Allot Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Alot's fourth 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 1-212-378-8040 or view it in the news section of our website, www.alot.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, please?

Thank you, Operator. Welcome to LOT's fourth quarter and full year 2021 conference call. I would like to welcome all of you to the conference call, and I'd like to thank Allot 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. He will then open the call for the question and answer session, where both Erez and Ziv will be available to answer investor 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 or 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 the COVID-19 pandemic, changing market trends, delays in the launch of services by Allot's customers, 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 now like to hand the call over to Erez. Erez, please go ahead.

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 was another quarter of solid growth. Revenues grew 5% year-over-year for the fourth quarter and reached $41 million. Our full-year 2021 revenues grew 7% year-over-year, reaching $145.6 million. This is our 16th straight quarter of revenue growth year-over-year, and I'm very pleased with the results we achieved during the fourth quarter. Also, during the fourth quarter, we succeeded in signing several recurring security revenue deals for several of our allot secure product lines, including a deal with a significant mobile CSP in North America and the tier one operator in Southeast Asia. In December 2021, our CCAS ARR was $5.2 million and our total ARR, inclusive of maintenance and support, was $47.2 million, up 39% from December 2020. I am very pleased with these results, and I believe it shows we are 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 to capitalize on the significant number of opportunities that we are identifying. We announced earlier today that we raised $40 million in a convertible loan from our long-term shareholder, Linrock Lake. The additional cash will enable additional flexibility in executing our CCAS strategy and enable us to support the growth while maintaining a strong balance sheet. I will further discuss the loan and its terms later. I would like to start by discussing our traffic management and analytics business addressed by our AlotSmart product line. Our AlotSmart business went well in 2021. The main use cases we see today in CSPs are continuing to be in traffic management, congestion management, quality of user experience, especially for video, policy and charging control, and digital enforcement. During the fourth quarter and throughout 2021, we won several deals where we will be replacing a direct competitor's product that is installed. 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 before. We are continuously increasing the number of CSPs that we work with, either by replacing competition in DPI or by our security offerings. This growth in our CSP customer base creates new opportunities for both a lot secure and a lot smart product lines. 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, reaching revenue of $28.7 million in 2021, compared to $21.1 million in 2020. It is worth noting that we are seeing much of the growth coming from North America and APAC, regions that contributed less to enterprise sales a few years ago. The deal we signed in the beginning of 2020 with Broadcom to position Allot as a replacement for their Packeteer product, which is at end of life, is contributing a significant portion of this growth. To summarize, I believe the demand for the Allot Smart product line, including congestion management, traffic management, analytics, digital enforcement, and enterprise use cases will remain healthy. I want to say a few words on the 5G market and what we believe it holds in store for AlotSmart and our 5G Net Protect product lines. Many operators worldwide are deploying 5G networks. Most of these are using 5G frequencies and radios, but continuing to use a 4G core. However, a growing number of operators are now making concrete plans to deploy a 5G core. We believe the 5G market is a significant long-term growth opportunity for Alok, and we continue to invest heavily in it. I would like to expand on two aspects of the 5G opportunity. During 2021, we successfully deployed 5G Net Protect in a couple of operators. As more operators solidify their plans to roll out a 5G core, we expect our pipeline for 5G network tech deals to grow in 2022 in advance of revenue growth in further years. Another aspect is 5G on the cloud. Many CSPs plan to deploy their future core in a cloud environment, for example, DISH and Rakuten. We believe the growth in traffic volumes that is expected in 5G networks, together with the need for high-quality control of the traffic, creates an opportunity for Alok Smart and our 5G Net Protect in this growing market segment. Not all clouds are the same. Some work with AWS, some with Azure, and some, like Rakuten, use their own versions. We are deploying our products in networks we contracted with, such as Dish and Rakuten. In addition, we are investing to adapt our products to the various containerized native cloud environments to take advantage of this growing market opportunity. Last week, we announced our partnership with AWS. We are working with AWS as an AWS independent software vendor building certified applications on the AWS cloud. This enables CSPs that choose to deploy their core functions on the AWS cloud to deploy a full suite of Elote cloud native applications already pre-integrated and tested. We have already deployed such a solution on the AWS cloud in North America. I believe our partnership with AWS will enable us to grow further in the 5G market as it is being revolutionized by cloud-native technologies. In addition, I will note that we are working with other cloud technology providers to reach similar agreements to further expand our opportunities. I want to turn our attention now to what we see in our cybersecurity business and how the market is continuing to change favorably. 