Allot Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Alot's second quarter 2021 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 received it, please contact Alot's investor relations team at GK Investor and Public Relations at 1-646- 688-3559 or view it in the news section of the company's website www.allot.com. I would now like to hand over the call to Mr. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin?

Thank you, Operator. Welcome to Allot's second quarter 2021 conference call. I would like to welcome all of you to the conference call and thank a lot to management for hosting this call. With us on the call today are Mr. Erez Entebbe, President and CEO, and Mr. Ziv Leitman, CFO. Erez will provide a brief opening statement and summarize some of 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 those 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 that the Safe Harvest Statement, this conference call may contain projections or other forward-looking statements regarding future events or the future performance of the company. These statements are only predictions and a lot cannot guarantee that they will in fact occur. A lot does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of impacts due to the COVID-19 pandemic, 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 Security and Exchange Commission. And with that, I would now like to hand the call over to Erez. Erez, please go ahead.

Thank you, Courtney. I'd like to welcome all of you to our conference call and thank you for joining us today. Today we are slightly changing the format. In the press release you will be able to find all the numbers and tables that we typically release as well as those that Zeev previously used to share in the conference call. Therefore after my remarks we will jump straight into Q&A and Zeev and I will be available to answer your questions. Our second quarter was another quarter of solid growth. Revenues grew 8% year-over-year for the second quarter and reached $35.3 million. In the second quarter, we also reduced our non-GAAP operating loss by about 40% compared to the second quarter of 2020 and increased our total cash and equivalents to $105.6 million. This is our 14th straight quarter of revenue growth year-over-year, and I am very pleased with the results we achieved during the second quarter. Also during the second quarter, we succeeded in signing several recurring security revenue deals for several of our low-secure product lines. I am very pleased with these results, and I believe it shows we are on track and successfully executing on our plan. Our business is expanding across our product lines and markets, and we are increasing our market share, especially in the cybersecurity business, as I will describe in more detail. As we see our opportunities grow, we continue to invest in order to capitalize on the significant number of opportunities that we are identifying. I want to start by describing what we see in our cybersecurity business and how the market is continuing to change favorably. As I have said in previous calls, Alok is rapidly transforming into a cybersecurity company, and this is where we see most of our future growth coming from. There is a revolution happening in the consumer cybersecurity market. Responsibility on securing the consumer, the family, the small business lies today with the individual. Each person is responsible to protect himself or herself and their families and small businesses. To do this, they need to find a security app, buy it, download it, and install it on every one of their devices. The problem is that regardless how good or bad a security app is, more than 90% of consumers don't do what I just described and are left unprotected. This means that the current solution with endpoint security apps is not accessible enough to most people. End users, consumers, and small-medium businesses are looking for a simple, zero-touch cybersecurity service. They prefer a simple security service and not have to do anything technical like downloading an app to each device and configuring it. While most people are practically left unprotected, threats such as phishing and others are growing. We recently published a report showing that for consumers protected by AlertSecure in Europe, during a period of three months alone, our security software blocked 140 million attacked attempts by the Lubach Banking Trojan. This is just one case, but it clearly shows the level of threats people are facing on the Internet. The revolution of shifting responsibility from protecting the consumers and small businesses from the individual to the CSP is indeed happening. I like to use the analogy of Walker. We buy water from the water utility company and expect it to come through our faucet safe to drink. We don't expect it to come dirty and then have to figure out ourselves how to filter and purify the water so that we can drink it. Much the same, the internet access our CSP provides us should be safe for us to use. Currently, we see a growing number of CSPs worldwide that understand that this is no longer a quote, nice to have, unquote, but rather becoming a quote, must provide, end quote. And with this growing understanding, so grows our pipeline of security as a service deals. This is evidenced in the deals we sign and those we are working on. Recently, we announced several security as a service deals. Two contracts with CSPs in APAC, one contract with a CSP in Europe, and another contract with a Tier 1 European group with operating entities in Europe and North America. In addition, we have recently been selected by several CSPs in APAC and Europe with whom we are currently negotiating the contracts. In North America, as I previously discussed, The market change in the past 18 months is very clear. Multiple North American CSPs are considering launching network-based security as a service to their consumer and SMB customer base. They are in