to change out a solution, if he doesn't like it from vendor A to vendor B relatively easily because there is no hardware change and everything should be running on the same machine. 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 theory and that's where the technology is supposed to take us as, I think, versus similar other major technology changes, to 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, 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, many operators talking about it or still considering which orchestrator they want to use, and so there may be a phase where there will be less than a smaller number of 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 for these networks to get rolled out and 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 interfaces operating system and so on and this will take sometime. Hope I answered the question.

Jeffrey Bernstein -- Cowen and Company -- Analyst

Yeah, 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.

Erez Antebi -- President and Chief Executive Officer

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.

Jeffrey Bernstein -- Cowen and Company -- Analyst

Great, thank you.

Operator

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

Marc Silk -- Silk Investment Advisors -- Analyst

Thanks for taking my call -- my question, Erez. 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.

Erez Antebi -- President and Chief Executive Officer

Sure. Yes, many of them can buy either or both, and look it's -- even though it's and I'll rephrase it a bit, even though it's the same operator is a 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, it is enhancing the brand of the operator to becoming a secure provider of services, bringing in new reps and 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 a different buying personas within the same operator. However, there is no doubt that if we are already in an operator and we are engaged with part of the organization, say, we sold in 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, customers are using us, they trust us. The network guys are comfortable with us. So, it's easier for us to selling into these customers. Same thing in reverse, right. If we are selling to a customer our security system and the network guys already accept our software, sometimes appliance to put in line into their system. It is then an upsell opportunity to go to them and say, OK, we're already inside the system. Here you take an other software package or other license and you have additional capabilities from the DPI side. So, yes, it's definitely 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 network security. So, it gives us an opportunity. It's an opportunity that we try hard to live with on, but it's not a necessity to have both.

Marc Silk -- Silk Investment Advisors -- Analyst

I appreciate that insight. And so I agree with you, it's important to have a healthy balance sheet when you go into these telcos, and I'm just encouraged by your continued success. So good luck going forward.

Erez Antebi -- President and Chief Executive Officer

Thank you very much.

Operator

We have a follow-up question from Jeff Bernstein. Please go ahead.

Jeffrey Bernstein -- Cowen and Company -- Analyst

Yeah, you talked about being involved in some bidding opportunities on 5G and can you just flesh out a little bit more or what the requirements are that the people are looking for 5G networks?

Erez Antebi -- President and Chief Executive Officer

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.

Jeffrey Bernstein -- Cowen and Company -- Analyst

Yes.

Erez Antebi -- President and Chief Executive Officer

So, they want to understand, what are the applications that are running on the network. How much bandwidth from whom which customers et cetera. And to the extent they can, they want to be able to exert some sort of control on it to handle congestion, better to limit perhaps if somebody reached -- that individuals program max. So, limit perhaps the speed of access and things like that are typical for DPI implementation. Now in 5G this is 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 a 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 networks if you have a certain site that is congested. Certain cell power all the applications suffer. They all get slowed down. In a 5G network at least in theory, we'll see how this rolls out as really is about 5G networks we have massively deployed, but the way they are designed is that you will, that the operator will decide for example on a certain quality that he wants to deliver. I don't know a voice traffic or and the certain quality that he wants to deliver, a YouTube traffic. Just to name to 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, this where they'll transport the core network, the whole thing and have 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 is -- similar same functionality, but some technological adaptations to working in a 5G networks such as will have to package our software and what is called micro services, will have to have a tighter integration into the packet core of the -- that the operators are providing. So same functionality, a slightly different implementation better integration with the other vendors.

Jeffrey Bernstein -- Cowen and Company -- Analyst

Great. And then lastly on the security side, it looks like in the US the cable companies are using a company called Cujo. A couple of them at least it seems to be more of a local US type company closely related to the cable industry whatever. Do you see other small guys out there as competition or what is the competitive front look like?

Erez Antebi -- President and Chief Executive Officer

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, and some deals we're cooperating with McAfee, 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.

Jeffrey Bernstein -- Cowen and Company -- Analyst

Great. That's great. Thanks so much.

Erez Antebi -- President and Chief Executive Officer

Thank you.

Operator

(Operator Instructions) There are no further questions at this time. Mr. Antebi would you like to make your concluding statement.

Erez Antebi -- President and Chief Executive Officer

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, and I look forward to talking to you in the next quarter. Thank you very much.

Operator

This concludes the Allot fourth quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.

Duration: 50 minutes

Call participants:

Gavriel Frohwein -- Investor Relations

Erez Antebi -- President and Chief Executive Officer

Alberto Sessa -- Chief Financial Officer

George Iwanyc -- Oppenheimer & Co. -- Analyst

Roger Boyd -- Needham & Company -- Analyst

Jeffrey Bernstein -- Cowen and Company -- Analyst

Marc Silk -- Silk Investment Advisors -- Analyst

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