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Presentation

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Allot’s Fourth Quarter 2022 Results Conference Call. All participants are at present in listen-only mode. Following management’s formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded. You should have all received by now the company’s press release. If you have not received it, please contact Allot’s Investor Relations team at EK Global Investor Relations at 1 (212) 378-8040 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. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin, please?

Kenny Green: Thank you, Operator. I’d like to welcome everyone to Allot’s fourth quarter and full-year 2022 results conference call. I’d like to welcome all of you to this conference call and I’d like to thank Allot’s management for hosting this call. With us on the line today are Mr. Erez Antebi, President and CEO; and Mr. Ziv Leitman, CFO. Erez will provide an opening statement and summarize the key highlights of the quarter. We will then open the call for the question-and-answer session and both Erez and Ziv will be available to answer your questions. You can all find the financial highlights and metrics including those we typically discuss on the conference call in today’s earnings press release. Before we start, I’d like to point out the Safe Harbor statement.

This conference call contains projections and other forward-looking statements regarding future events or the future performance of the company. These statements are only predictions and Allot cannot guarantee that they will in fact occur. Allot does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of the impact due to COVID-19 pandemic, changing market trends, delays in the launch of services by our customers, reduced demand and the competitive nature of the security services industry, as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission. And with that, I would now like to hand the call over to Erez Antebi, CEO.

Erez, please go ahead.

Erez Antebi: Thank you, Kenny. I’d like to welcome all of you to our conference call and thank you for joining us today. Our fourth quarter revenues reached $33 million, 20% lower than comparable revenues last year. Our full-year 2022 revenues were $122.7 million, 16% lower than our comparable full-year revenues in 2021. In December 2022, our SECaaS ARR was $9.2 million, 33% higher than our SECaaS ARR in September 2022 and 77% higher than our SECaaS ARR for December 2021. Our total ARR including support and maintenance grew 10% year-over-year and reached $51.7 million for December 2022. 2022 was a challenging year for us. The transition of the business into SECaaS recurring revenue model has proven to be slower than we originally anticipated.

In addition, we had some headwind on our core DPI business. While we don’t expect those challenges to disappear in 2023, we continue to make progress in this transition. I remain optimistic on the fundamentals and the future. During today’s call, I will discuss the challenges we are facing, the opportunities we see, and why I am confident in the future. As discussed in our previous earning call, we implemented cost cutting measures that also included reduction of our workforce. We intend to continue with the policy of tight control of our expenses in order to reduce our loss in 2023, and we reiterate what we stated previously, that we remain committed to reach profitability for the full-year 2024. Now, I would like to move to discuss our different product lines.

I would like to start by discussing our traffic management and analytics business addressed by our Allot Smart product line. The main use cases we see today in CSPs continue to be in traffic management, congestion management, quality of user experience, especially for video, policy and charging control and digital enforcement. As governments look to fight crime and terrorism, we see a growing interest globally and being able to block illegal activities such as drug trafficking, child pornography and terrorism. We have solutions that address these issues and we are seeing growing interests in our products. Many CSPs today are reexamining the composition of their networks. This may be because they are moving to 5G or because they need to replace end-of-life products or other reasons.

As they do so, we see multiple opportunities globally where CSPs currently using our competitor’s product are considering a change. We are working closely with quite a few such CSPs to win their trust and business becoming their next choice for DPI. Most of these processes are through a competitive bidding process and some are potentially negotiated deals. In addition, we are working on expanding deals that we won before. Specifically, during the fourth quarter, we won two competitive bids, one in EMEA and one in APAC, where we will replace an existing DPI system provided by a competitor of ours. In addition, we also won two projects in EMEA to install a DPI system for new customers that did not have such a system before. While we continue to see in our pipeline a similar combination of replacement opportunities and new deals, and while we remain excited about these opportunities, we also recognize that we are facing several challenges that continue to make it more difficult for us to provide a definite forecast.

First, as discussed in previous earning calls, it is taking us longer to close DPI deals than in the past. I believe this has to do with the general economic environment and tighter expense control by CSPs. Second, the total number of DPI bids for CSPs we are seeing is not growing. Third, in the enterprise market, we believe the growth we saw as a result of the Broadcom deal has peaked and we do not expect further growth in this market. We have a strong pipeline of large deals for the year. We believe that the DPI market remains solid and that we can continue to gain market share. However, the three dynamics I discussed previously and the potential lumpiness of large deals make it challenging to predict the timing of wins and revenue recognition for our DPI business.

