Title

Presentation

Allot Ltd. beats earnings expectations. Reported EPS is $-0.02, expectations were $-0.04.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Allot’s Results Conference Call. All participants are present in listen-only mode. Following management’s formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded. You should have all received by now the company’s press release. If you have not, please check the company’s website at www.allot.com or call EK Global Investor Relations. I would now hand over the call to Allot Investor Relations Officer, Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin?

Kenny Green: Thank you. Good day to all of you and welcome to Allot’s conference call to discuss its financial results for the quarter. I would like to thank Allot’s management for hosting this conference call. With me today on the call are Mr. Eyal Harari, CEO; and Ms. Liat Nahum, CFO. Following Eyal’s prepared remarks, we will open the call for the question-and-answer session. And both Eyar and Liat will be available to answer those questions. You can all find the highlights of the quarter, including financial highlights and metrics, including those we typically discuss on the conference call in today’s earnings release. Before we start, I’d like to point out the following Safe Harbor statements. This conference call may contain projections and other forward-looking statements regarding future events or the future performance of the company.

Those statements are early 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, delays in the launch of services by Allot customers, reduced demands and the competitive nature of the securities services industry as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission. Also, the financial results in this call will be presented mainly on a non-GAAP basis. Allot believes that these non-GAAP financial measures provide more consistent and comparable measures to help investors understand Allot’s operating performance in the quarter.

For all the data, please refer to the financial tables published in the results press release issued earlier today, which also includes the GAAP to non-GAAP financial reconciliation tables. And with that I would now like to hand the call over to Eyal Harari, CEO. Eyal, please go ahead.

Eyal Harari: Thank you, Kenny. I would like to welcome all of you to our results conference call and thank you for joining us today. I’m pleased with the results of the second quarter as we have clearly made good focus. Most notably, I’m happy that Allot generated positive operating cash flow and increased its overall net cash position for the first time in three years. This success was driven by our efforts, which drove a significant decrease in operating expenses, while also stabilizing revenue and gross margins. In the past couple of quarters, we have significantly optimized operational expenses, which are approximately 25% lower than last year. We undertook these actions to bring the business to sustainable profitability and to grow the cash position.

I want to spend few moments talking about the various parts of our business, starting with Allot Secure, our main growth engine. We continue to invest in our SECaaS growth engine and the business continued to gain traction. In the second quarter, SECaaS revenue increased by 54% year-over-year. Our extensive list of Tier 1 customer enable us to pursue further expansions within these large accounts, while also providing us with high-quality references as we look to attract new logos. We recently signed an expansion agreement with one of our Tier 1 European CSP customers for the provision of SECaaS to its customer base. The expansion agreement should start contributing to our revenue at the end of this year, representing additional SECaaS growth potential for Allot in 2025.

Our most exciting SECaaS launch last year was with Verizon business. The engagement continues to be mutually beneficial. And as a result, we are discussing several potential expansion opportunities within Verizon’s different customer segments. I want to point out that Verizon highlighted Allot’s contribution to their security solution in the recent published 2024 Mobile Security Index Report validating Allot as one of the trusted partners in protecting their network and customers. Specifically, the report noted, that the growth of the mobile computing and IoT is exponentially expanding the attack surface that needs protection, which in turn will require a matching focus on insurance sufficient mobile security processes, policies and investments.

Overall, I believe the SECaaS solution is a key long-term growth driver for Allot in the security space. For Allot Smart, in the second quarter, we saw increasing traction, converting some of our pipeline into contracts. We achieved an improved level of sales to new customers as well as an expansion of sales to current customers. Allot is a trusted long-term supplier of its smart products to a strong customer base. This is highlighted by our relationship with Rakuten Mobile. Rakuten is the fourth mobile network operator in Japan with a fully virtualized cloud-native network. Allot has been working closely with Rakuten since 2019 when they were rolling out their network infrastructure. Rakuten recently announced that their subscriber base crossed 7 million.

Allot continues to provide Rakuten with solutions as they grow the network to support an expanding subscriber base. Since joining Allot earlier this year, I have been meeting with our key customers and partners globally. I am focused on identifying ways we can leverage our technology to better serve our customers with a goal to reignite growth by expanding within our installed base. Allot has a long tradition of innovation with differentiated technology and a top-tier global customer base. I have spent time with employees. We have a strong team of professional and talented individuals, many with deep technology and know now and capabilities in the networking and the security space, which stands at the epicenter of TIP spending priorities. I’m currently working closely with the Board and Management, including our new CFO, Liat Nahum, who joined us at the beginning of Q3 to formulate a strategic plan to drive renewed revenue growth and long-term profitability.