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. There is a revolution happening in the consumer cybersecurity market. Responsibility on securing the consumer, family, small business, lives today with the individual. Each person is responsible to protect himself or herself and their families and small businesses. To do this, they have 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 do not 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 SMBs are looking for a simple, zero touch, quote unquote, 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. Network-based security is the solution that makes this possible. We are engaged worldwide with CSPs that are looking to provide their customers with such network-based CCaaS security. As we look at the market, we clearly see that the direction and momentum are very positive. We see that the number of engagements, the level of engagements, the total addressable market size of our pipeline, a lot win rate, the acceptance and scope of service by consumers in SMB, are all improving and getting stronger. We see evidence of all these in the rate and size of deals we sign and in the networks that have commercially launched. As of December 31, we signed a total of 22 deals with CSPs to launch CCAS to their customers. Of these 22 customers, 12 were signed in 2021. This is more than what we signed in 2019 and 2020 combined, which was 10 deals. Furthermore, by our account, Allot won most of the deals that were closed in 2021 by CSPs worldwide to launch network-based security services to consumers. I believe this shows two very important points. One, network-based security services by CSPs to consumers is an expanding market as more CSPs understand they need to launch such services. And two, Alok achieved a prime leadership role as a technology company enabling the CCAS CSP services. Last week, we announced two very interesting deals that were recently signed towards the end of 2021. One is with a significant North American CSP with millions of mobile customers. This CSP plans to offer the service based on a local network secure to both 4G and 5G customers. It is important to note that this is our third deal to deploy security services to consumers in the North American market. Previously this year, we announced such an agreement with DISH. We also signed and announced a deal with a European headquartered group that also has operations in North America to deploy our home secure solution. As I discussed in previous calls, we are seeing interest in providing network-based cybersecurity to consumers with several North American CSPs. In addition to those that signed with us, we are in discussions with other North American operators as well. It is worth noting that none of the North American CSPs we signed were commercially launched yet. While we expect significant CCAS revenues from North America in the years to come, based on the expected launch time and initial customers targeted, I do not expect significant CCAS revenues from North America in 2022. The other deal we recently announced is with a tier one operator in Southeast Asia, where the operator will deploy network secure to protect its SMB customers. I will note that in this case, we are replacing an existing service based on a competitor's product that, according to our customer, could not scale well enough to support their future growth. We are continuing to see growing interest from CSPs worldwide in launching security service to consumers and SMBs. Our pipeline is continuing to grow as we continue to sign additional deals with CSPs. In addition to the deals we sign, we have already been awarded by several other CSPs in Europe, in North America, and in South America, and we are working to sign contracts with them. If all goes well, these contracts should be signed in the coming months. As I indicated in our previous call, there is still a lot to be done to turn signed contracts into short-term revenues. I think that during last year, we learned a lot more how to overcome obstacles and how to help the operators become more effective in marketing the services to their customers. To that end, we have implemented internal changes in Alot in both the technical and marketing teams. Every CSP, that we contracted with to launch security services is assigned an account team consisting of a salesperson, a customer value manager for marketing, and a program manager. Each such team, which may have multiple accounts, has a CCAS revenue target, a target launch date, and is tasked with improving books. While this structure does require some more people, It brings a strong combination of expertise in what is needed to launch quickly, what is needed to achieve high adoption rates, and how to get the CSP to accept and implement the required actions. From what we see in the last few months since we implemented this change, we are seeing more ideas on how to improve and more effective interaction with the CSP. This is true both