As a result, we do not expect to see growth in our DPI segment for 2023. However, we also do not believe that the contraction will be more than 5% to 10% in 2023. I would like to point out one item with respect to our account receivables. As you might have noticed on our financial statements, our account receivables grew by $11.6 million during 2022. A majority of this growth came from sales to resellers in Africa and Latin America who are late on their payments to us. We learned that the cash flow of these resellers was impacted by a failure to receive payments from end customers, which in turn affected their ability to meet the payment terms to which they agreed with us. We have assessed the late payments and determined that the payments remain collectible.

I want to turn your attention now to what we see in our cybersecurity business and how the market is developing. As I have said in previous calls, Allot is transforming into a cybersecurity company and this is where we see most of our future growth coming from. We are engaged worldwide with CSPs that are looking to provide their customers with network-based SECaaS. As we look at the market, we see that the direction and momentum of operators interested in launching network-based security services continues to be very positive. We see that in many markets the various operators provide services that are on par on speed, coverage and reliability. As they look for differentiation, network-based security is emerging as an important element. This is even more important since network security is a service native to the operator’s network and is directly coupled to the access network itself.

There are several Tier 1 operators who have reached the conclusion of providing network-based security to their customers is of significant importance to them, and they are discussing with us how to do so. The largest signed SECaaS opportunity for Allot was a Tier 1 operator is the contract we signed with Verizon business, which we discussed in the previous earning call. During the fourth quarter, we signed two additional SECaaS deals, one in Latin America and the other in APAC. Both will utilize our HomeSecure product. In addition, we are in contract negotiations with several other operators globally where we were awarded deals but have not yet signed the contracts. On top of that, we are in serious discussions with additional operators where an award has yet to be provided.

As we discussed in previous calls, and as I will address in more detail later in the call, we have changed our strategy for the Allot Secure business. We are putting more emphasis on strategic accounts that can have high revenue impact, while in small to medium deals we are looking for some customers’ assurance in setting minimum revenue thresholds. While this approach might affect a number of deals we signed, it will allow us to get to profitability sooner. Our MAR of all new deals signed in 2022 was $191 million. As we mentioned several times in the past, MAR is proving to be not a good enough metric for predicting short-term revenues and we have decided it is not beneficial anymore as a metric for our future business. We are no longer using it internally to measure new deals, and as a result, this is the last time we are reporting MAR.

We recently reviewed some of the deals we previously signed and have not yet launched. After reviewing these deals, we decided to cancel some of the contracts because we no longer believe the investment in them is justified. These project cancellations with six CSPs total approximately $45 million of MAR. We are continuing to examine a few additional contracts to see if they can be turned into real revenues or if we should cancel the contracts as there. We remain excited about our SECaaS opportunity as we have a differentiated, scalable solution for CSPs. During the fourth quarter, we launched three new SECaaS services. Two are using our DNS secure product and one Far EasTone in Taiwan is using our network secure product. Our SECaaS revenues for the third quarter were $2.2 million and the SECaaS ARR at the end of the third quarter — sorry.

I’ll take that back. Our SECaaS revenues for the fourth quarter were $2.2 million and the SECaaS ARR at the end of the fourth quarter was $9.2 million, a significant growth from the third quarter. As of December 30, 2022, we have 27 signed customers. Unfortunately, only 14 have started to generate revenues and most of them are relatively small operators and most of them launched the service only to a portion of their subscriber base. As we have discussed previously, our main challenge today in our SECaaS business is to translate the contracts we signed into revenues. The first challenge is to launch the service. This process involves many stakeholders on the CSP side, technical, operational, marketing, purchasing and more. They all have multiple other tasks and priorities.

Often integration of our products with different internal IT systems is required. During 2022, we increased our efforts to assist in those processes, and in some cases, we managed to help and expedite the process. As we discussed in the previous earnings call, we unfortunately concluded that while in some cases, we managed to speed up things, overall, our ability to positively impact the launch date is very limited. As a result, we changed our approach and we will focus our future efforts of speeding up launches mainly on few targeted larger opportunities that we believe can contribute significantly to revenues. A major challenge we have is the marketing aggressiveness of the CSP when launching the SECaaS service. Aggressive go-to-market approaches can include among others, proactively offering the service in every customer interaction, bundling the security offering in the price plan for some or all of the customers, et cetera.