discussions with us as well as with others. We see North America as an opportunity and a focus area for Alot. As we previously announced, We intend to sign a Security as a Service Agreement with DISH to protect their mobile and fixed customers on the new 5G network DISH is building. While we cannot be sure that any of the discussions, selections and awards I mentioned will indeed result in contracts, I am optimistic. I believe the contracts we signed and the awards we got are strong testaments to the positive change in the market and to Alok's strong position in the network-based security market. I would like to remind everyone of the Alok business model in a typical security as a service deal. When we sign such a deal with an operator, Alok takes upon itself to provide all the required hardware, software and professional services to enable the service. We further assume responsibility for the support and maintenance of what we provided and provide significant marketing support to the operator's marketing team. In return, we ask for a share of the monthly revenue generated by the service or a monthly fixed subscription fee. Operators worldwide can typically charge for network-based security services anywhere from 5% to 8% of the consumer's ARPU and much higher rate A lot will typically get anywhere from 20% to 50% of what the operator can charge the consumers or SMBs, depending on various factors. This is the preferred business model that most, but not all, operators worldwide accept. While each of the CSPs that decide to work with us may be interested in different parts of Alok Secure product family, we are seeing strong demand for all elements of the Alok Secure enforcement abilities. Network secure in the core network, home secure in the home router, business secure in the SMB router, DNS secure and also endpoint secure. Our ability to provide such a wide variety of security enforcement capabilities together with a unifying management layer of Alok Secure Management or ASM are important differentiators and key to winning many of these CSPs. I am not familiar with other technology companies that provide such a broad unified experience across access means, devices and threats. While Alok has different competitors coming from different disciplines for each of its product lines, Alert is the only company that offers a comprehensive solution addressing such a broad range of consumer needs with a single unified management platform and with integrated policies. I would like to say a few words about the penetration levels we are seeing with those security as a service offerings that we have already launched. In CSPs that launch the service, we continue to see growth in number of consumers and SMBs that sign up for the service. CSPs that accept security as part of their core offering and offer the service in multiple touch points show high penetration levels even when customers sign up for the service separately. For example, in one of the operators, when offered in a store, we are seeing around 80%, eight to zero, of new customers signing up for the connectivity service also signing up for the security service. The lifetime value of customers who sign up for the service is also high. In one of the CSPs, we see that even one and a half years after signing up for the service, approximately 65% of those who signed up for the service stay with it. This is, in my opinion, Very strong evidence that the service is valued by the customers. However, CSPs that launch it as, quote, just another value-added service, end quote, with limited sales channels and less aggressive building market plans, show lower penetration levels. Aleph has set up what I think is a strong marketing support service where we work together with the marketing departments of the CSPs to show them the value of offering the service in broader sales channels and direct go-to-market plans. As a result, we are seeing CSPs appreciate the experience other operators are having and some are modifying their go-to-market approaches and significantly improving their results. The number of operators closing deals and planning to launch is growing. especially with new restrictions imposed with the current outbreak of the Delta variant is causing delays in launches and various marketing activities. While we are very encouraged by the penetration levels of operators who launch the service, these delays have a short-term impact on our revenues. In addition, we are finding operators who decide to launch the security service with several months of free service Despite our view that one month of free service would result in very similar take-up rates, the combination of the delay in launches and prolonged free services have contributed to somewhat reduce the initial recurring revenues for us expected during 2021. We expect our recurring security services in 2021 to be around $5 million. When we look at our recurring security revenue growth plan, We see our revenues growing in three dimensions. One, signing up and launching cybersecurity services with additional CSPs. Two, in a CSP that launched the service, having more end users sign up for this security service. And three, CSPs expanding the security offering to the market from an initial market segment, such as mobile, to additional segments, I believe this threefold growth opportunity is what can make our recurring security revenues grow very rapidly. Looking at the existing CSP services growth as we see it now, the new CSP launches from existing contracts, and the expected launches from deals we were awarded recently, we remain confident that in 2022, Our recurring security revenues will be around $25 million. I would like to turn our attention now to 5G networks and our opportunities there. Securing internet access actually consists of two aspects. The first, that I described till now, is securing the end-user access to the internet. But in addition, we also need to secure the