at the working level and the executive level and in both the network teams and the business teams. While I expect we will see more effective launches in 2022, still most of the revenues will come in the years ahead. In 2021, We signed deals worth a combined total MAR of $193 million, which of course is in addition to the MAR signed in previous years. As we learn more about the CCAS market dynamics and we get more involved in the detailed launch planning before we sign the deals, we also learn to better calculate the MAR. We now have a better understanding in many cases of which segment of the market the CSP will initially target in their marketing, and sometimes we know the extent to which their marketing will be quote-unquote serious about it. We also learn how to influence things in early days to yield faster and better results. The MAR, as we learn to calculate it better, considers the relevant subscriber base that is expected to be targeted at launch in a quote-unquote serious manner. I will remind us that the MAR is calculated based on the number of relevant subscribers the CSP has when we sign the deal. For example, we signed the deal with DISH this year. While DISH has today millions of customers on a 4G network, this deal is focusing on customers that will be on their 5G network, which is not yet commercially launched. Therefore, while we believe the revenue opportunity for Alok with DISH is large, the MAR was calculated as zero. As I discussed in the previous call, the MAR indicator, which we have put forward as an indication for future revenues, is not good enough to forecast revenues in the short term. It does not take into account the high variance on launch timing and marketing strategies, especially over a small base of launched operators. There are many variances, some of which we were aware of, like the difference between prepaid and postpaid customers, and some we learned to appreciate more recently. Therefore, while we will continue to provide information on MAR, we will also continue to track the number of signed deals, the number of launched services, the CCAS revenues, and the CCAS annual recurring revenue rate, or ARR. We define the ARR as the monthly recurring security revenues we achieved during the last month of the quarter multiplied by 12. During 2021, the ARR for CCAS revenues grew from $2.7 million in December 2020 to $5.2 million in December 2021. As of December 31st, 2021, of the 22 signed deals, only eight launched commercially, some of them only to a portion of their subscriber base. As I said in the previous call, I expect we will launch an additional 12 to 18 CCaaS customers during 2021. Excuse me, during 2022. This is a significant operational challenge We have planned and made organizational changes to prepare for it, and I am confident in our ability to deliver on time. On the Alok Secure product side, we also have challenges. While Network Secure was launched in multiple networks, Home Secure launched operationally only recently. As products get launched and are deployed more widely, it takes efforts to mature and support them. We have expanded and aligned the organization in anticipation of the launches and we are confident that we are well prepared. Our team is working closely with the customers and we see there is a strong appetite by the CSPs to launch. But as I mentioned in previous calls, there are also challenges and delays. Even once a network is commercially launched, it may still take time for it to generate revenues as CSPs offer security services with free service periods of up to three months. As we prepared and aligned the company to launch the networks and work with the CSP to drive revenues, caution and patience are still required. As we look at the CCaaS potential globally, I am very encouraged with our prospects for several reasons. One, our pipeline is bigger than ever. A growing number of CSPs understand they need to launch security services to their customers, and as a result, we see continued growth in number of RFPs and number of operators we are in direct engagement with. Two, adoption rates of consumers and SMBs. When the service is launched with good go-to-market approach, adoption rates are high, as we discussed in previous calls. Not only is the adoption rate high, but customers stay with the service even when they can opt out. In most cases, the lifetime operators calculate for a consumer is around three years. Three, a growing number of CSP chief marketing officers understand that security needs to be part of the brand promise and are building it into their core offering. Some CSPs still look at security services as a VAS or a value-added service. but a growing number view it as a core service. Viewing security as a core service rather than a VAS leads to more aggressive go-to-market and higher penetration rates. Four, the North American market is very interested now in network-based security services. As I mentioned earlier, several North American operators, in addition to the three we already signed, are actively looking to launch such a service although it may be for a subset of their customer base. Five, we have a high win ratio. During the past year, by our count, we won most of the deals that were awarded for CSP network-based security to consumers. We are winning due to our unique combination of several elements. A, a comprehensive 360-degree product offering that enables unified security across mobile and fixed access, across all devices, and against many threats. D, our commercial partnership model where we