I want to share my initial thoughts. We are looking for long-term profitable growth opportunities that leverage Allot’s core capabilities. The cybersecurity market continues to experience rapid growth as threats continue to emerge and increase in sophistication. The mobile cybersecurity market is projected by analysts to be an $8 billion market with over 20% compound average growth over the next decade. Cybersecurity is one of Allot’s growth engines and we are considering improvements and innovations to our SECaaS Solution to bring additional value and even better cyber protection to our customers. We are also looking at additional go-to-market strategies for SECaaS to expand our customer base and addressable market. Another trend we are looking at is 5G evolution.

As new 5G networks continue to be rolled out, the demand for advanced security solution is growing significantly with analysts expecting compound annual growth rate in excess of 40% over the next five years. A recent report indicates that around 70% of large companies and 40% of small businesses have adopted at least one cloud service to-date. The movement to the cloud is being driven by the increasing need for remote work solution, digital transformation initiatives and the desire to optimize costs and enhance business agility. We are exploring the potential of our products to address and provide additional value to the cloud and 5G markets as we strive for further penetrate these markets. While our go-to-market strategy is global in its outlook, we are underpenetrated in North America market.

Allot has seen initial success in the region in recent years and we have strong references including Verizon. We are exploring ways in which we can leverage our early success to deepen our engagement in this region, which today is leading many of the security growth trends. We see a significant opportunity for Allot in North America. Allot works with many large enterprises and leading CSPs and it is clear that customer success and deepening relationships are key drivers to potentially expanding our business within our installed base. We are looking at ways to make Allot more customer-centric as we strive to further cement customer relationships, enabling us to penetrate further into organizations with our products and services. A goal would be to structure our organization to better support our customers’ business goals as we believe this will allow us to increase business from existing customers.

I’m working closely with the Board and the management on a strategic plan for renewed revenue growth and long-term profitability. We will provide more details as we progress. In summary, with research management, we believe we are at the start of a new chapter for Allot. In the second quarter, we stabilized revenues and significantly reduced expenses. We returned the business to the operating profit breakeven range with positive cash generation. I believe we are well positioned to drive sustainable, profitable long-term growth, and I’m optimistic that Allot will execute on the many opportunities ahead. Now I would like to hand it over to our CFO, Liat Nahum for the financial summary. Liat, please.

Liat Nahum: Thanks, Eyal. We reported revenue of $22.2 million in the quarter, representing a year-over-year decline of 12%, but up 1% versus the prior quarter. Revenue from our growth engine, SECaaS, were $3.7 million in the quarter, up 54% year-over-year and comprising 17% of our revenue in the quarter. Our SECaaS annual recurring revenue as of June 2024 was $14.6 million. As we discussed in our press release, full year SECaaS revenue and SECaaS ARR are expected to continue experiencing accelerated growth at around 50% year-over-year. You can find various breakdowns of our revenue in the table in our press release. Our gross margin in the quarter was 70.6%. In the second quarter last year, our gross margin was 71.4%, and in the prior quarter, it was 70.4%.

While the gross margin depends on the specific product mix sold in the quarter, the long-term target for gross margin is an average of 70% and we are pleased with the return to the 70% level in the first half of 2024. As Eyan mentioned, we reduced expenses considerably over the past year, with a non-GAAP OpEx at $16.7 million, similar to that of last quarter and down by over 25% from the second quarter of last year. Allot had 500 full-time employees as of June 2024. The non-GAAP operating loss showed significant improvement with a 95% reduction on a non-GAAP basis from $18.9 million in Q2 last year and $1.2 million in last quarter to $1 million in Q2 2024. For the second half of 2024, we expect a non-GAAP operating profit at around breakeven.

In terms of non-GAAP net loss, we reported $0.8 million in the quarter or a loss of $0.02 per share as compared with a non-GAAP net loss of $18.3 million or a loss of $0.49 per share in the second quarter of last year and net loss of $0.9 million or a loss of $0.03 per share in the previous quarter. Operating cash flow in the second quarter was $1.2 million. Cash, short-term bank deposits and investments as of June 30, 2024, totaled $53.2 million, an increase of $0.6 million versus $52.6 million at the end of prior quarter, demonstrating stability in the cash level. Looking ahead, we expect our net cash position to not decrease below the current point. Cash, short-term bank deposits and investments as of year-end 2023 were $54.8 million. That ends my summary.

Eyan and myself would now be happy to take your questions.

Operator: Thank you. Ladies and gentlemen at this time we will begin the question-and-answer session. [Operator Instructions] The first question is from Nehal Chokshi of Northland Capital Markets. Please go ahead.