operator's network itself. mainly the user plane from DDoS or bot attacks. As I discussed in previous calls, Aloft has a unique position to play in securing the user plane in 5G networks. Our combination of being able to analyze in real time the full traffic flow, ability to mitigate DDoS attacks in line very quickly and protect the network from rogue IoT devices puts us in a unique position to help operators secure their 5G networks. Alert comes to the 5G world with a very strong telco-grade technology, products that scale easily to the 5G bandwidth requirements, and full multi-tenancy support to enable differentiated services. These abilities are key differentiators for our 5G Net Protect product in future 5G deployments. Working with an operator to protect both the network itself and the access by its customers is a powerful combination. This is what we are planning to do, for example, in the DISH network. Earlier this year, we announced that we signed a contract with the U.S. operator, DISH, to use a local 5G net protect to help secure the user plane of the 5G network they are building. The DISH design of a 5G cloud-native network is the most advanced we are familiar with. I view DISH's selection of Alloc technology to help protect their network as testimony to our technology and implementation capability, which will serve as a great reference for other operators, especially in the North American market. During the second quarter, we announced that we closed another 5G Net Protect deal with the Tier 1 CSP and APAC. I can share with you today that we have been awarded yet another Tier 1 5G network and we are currently negotiating that contract. I believe the growth of 5G networks worldwide and the need for securing the network itself could become another powerful growth engine for Alok. To summarize, I believe the market for cybersecurity services by CSPs to consumers and SMBs is taking off and our pipeline is stronger than ever. I believe our lot is uniquely and very well positioned to take advantage of this and grow significantly. New deals with CSP still take time, usually between 12 and 18 months, and with COVID, some even take 24 months. Once signed, it usually takes 9 to 12 months to launch the service and start gradually building a revenue base. On-going COVID-19 impact may cause further delays of several months launching the services after the deal is signed. Factoring all this, as I explained earlier, we expect recurring security revenues from security deals in 2022 to be around $25 million and to keep accelerated growth year over year after that. We also expect that in 2021, We will sign new recurring security revenue deals totaling at least $118 million of MAR. Finally, I would like to turn now to discuss our visibility and control business addressed by our Alok Smart product line. Revenue from this business is continuing to grow well for us in 2021. The main use cases we see today in CSPs are in traffic management, In some of these deals, we will be replacing a direct competitor's product that is installed or we are being added to the network where the CSP had until now used our competitor's product exclusively. We are discussing multiple other opportunities with other CSPs currently using our competitor's product and are working on expanding such deals that we won last year. As governments look to fight crime and terrorism, we see a growing interest globally to be able to block illegal activities Such as drug trafficking, child pornography or terrorism. We are seeing growing interest in our products in this area as well. Our enterprise business is continuing to grow. During the first half of 2021, our enterprise revenues grew about 70-70% compared to the first half of 2020. The deal we signed in the beginning of 2020 with Broadcom to position Aloh as the replacement for their Pacatea product, which is at end of life, is contributing a significant portion of this growth. We are signing new distributors for our enterprise products in multiple countries, including North America and Japan. One example is a deal we announced with a North American government agency, which was brought to us by a by a distributor who previously worked with Broadcom. We expect continued double-digit growth of the enterprise business in the remainder of this year and probably in 2022 as well. To summarize, I believe demand for a LookSmart product line including congestion management, traffic management, analytics, digital enforcement, and enterprise use cases will remain healthy with single-digit growth for Alot in the years ahead. I would now like to summarize the overall picture and the key messages. We are proceeding according to our plan and continuing to grow the business. In the Alot Smart product line, we see a strong pipeline. Multiple use cases such as congestion management, digital enforcement, and the enterprise business are growing. Overall, we see a solid demand for Alot Smart. The security area is where we see our long-term growth. We are very encouraged by the pipeline growth we see and by the consumer and SMB take-up rates as they sign up for the service. We sign significant deals for our various products. While these deals always take time to close, COVID-19 pushed the close of several deals a bit more. It is also postponing services commercial launch in some of the deals that were already signed. Overall, the number of operators we are closing deals with is growing worldwide, and our pipeline of potential future deals is growing as well. Looking at our backlog, the market demand as we see it now, and the pipeline of deals that we are working on, I would like to reiterate our revenue guidance for 2021 between $145 to $150 million, which includes about $5 million of recurring security revenues. We further expect to sign additional recurring security revenue deals in 2021 with a total NAR exceeding $180 million. 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?