The willingness of the CSP to commit to an aggressive go-to-market approach in the contract is to a degree, an indication of how strategic this service is to them. These discussions sometimes take time and further delay the launch, but I think they are very important to our long-term success, as well as to the CSP success in this field. Bringing all the above into account and in line with what we discussed in the previous earnings call; we changed certain elements of our approach to the market. One, going forward, we are shifting our focus from “land grab” for market share and number of CSPs to CSPs with revenue potential in the next couple of years. This means we will focus on CSPs that have a significant revenue potential even at the expense of market share.

As a result, we are no longer focusing our salespeople on MAR targets rather their time is being spent with specific accounts. Two, we are approaching the CSPs as partners, not as customers. We’ll push very hard to have CSPs we engage with, contractually commit to an aggressive go-to-market. CSPs of medium size that will not commit to an aggressive go-to market approach and small CSPs regardless of their planned go-to-market approach, our offered commercial terms where our revenues are not dependent on their marketing success. We expect some of these CSPs may agree to this and some will not. I expect these changes will reduce the number of new CSPs we eventually signup. However, it will allow us to focus our resources on the smaller number of CSPs that we see more strategic value in the SECaaS service and it will ultimately drive profitable revenue growth for Allot.

As I look at the deals we have done and those that are in the pipeline, I am convinced that the size of the market remains huge. While I am disappointed with the current pace at which our revenues are materializing, I remain confident in our ability to achieve our long-term goals. Looking ahead, I want to summarize our expectations for 2023. As I stated, we have already implemented some cost-cutting measures and we will continue to implement more. As a result, we believe our net cash reduction and our operating loss for the year will be between $15 million to $20 million. We remain committed to reach profitability for the full-year 2024. This will be achieved by some revenue growth, mainly on the SECaaS business, but also through tight expense control.

We expect SECaaS revenues for the whole of 2023 to be between $11 million and $13 million. We expect the SECaaS ARR for December 2023 to be between $15 million to $20 million and our total ARR including support and maintenance to be between $56 million and $63 million. We expect our total revenues for the full-year 2023 to be between $110 million and $120 million. Regarding Q1, recall the Q1 is seasonally a weak quarter for revenues, and we expect the first quarter revenues to be approximately $20 million. Given the lumpiness of the DPI business that we mentioned earlier, we do expect notably higher quarterly revenues as we move through 2023, especially in the second half. Our strategy remains the same. While we believe that our DPI business has limited growth potential, we think we can maintain a similar revenue of business through new use cases and winning competitor accounts.

However, the lumpiness of the business makes it difficult to forecast over short timeframes. Our SECaaS business is where we see our significant future growth. While our SECaaS revenues are being recognized later than we would’ve liked and later than we expected, I remain convinced of the large potential of this business, and I’m confident that it will grow significantly in the coming years. I have full faith in our company, our team and our products, and I believe the actions we are taking make these goals achievable. And now, I would like to open the call for questions-and-answers, and Ziv and myself will be available to take your questions. Operator?

Operator: Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. . The first question is from Eric Martinuzzi of Lake Street. Please go ahead.

Eric Martinuzzi: Yes. I had a question regarding the traffic management and analytics of the DPI side of the business. Last quarter, we talked about CapEx deals slow down and you gave us some additional color in your prepared remarks just that the — it’s taking longer to close because of the economic environment. The number of deals in the pipeline is not growing. And then, the Broadcom deal flow having peaked. I’m just curious to know what are people, if you know is the overall industry in contraction or is it just a temporary macro, but does it seems like a the service that carriers would need to provide, would have to provide and would need to upgrade over time.

Erez Antebi: And I don’t believe that the overall market is in contraction. Obviously, it’s very hard for me to measure this on a quarter-by-quarter basis, but I don’t believe so. I think it’s mainly the — it’s mainly really the timing and how long it takes to close the deals and then recognize the revenue and that’s delaying our revenues, but I don’t think it’s an overall contraction in the market size.

Eric Martinuzzi: Okay. And then for the support and main — maintenance ARR forecast, I noticed that at the mid-point of your 2023 expectation that is potential step-down versus 2022, what’s behind that contraction?