share the risk and reward with the operators. C, our value-added sharing best marketing and sales practices, helping them position and launch the service. And D, our track record that can be shared proving that when launched correctly, Adoption rates and revenues are high. Looking ahead, I want to summarize our expectation for 2022. We expect our CCAS revenues in 2022 to be between $10 million to $15 million. Most of these revenues are expected to come in the second half of the year as additional customers launch and as existing customers grow. We expect the CCAS ARR for December 2022 to be between $20 million to $30 million. In addition, we expect to sign during 2022 additional CCAS deals with an aggregate MAR of more than $118 million. We also expect to commercially launch between 12 to 18 new CCAS customers through 2022. I would now like to say a few words on our expectation for the overall company performance in 2022. Overall, we expect our 2022 revenues, including CapEx and recurring revenues, to be between $147 million to $153 million. The revenues in the first quarters of the year are expected to be roughly in the same level as in 2021, and towards the end of the year, we expect to see growth. We expect our total ARR in December 2022 to be between $61 million to $73 million, comprising of $20 million to $30 million of CCAS ARR and $41 million to $43 million of support and maintenance ARR. We expect gross margins to be around 70% in 2022. As we continue to invest to deliver on our CCAS strategy, we expect our OpEx in 2022 to grow. We expect some increase in headcount, mostly in R&D and sales. As you know, the global market for high-tech talent, including in Israel, has become very challenging, and the Shekel exchange rate also has an impact. Alot is committed to get the best talent and invest in people as we think this is required to succeed, and deliver on the opportunities we have. Altogether, we expect 2022 OpEx to be between 127 to $130 million. As a result, we expect an operating loss between $23 million to $24 million. I believe 2022 will be a very significant year for Elope. Significant number of new CCaaS networks will be launched CCAS revenues and year-end ARR will become substantial for the first time. As I stated earlier, this year also comes with operational challenge to launch many new CCAS customers and several new products. The right thing for us to do is to invest what we should to succeed in the goals we set for ourselves and that I outlined to you today. This results in an expected increase of our operating loss and cash burn in 2022. We do not manage our business with a separate P&L for CCAS and CAPEX deal. And therefore we do not report it this way. However, to give some color on this, we made a synthetic analysis of our 2022 expected business on a fully loaded basis. Our analysis shows that our CAPEX business which is estimated to have around $135 to $140 million revenues in 2022, should have an operating profit of 10% to 15%. On the other hand, our CCAS business on the same synthetic fully loaded basis is expected to lose tens of millions of dollars. This analysis shows that the investments we are making in 2022 are going towards growing our CCAS business. Our expected negative cash flow in 2022 is expected to be $35 to $38 million. The main reasons for the negative cash flow are the operating loss, expected reduction in deferred revenues and other working capital elements, and CapEx investments required for the CCAS deals. As CCAS revenues grow, we expect that our loss and cash burn in 2023 will be significantly less than in 2022. We further expect that as the CCAS revenues continue to grow, we should become profitable and generating cash in 2024. Earlier today, We announced we reached agreement with Linrock Lake, our largest shareholder, to provide us financing of $40 million in the form of a convertible loan. The loan will mature in three years with an option to extend the maturity up to five years by additional two one-year extensions at allot sole discretion. The note will not their interest and will not accrete. The conversion price was agreed at $10.30. There will be downward adjustment in the conversion price if the maturity is extended beyond the three years. We believe this is an excellent deal for Allo as it allows us additional flexibility in executing our CCAS strategy. It further enables us to pursue growth while maintaining a strong balance sheet, which is desirable for our potential CSP customers. I think this deal is a testament to the trust Linnrock Lake has in our company and our strategy, and I wish to thank them for this vote of confidence. I would now like to summarize the overall picture and the key messages. In the AllotSmart product line, we see a strong pipeline. Multiple use cases such as congestion management, digital enforcement, and enterprise business are growing. We are successful in winning deals away from our competitor and unseating them in several CSPs where they are the incumbent. Overall, we see a solid demand for adult small. 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. I believe the network-based cybersecurity market is emerging as a high-growth market We are winning most deals, and I am confident of our future success in the direction we are pursuing. We are working better with CSPs to achieve high penetration rates, and I am very optimistic on our recurring revenue outlook. And now, I would like to open the call for questions and answers, and Zeb and myself will be available to take your questions. Operator?