Allot Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Alot's first quarter 2022 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 Investors and Public Relations at 1-212-378-2700. or view it in the news section of the company's website at 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 ALOT's first quarter 2022 conference call. I would like to welcome all of you to the conference call and thank ALOT's 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 an opening statement and summarize the key highlights of the quarter. We will then open the call for the question and answer session, where 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 in today's earnings press release. Before we start, I'd like to point out St. Papa's 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 made different 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 our 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 first quarter revenues were slightly higher than the comparable quarter. revenues grew 2 percent year-over-year for the first quarter and reached $31.9 million. This is our 17th straight quarter of revenue growth year-over-year, and I am pleased with the results we achieved during the first quarter, which met our expectations. In March 22, our CCAS ARR was $5.9 million, and our total ARR, inclusive of maintenance and support, was $48.4 million, up 20% from March 2021. We announced last week the appointment of Rafi Kesten to a local board and a cooperation agreement with our investor, Outer Bridge, and their group. Rafi has over 30 years of senior executive business and management experience in the high-tech and cybersecurity industry from companies such as NDS, Cisco, and Radware. We believe this will be an excellent addition to our board. Rafi will be replacing Rony Keneck, who served on our board for eight years. As you will have seen from our earnings release, despite overall progress and confidence in our long-term vision, we are facing short-term headwinds that have led us to lower our forecasts for this year. I will address these headwinds and their impact in more detail as I discuss our forecast later in the call. I would like to start by discussing our traffic management and analytics business addressed by our Alok Smart product line. Our Alok Smart business remains solid. 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 last few months, we were awarded 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 line. 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. In addition, we are investing in new ways to help wireless operators manage congestion on their networks and save on their costs of expansions. To summarize, I believe demand for the AlotSmart product line, including congestion management, traffic management, analytics, digital enforcement, and enterprise use cases, will remain healthy. I want to turn our attention now to what we see in our cybersecurity business and how the market has developed it. As I've said in previous calls, Adolphe 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, 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 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 CCAS 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 low win rate, the acceptance and scope of service by consumers in SMB, the requests we are getting from customers and vendors to integrate more products to our management platform are all improving and getting stronger. We see evidence of all of these in the rate and size of deals we are awarded and in the networks that have commercially launched. I would like to say a few words on the North American market. As we previously announced, ILOC has already signed CCAS deals with three operators in North America, one of which is DISH. None of these operators have launched yet. I would like to inform you that we have been awarded by a fourth North American operator and selected by a fifth. We are currently in contract negotiations with both of them, and while we cannot assure you the contracts will be signed, we are very optimistic. These potential contracts represent a mark of dozens of millions of dollars. In addition, we are in serious discussions with additional operators. North America is the largest telecom market globally. Aloha was traditionally much stronger in other regions, and the advancement we are making with the North American operators represents a significant change for Aloha and will be key to generating CCAS revenues in 2023 and beyond. We introduced the MAR as a simple metric to allow us to estimate the long-term potential of the deal we sign. As we indicated in previous calls and was already reflected in the second half of 2021 MAR numbers, we apply MAR not to the full subscriber base, but only to our best estimate of the relevant segment that the CSP is going to initially address. Examples of such segments that are not initially addressed may include prepaid customers, governmental corporate lines, or just a CSP strategy to prioritize a specific set of customers. It differs from CSP to CSP, and it may change over time as we are working with the operators to extend that loop. It's important that those are our best estimates at the time when the contract is signed. But from our experience, and on the average, we can say that they represent about 50% of the CSP customer base. It is important to note that while MAR is a good indicator for long-term market opportunity, it is not a good predictor for short-term revenue. As we indicated in previous calls, our main challenge is to translate the contract into revenues. The first challenge is to launch the service. This process involves many stakeholders, technical, operational, marketing, purchasing, and more. Often, this requires integration with our product as well as with many internal IT systems. We have increased our efforts to assist in those processes, and in some cases, we can help. This also gives us more visibility into the actual progress of the launch process. Unfortunately, we have limited control over the final outcome and the process can be subject to many unforeseen delays. Those delays have a material impact on our short-term revenues and we believe it is prudent to adopt more conservative forecasts for services that have not been launched yet. The second stage is the go-to-market strategy. Here again, there are many strategies from bundling price plans, periods of free services, the segment targeting the channels, and the market needs strategy. On that front, we have learned a lot. And in some cases, we are able to influence that strategy. We hope those lessons will improve time for revenue and penetration rates. but those could come into play only after the project has been launched. As of March 31st, 2022, of the 23 signed customers, only nine launched commercially, most of them only