Ziv Leitman: It’s not really a reduction in the number in the ARR for December 2022; it was the $42.5 million. Now we take a range between $41 million to $43 million. There could be some currency fluctuation and other fluctuation depends on the timing the customer renew the contract. So generally speaking, it’s stable market.

Eric Martinuzzi: All right. And then the — regarding the SECaaS ARR that was actually that came in about where you expected for Q4. I know you said you expected to exit $9 million or better and you came in at $9.2 million. Was there any a particular carrier that came through for you, or was it strength across the installed base?

Erez Antebi: I think it was — I don’t think there was a specific carrier that came through that made a difference. It was basically across the installed base, I would say.

Eric Martinuzzi: Okay. And I understand you’re kind of trying to put more wood on fewer arrows on the penetration here in 2023, but have you changed the sales compensation plan in 2023 on the SECaaS side of the house?

Erez Antebi: Like I mentioned, we have to an extent, for example, we’re no longer giving the salespeople a MAR targets but rather we’re just and we’re focusing them on a smaller number of accounts. So they — so basically salespeople that are going after new accounts are given named to targeted accounts to go after. And it’s a — the compensation plan is built around whether they win, well, hopefully they win, right, these accounts — these specific accounts, it’s not an MAR metric anymore. So it makes a difference.

Eric Martinuzzi: Understand. And last question for me. Can you remind me of the terms on the convertible debt that you have? Is there any interest associated with that?

Ziv Leitman: It’s zero interest.

Eric Martinuzzi: Zero interest. Got it. All right. Thanks for taking my questions.

Operator: The next question is from Nehal Chokshi of Northland Capital Markets. Please go ahead.

Nehal Chokshi: Yes. Thank you. So during the prepared remarks Erez you said that in the fourth quarter you won two competitive bids against competitor I presume that’s likely Sandvine and Procera. I presume the point of that statement is that you don’t believe a lot is losing market share in a DPI market. Is that correct?

Erez Antebi: That is correct.

Nehal Chokshi: Okay. Just to be clear, I mean, isn’t there typically within the course of every quarter deal wins against these competitors and also usually some losses, I mean, is that part for course of a quarter?

Erez Antebi: I’m sorry. I’m sorry. I missed the first part of your question. Could you repeat that, please?

Nehal Chokshi: Yes. Aren’t there deal wins against these competitors pretty much every quarter? Isn’t that kind of par for the course there?

Erez Antebi: Not every quarter, no. Of course, every year, yes, but not every quarter. I can tell you that to sometimes we — sometimes there’s a competitive bid where our competitors DPI system is installed and we are unsuccessful in unseating them. It’s a big issue to unseat a competitor from an existing operator. But I don’t remember them unseating us or any of our competitors unseating us for quite a long time. So I think that demonstrates how well we are performing in the competitive environment.

Nehal Chokshi: Got it. That’s very helpful. Okay. And then moving to the SECaaS, you had a very solid incremental ARR of $2.1 million. Can you give me guide up between existing CSPs adding customers and new CSPs being onboard?

Erez Antebi: Ziv, do we have that breakdown? I’m not sure.

Ziv Leitman: Unfortunately, we don’t provide this breakdown.

Nehal Chokshi: I’m sorry. I didn’t hear that.

Ziv Leitman: Unfortunately, we don’t provide this kind of breakdown.

Nehal Chokshi: Okay. All right. I guess what I’m trying to drive that is that once you have a CSP onboard, what kind of expansion rate are you seeing from that CSP in the form of rate at which they’re adding customers? That’s where I’m trying to get it down. Any information you can share with that.

Erez Antebi: I think it depends very much on the operator itself and what their go-to-market is. And once they’ve launched — start working, we obviously before they launch, but even after they launched, we continue to work with them to try and get to new plans of how they go about the market, which channels they use, what sort of pricing plan they have, what sort of incentives they give their sales people and the event that that’s relevant, et cetera, et cetera. And based on that, we measure together with them there if the new ads that they are able to bring to the network are unreasonable or satisfactory in our opinion or not good enough and we need to change further. Now, we’re never happy. We always want it to be higher.

But working with the operators in this way gives us the ability to measure not only what they did — what they’ve achieved so far, but where they should — what they should be able to achieve in the coming six, nine months or whatever. And what they should do potentially in order to increase that. And that’s part of our day in, day out work with these operators.