Nehal Chokshi: Yes, thank you, and good to talk with both of you here. I’d like to focus on the guidance, especially SECaaS ARR guidance. When you say the same 50, around 50% year-over-year growth, that translates to an ARR of around $19 million, correct, versus $14.6 million at the end of the June quarter?

Eyal Harari: Yes, this is correct. We continue to see increased demand for our SECaaS service. And we reported, as we reported this quarter, a 54% growth, we expect this trend to continue in the coming quarters.

Nehal Chokshi: Okay. So when you think about your SECaaS ARR guidance, how do you build up that guidance? Are you thinking about what are the incremental subscriptions you’re going to likely see over the September and December quarter? Or are you really thinking more in terms of, this is the year-over-year growth that can be sustained?

Eyal Harari: So the SECaaS growth is comprised from multiple things. The first is, obviously, winning new accounts that are implementing our SECaaS service. This adds to our installed base and provide additional revenue. But we also see that within the existing customers, we are able to expand our SECaaS to additional services and address additional TAM and by that expand our business and revenue from our existing partners. I will also mention that some of the nature of the business is after new win and launch a service, it takes some time for the service to uptake. And as the operator is starting to market and offer this service to its customers, and therefore, even within the specific service, there is a potential to grow.

So overall, we see a mix of three dimensions that are progressing and can grow. Obviously, in some services, we reach to that plateau where the operator reached to the max level of revenue that it can generate. And the 50% is built out of those three growth that we foresee, both growth, use of the service within what we already launched. Launching new services with our existing base and winning new accounts and starting to launch services with them.

Nehal Chokshi: Okay. That’s great. That’s really helpful. So now thinking about the in terms of like the actual incremental SECaaS ARR that you’re guiding to for the rest of the year that’s basically $4 million to $5 million here, which would represent the most incremental SECaaS ARR for two quarters in a row or are you expecting that most of this $4 million to $5 million is going to come in the fourth quarter as opposed to being distributed between the third and fourth quarter?

Eyal Harari: It will come gradually, I would say, more on the last quarter, but we will also foresee increase in Q3. Some of the growth will come in Q3 and a higher growth in Q4.

Nehal Chokshi: Okay. And you mentioned that there is something that’s happening at the end of the calendar ’24 that’s going to be a driver to SECaaS ARR. What is that driver there at the end of calendar ’24?

Eyal Harari: So one of our existing customers, we got into an agreement to expand our SECaaS services to its customers. This is going to be implemented in the coming couple of quarters. And by end of the year, we are looking to expand our SECaaS service in this EMEA customer. After it will be launched, we are looking to see growth in 2025 from this new service. This is a very encouraging agreement that we got as this customer was using our SECaaS service in a perpetual way and a onetime fee and now it’s going to contribute to our SECaaS revenue moving forward.

Nehal Chokshi: Got it. Okay. So I think you guys had a relatively well-known perpetual SECaaS customer and Vodafone, one of the geos with Vodafone. So presumably that’s the one that you’re referring to?

Eyal Harari: We didn’t print the name and we are subject to NDAs. But one of our customers that is working with us going to contribute in the SECaaS revenue. I think most important is not the exist customer, but the ability and the importance of the service as SECaaS is critical for them and they are looking to continue a long-term relationship with us providing the customer the right security protections.

Nehal Chokshi: Right. Sure. Very good point. And I guess the key point here is that this is a customer that had a perpetual lessons for existing set of customers. And now that they see the value of that, presumably, they would prefer to get another perpetual license. But because of the strong value they’ve agreed to the SECaaS revenue sharing?

Eyal Harari: Yes.

Nehal Chokshi: Okay. Great. And then so what’s the level of risk that this customer’s intention to roll out to additional to next set of customers flips out into calendar ’25 as opposed to launching within calendar ’24. And if that does occur, what’s the potential impact to your guidance then?

Eyal Harari: We have very good visibility in terms of our SECaaS revenue and this is based on the agreement already in place. Of course, as some of the projects we have implementation time that might fluctuate as we are implementing within the telco environment that is always require some integration and some work and things may take time. But overall, we are feeling very confident with the progress, and this is why we indicate this guidance. Now it might move, some of the projects might move a quarter, but it’s based on our already secured agreement. So you might say it quite secured.

Nehal Chokshi: Okay. All right. And then looking at the June Q SECaaS ARR results, there was an incremental $0.9 million of SECaaS ARR, very close to $1 million that you reported for the March quarter. And I don’t believe you had any new CSPs that launched within the June quarter. So can you talk about what was the driver of sustaining basically $1 million of incremental ARR in the June quarter?