to a portion of their subscriber base. In addition, we expect to sign additional deals that have been awarded. We see that the quality and size of the operators is increasing. we have the most extensive array of products in the market, from network-based security to home security, DNS security, and integration with endpoint solutions. But maybe the most important, an integrated management platform that offers a unified policy that is crucial as more operators are moving into converged networks and want a unified solution that they can grow with. A good indication for that approach is that we see growing signs of vendors either requested by the customer or independently asking to integrate with our management platform. The size of the market remains huge. So while we are disappointed with the current pace at which it is materializing, we remain confident in our ability to achieve our long-term goals and continue to invest in it. Looking ahead, I want to summarize our expectations for 2022. A number of factors have changed during the last few months that have led us to modify our outlook for the year. The CCAS revenues and ARR in 2022 are composed of the projected performance of the nine networks we launched, plus the projected revenue of new networks yet to be launched. With nine launched networks, Any change in the timing of an expected new launch or any change on the manner in which it is expected to be launched or marketed would result in a significant impact to the overall CCAS revenue number for the year. As I noted, unfortunately, launch dates are hard for us to predict reliably. In addition, we are seeing launch dates get delayed by the CSPs for a variety of reasons. Since we put together our annual operating plan for 2022, about four to five months ago, our projected launch date for more than 10 CCAS services was delayed anywhere from one to eight months. Some of the reasons for those delays are budget allocation, team resource allocation, and prioritization within the CSP, especially in the IT departments. Two, internal issues between group headquarters and national operating units. Three, request to shift more responsibilities to allot. Four, product maturity and integration issues with our DNS secure and home secure. I would like to note that we still expect to launch numerous CCAS networks during 2022, despite the above delays. But as we are getting closer to year end, and given that usually there are also a few months of free service and ramp time, we do not expect them to have significant contribution to 2022 CCAS revenues. In addition, the war in Europe has had an ongoing negative impact on some of our CCAS services. In Poland, where we launched with play, sales in stores were significantly lower than expected in the last few months due to the stores and salespeople focusing on providing for the millions of refugees entering Poland. In Ukraine, where we were expected to launch a CCAS service, this launch has been understandably suspended. Most of our CCAS revenues are tied to the euro. From January till today, the euro fell about seven to 8% compared to the US dollars. This has a negative effect on our revenues. As a result of all the above, we are modifying our forecast of CCAS revenues for the whole of 2022 to be larger than $7 million and our December 2022 ARR to be larger than $12 million. As explained earlier, despite the more conservative method for calculating the MAR, we still expect to achieve over $180 million of new MAR in 2022. We still believe that a target of 25% penetration rate of the relevant segments three to four years after launch is an achievable target. But we now believe that the average time from contract to initial revenues after a typical initial free period may extend to 18 months, sometimes longer with the larger operators. I would now like to say a few words on our expectation for the overall company performance in 2022. Two of the factors that affect our CCAS business in 2022 also affect our CAPEX business. One, as the war in Europe continues, Some projects of CSPs in Ukraine and in former CIS countries are being delayed or canceled. Two, with most of our lot revenues coming from EMEA, a significant portion of revenues are in euros. The significant change in the euro to USD exchange rate has a significant impact on our total revenues. Bringing into account our reduced guidance on CCAS revenues and the reduction in CAPEX revenues, we are now forecasting total revenues for 2022 to be between $135 to $140 million. Further to the updated revenue guidance, we are expecting that the revenue in the next three quarters of 2022 will be somewhat lower than the revenues in the comparable quarter of 2021. Our forecast for support and maintenance revenues remains at $41 to $43 million. Regarding our expected loss, as security launches are being delayed, we can also delay some of the expenses. We also benefit from the Euro exchange rate, and we're able to adjust other costs and expect our OPEX for the year to be between $119 and $121 million. We believe our loss for the year will remain as previously forecasted between $23 and $25 million. Likewise, we believe our net cash reduction for this year will also be as previously guided between $35 to $38 million, not including the convertible loan. We expect our gross margin for the year to remain about 70%, despite our near-term headwinds and the slow time for revenue. We believe that enough services will be launched during the second half of 22 and during 23 that will allow us to reach profitability during 2024. As we discussed in the previous call, we don't manage our business on separate P&L for CCAS and CAPEX deals, and we don't report this. As we said previously, we estimate in 2022 on a synthetic, fully loaded basis, quote unquote, that the CapEx business has about 10% to 15% operating profit, and the CCAS business is expected to lose tens of millions of dollars. This estimate has not changed. I would now like to summarize the overall picture and the key message. In the Aloft smart product line, we see a healthy pipeline. Multiple use cases such as congestion management, digital enforcement, and the enterprise business are growing. We are successful in winning deals away from our competitors and unseating them in several CSPs where they are the incumbent. Overall, we see a solid demand for Aloft now. 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. Unfortunately, the war in Europe, CCAS launch delays, and the Euro to US dollar exchange rate are causing us headwinds and negatively affecting our expected results in 2022. We 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 we remain optimistic on our recurring revenue outlook. And now, I would like to open the call for questions and answers, and Ziba and myself will be available to take your questions. Operator?