Nehal Chokshi: Okay. Very good. And then given the range of incremental ARR for calendar 2023, that’s $6 million to $11 million, how do you expect that profile of incremental ARR to layer through calendar 2023 i.e. is it going to be linear $1.5 million per quarter or is it going to be more backend loaded or some other profile? Can you give any process first how that will layer through?

Ziv Leitman: Most of the increase is expected to be in the second half of the — because it depends on the timing of new launches and so on, so most of it would be in the second half of the year.

Nehal Chokshi: Okay. All right. And did I hear it correctly that you’re guiding to 1Q 2023 to $20 million of revenue? Did I hear that correctly?

Ziv Leitman: This is correct.

Nehal Chokshi: 2-0?

Ziv Leitman: This is correct.

Nehal Chokshi: Okay. All right. And are there any seasonal elements that we should be mindful of when we think about our full-year model here?

Ziv Leitman: Not — not something specific.

Nehal Chokshi: Okay. All right. And this $20 million, I mean, that’s a big year-over-year drop. And so it sounds like macro pressures are increasing. Is that a fair statement?

Erez Antebi: I think that’s a fair statement. But it’s — but again, I think they’re contributing more to delays than anything else.

Nehal Chokshi: Yes. Understood. Okay. Thank you.

Operator: The next question is from Matt Dezort of Needham & Co. Please go ahead.

Matt Dezort: Hi guys, this is Matt on for Alex. I guess just following on to that last question; can you talk a little bit more about the canceled contracts, why you decided to remove those and if we should expect further reductions in the future and how we’ll have visibility to that?

Erez Antebi: These were several contracts that were signed a while ago and the operators have not launched the service for a variety of different reasons. So we really went one by one and made an assessment both on our own and talked to senior management with the operators to figure out, okay, are they motivated enough to do this? And what do we expect? And on these specific ones, we came to the conclusion that, that we would have to spend too much energy and push too hard. And at the end of the day, probably gain too little revenue for this to be worthwhile. So we decided basically to walk away from these deals. Like I said, we’re examining a few other deals, small number of other deals that, that the — from my perspective, the jury is still out whether or not we can turn them around into a revenue producing, profitable, worthwhile service or not.

So we will — as we examine them, and if we come to a conclusion that that we decide that we will need to cancel one or two additional of ones, we’ll let you know like we did this — like we did here.

Matt Dezort: Great. And then just going back to unwinding of the MAR calculation, could you just talk a little bit about thought process behind that the shifting focus on sales reps and any friction or opportunities that you may have seen so far from that? Thanks.

Erez Antebi: I’m not sure I fully understood the question. You mean why did we decide to stop using it as a metric for salespeople or —

Matt Dezort: Yes, both internally and externally. My understanding was to — yes, thinking about sales reps that no longer to take.

Erez Antebi: Look, we invented, if you like the MAR metric few years ago because we thought it would present a good metric to measure the long-term revenues or revenues at all, that that could be achieved from a certain operator. It turned out as we discussed several times in previous earnings calls, that while it could be a good indication for long-term potential for the first — I don’t know, for the first few years, it’s not a good indication for the short-term revenue because it doesn’t bring into account the timing of the launch. It does not bring into account how aggressive the launch will be in terms of go-to-market, it does not bring into account how to — into which segments of the operators customer base the service is being launched, et cetera.

So when we looked at it again this year and figured out, okay, where do we want our sales people to focus on? We came to the conclusion irrespective of the MAR right, we came to the conclusion we want them to focus on a relatively smaller number of opportunities that have a higher probability of generating significant revenues. Now, once you do that, then there is no point in just giving them a number to meet like an MAR number or like if they’re selling DPI system, meet a CapEx number, certainly a booking number. But rather we want to pinpoint them and tell them, okay, you’re salesperson in country X, these are the two or three deals that we expect you to go after and we expect you to win one of them. It’s not go after whichever operator you want, then sign them on a contract.

We’re telling you which operators we want you to go after that, that means that the MAR is no longer a relative, a reasonable metric to measure the salespeople by, because we’re giving them much more concrete instructions on which operators to go after. And since we’re not going to measure it internally then there’s no point in measuring it externally as well. Hello?

Operator: The next question is from Marc Silk of Silk Investment Advisors. Please go ahead.

Marc Silk: Thanks for taking my questions. You mentioned some SECaaS deals that were signed at the end of the year and into this year. So are those recent deals part of the new strategy or as far as what you’ve been talking about?