Eyal Harari: Yes, as pointed out before, we did see increase of usage that some of our existing customers managed to penetrate deeper into the installed base. So more of their customers are using now our service as well as some of the customer launched additional protections. For example, one of the some — couple of our customers launched HomeSecure, do not only cover and protect the customer from the network side, but also protect them from the home router. So these are incremental expansions within those existing customers that contribute to the revenue growth and we expect this trend to continue as we still have in our installed base customers that didn’t fully maximize the potential of their SECaaS revenue and penetration and this is why we are expecting growth to continue even in the installed base.

Nehal Chokshi: Okay. And so I think this is a third quarter availability within the Verizon SMB. How does the trajectory of attach rates within Verizon look? Is that continuing to stay steady from when you launched or has it started to you know the attach rate has started to come down here?

Eyal Harari: No. So, overall, we feel that the trend is to continue to grow and adoption should increase. We still have a big potential of installed base of business customers to address. We are working closely with Verizon to see best ways to market our solutions into the customers. Also, as pointed out in my previous comments, looking into expansion to additional services, I believe the Verizon relationship is something we need to look long-term strategically and we are very optimistic on our ability to further grow within Verizon.

Nehal Chokshi: Okay. Just to be clear when I was talking about attach rate, my impression is that when you get an incremental subscriber through an existing CSP, it’s usually because that CSP had signed up a new subscriber. It’s at that point of sale that the SECaaS attach most likely occurs. So that’s the attach rate that I’m talking about, the attach rate to new subscribers for a given CSP?

Eyal Harari: Yes, yes. So we see both new attached subscribers, the rise on a reporting growth in the business customers on the fixed wireless service and we are enjoying this growth. We also have the installed base of existing customers with our potential to use our service. And not only installed base is already leveraging that. And we are looking on ways to both capture as much as bigger share as possible from the new subscribers as well as the installed base. So in overall we see more potential to grow there.

Nehal Chokshi: Got it. Okay. So the bottom line is that the attach rate to new subscribers for the fixed wireless customers of Verizon has stayed relatively steady from the March to June Q?

Eyal Harari: You could say that.

Nehal Chokshi: Okay. All right. Great. And is that in contrast to most of your prior CSP launches?

Eyal Harari: No. We see that you know it depends on the business model. The operator decides to promote the service. Some of them might offer it as a bundle and included as part of the package. So some offer it to everyone and some offer it as an upsell. And if you offer it as an upsell like Verizon offer it as an incremental service then it’s an opportunity to increase over time. It also depends on the network service that we are connected to. It’s different if you are protecting the mobile consumer that already you know we know it’s a separated market, everyone has a phone and you need to find the right timing for engaging with the customer to do this upsell as opposed to fixed wireless factor, that is a new service to the operator, and it’s still growing.

And it’s one of the growth engines of many of the carriers from North America. And we are attached to a growing service. And by that we are expecting to grow as part of the natural service growth in the foreseeable future.

Nehal Chokshi: Okay. Great. And then shifting over to the DPI portion of the business. I believe key competitors Sandvine reported significant layoffs. Is this part of the increased pipeline that you’re talking about?

Eyal Harari: We are mainly focused on what we do and what we approach with our customers. We know that we have a very competitive product for the smart for the traffic management and DPI. Overall, we know that this market is the legacy market with specific customer requirements that we know that there are not so many competitors that can fulfill. And we are happy to see more and more requests from customers to, we don’t know if necessarily come from our competitor situation, we mainly focus on our ability to deliver. But still we see that there is the demand is still lower than previous years. We are looking to see ways how we can increase our pipeline in this area as well and how we can leverage short-term opportunities that might be raised due to market dynamics.

Nehal Chokshi: Okay. And so can you give some quantification of how much improved is the pipeline that you’re seeing? And is it showing up in bookings already?

Eyal Harari: So it’s not, it’s too early to say, and it’s not something we are not sharing our pipeline information. I would say that it’s now being under analysis and we are looking for the best way to leverage the business potential.

Nehal Chokshi: Okay. Great. And then I did notice that you had a relatively large CapEx in the quarter of about $1 million relative to prior quarters. Any particular reason to call out for that?

Eyal Harari: The CapEx is a mix of SECaaS customers that we invest and some CapEx investment into our own environment. Liat, maybe you want to add.

Liat Nahum: No. So nothing special. Basically just additional investments around the business as usual and as Eyan mentioned, SECaaS.

Nehal Chokshi: Okay. Thank you for addressing all my questions.

Eyal Harari: Thank you, Nehal.

Operator: [Operator Instructions] There are no further questions at this time. This concludes the Allot Second Quarter 2024 Call. Thank you for calling in.