Erez Antebi: I would say that one of them is, one of them has been in the pipeline for a very long time. So I can’t attribute a new strategy to it. It’s just finally closed.

Marc Silk: So one on the pipeline. Are you going to basically say, is it just going to be like the old thing or is it going to be like this is, we need a commitment to go-to-market? That’s kind of my point.

Erez Antebi: No, we — I think we have under — even though we don’t — in this case, we don’t have a contractual commitments on the go-to-market, but I think we have a very good understanding how the go-to-market is going happen. We spend a lot of time on negotiating that and getting that down to a very good understanding that we’re satisfied with.

Marc Silk: Okay. So I’m trying to figure out how you get the profitability in 2024. And I know you mentioned continued cost-cutting your — you talked about SECaaS expectations, but I think the investors who are on the sidelines and myself as well need more concrete maybe points in 2023. So my question is what should we be looking for this year deal signed in 2023 that relate to revenue in 2024 as far as the DPI and the SECaaS?

Erez Antebi: Look, I think what we should be looking for in 2023 is we should be looking for a especially in terms of SECaaS, one is a new deal signed, but more importantly, new launches of deals that we have already signed or about to sign. And it will start showing some revenue in 2023, but should show significant revenue in 2024. So I think that’s the main one I would look for. Of course, we’d look for DPI deals and to see — and we’d measure whether or not we’re able to increase our backlog by the end of the year or not. Ziv, you want to add to that?

Ziv Leitman: No, just let’s generally speaking, we will have three sources to get to profitability. As we said, one is expense control, the other one is SECaaS, and the third one from the CapEx deal, we can expect maybe an increase of a few percentages. And hopefully, we’ll be able to bring more business in 2023, and not necessarily all of it’ll be recognized in 2023. So these are the sources for our plan to be profitable in 2024.

Marc Silk: Okay. So on the traffic management, which is going to be flat or down 5% or 10%, a lot of it is set to do with delays, et cetera. So it sounds like your biggest opportunity is in 5G or replacing incumbent, I know it’s hard to say now, but are you expecting more acceleration in 2024 in that area?

Erez Antebi: I think you are right that it’s hard to say now. I would hope — I don’t — I can’t even say expect, I’m at this point I’m hoping that that 5G standalone networks start getting deployed at a much larger scale than they have so far. These networks have been talked about and these new core networks for 5G have been delayed and delayed in many places. When they start — when they finally start being deployed, I think it will generate a significant new opportunities for DPI. Now, will that happen in 2024? I’m hopeful that it’ll, but I have — I — at this point, I cannot say that, that I know or estimate even that it will, I’m hoping it will.

Marc Silk: All right. So a general question. So would you say there’s more potential in DPI now than that might have been four or five years ago mostly because of the 5G opportunity?

Erez Antebi: Yes. I would say not yet. The 5G opportunity is still not materialized. I think the once it will materialize, it will create a — it should create a growth in the market and opportunity. Yes. And at some point it will materialize. I don’t know the timing of it.

Marc Silk: Okay. Because the point I’m getting to, it’s frustrating when your competitors got bought out several years ago at almost 3x revenue, which just that division alone gets you stock price above seven. But a piece of the parts sees that maybe people don’t believe you’re going to get profitability. But let’s hope you can do it and good luck.

Erez Antebi: Thank you.

Operator: The next question is from Rory Wallace of Outerbridge. Please go ahead.

Rory Wallace: Hi Erez and Ziv, and sort of a tale of two divergent businesses here on this call, I’m wondering if we start with the DPI business first. You made comments that you don’t think that this market is in contraction and that you’re not losing market share, but the business was about $140 million two years ago, and it’s going to be around $100 million based on the guidance you put out this year. So I wonder if you can just sort of help us think through what could be going on. I think you’ve provided some decent explanation already, but just to give us comfort that the reason this declines happening isn’t because there’s some sort of really secular issue with the DPI space.

Ziv Leitman: So when you compare the number to two years ago, so there are few reasons why now the revenue is lower. The first one is that two years ago, we had revenue from 5G network, and this was explained by Erez in previous conference call, this product is relevant for 5G network and I mean the 5G core network. And since you don’t have so many of them, we said that only in the future we will see more opportunity. So this is number one. The second reason that two years ago we had relatively large CapEx deal from security, which is not part of our strategy since we would like all the security deals to be in a SECaaS business model. But two years ago, we had few deals of capital. So this is the second reason. The third reason is the currency fluctuation, which the Euro, some other currencies were stronger two years ago than the current rate.

As we said, because of the war in Europe, there are few millions of dollars of deals that were hopefully just postpone and not compare and the delay that I was thinking about.

Rory Wallace: Okay. And —

Ziv Leitman: And in addition what Erez discussed before, the enterprise business that now the revenues are lower than 2021.

Rory Wallace: Yes. Sure. And on that —

Ziv Leitman: Like they are — altogether they are like seven reason of the revenue reduction, it’s not just one reason.

Rory Wallace: Got it. And with the enterprise business, I think that’s been running around $5 million or $6 million a quarter. Are you expecting that to be dramatically lower this year? I know you said the Broadcom impact has peaked, but I’m trying to understand that especially this $20 million guidance for Q1, because if I take the maintenance run rate that you have which is around $10 million a quarter, and then kind of layer in some enterprise SECaaS, it looks like the CSP the sort of lumpy CSP deal business is being guided to basically zero for Q1. And I want to understand if a) my methodology is correct and b) is that reflective of you trying to provide us an outlook that that is going to be appropriate and conservative? Or is this really that that there’s no CSP business that’s going to shift this quarter?

Ziv Leitman: Basically your logic is correct, which means the CSP business, which is expected for Q1 is relatively low.

Rory Wallace: Got it. And your backlog in bookings were flat for the year, I think roughly unchanged maybe plus or minus 1% or 2%.

Ziv Leitman: Yes. Book-to-bill was around 1%.

Rory Wallace: The book-to-bill was 1%, but Q1 revenues being guided down 33%. So I’m just trying to understand a little bit better sort of what — because there was a call back in Q3 where there was a preliminary outlook that was given for 10% growth give or take. And obviously the DPI business is now being guided down 10%, which is impacting the outlook. I just want to understand, did something change dramatically in the last 90 days for maybe are you — anything you can add to kind of give us more color?

Erez Antebi: Go ahead, Ziv.

Ziv Leitman: I would say it’s mainly related to the general business environment and the delays that we see in the market. It’s not because we see that we are losing market share. We’re not losing market share as far as we know. It’s just the general business environment, everything, it takes more time and we see delays in project. So this is the main reason. And we think that in Q1, the amount of deals that we will be able to recognize revenue are relatively low with the CSP.

Rory Wallace: Okay. And in terms of the resellers and the accounts receivable that you called out being up $10 million, is that something that’s with relatively large and solvent customers? Are you expecting that you’ll be able to collect those down in the first half of the year and start to bring that working capital back in line?

Ziv Leitman: We are expecting to collect those amounts in the coming months.

Rory Wallace: Okay. And switching to more positive subject matter, but with the SECaaS business, it was encouraging to see the 30% sequential growth, and I was wondering how much of that came from Taiwan Far EasTone? I know it launched pretty late in the quarter, so did it impact that run rate materially or is that really not in this quarter.

Ziv Leitman: There was an impact of SECaaS but I don’t know what is significant. There was an impact.

Rory Wallace: Okay.

Ziv Leitman: It’s not — but it’s not the reason for the entire inquiry.

Rory Wallace: Got it. And with sort of the large deals that you’ve won, the tent pole projects from Verizon to the Vodafone Home security to some of the other Tier 1s that you’ve announced, do you have good confidence that some of these deals are launching this year? And that we’ll be able to actually see these networks running and use the products ourselves in some cases, if we’re in the U.S. or Canada and want to actually try these products. I think it would be very positive for shareholders and for the broader company to actually get some exposure via obviously Verizon launching or some of these other Tier 1s launching. Do you think that’s something we can actually expect in 2023?

Erez Antebi: And we would like them to launch to everything tomorrow morning, obviously. But they have their own plans and because it’s a competitive environment and this is a new service that they plan to launch, unfortunately we can’t share what their plans for launch are and neither the timing or pricing or anything like that. So we’ll just have to wait and see.

Operator: . There are no further questions at this time. Mr. Antebi, would you like to make your concluding statement?

Erez Antebi: Yes. Thank you, Operator. I want to thank everyone for joining the call and I want to thank you for your support in Allot and I look forward to seeing you in the next conference call or before perhaps meet you someplace. Thank you very much.

Operator: Thank you. This concludes the Allot fourth quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.