Allot Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to LOT's second 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 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?

Thank you, Operator. Thank you, Operator. Welcome to Allott's second quarter 2022 results conference call. I would like to welcome all of you to the conference call, and I'd like to thank Allott's management for hosting this call. With us on the line today are Mr. Erez Emtebi, President and CEO, and Mr. Ziv Leitman, CFO. Erez will provide an opening statement to 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 those questions. You can all find the financial highlights and metrics included, 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 of 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 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 risks identified in the documents filed by the company with the Securities and Exchange Commission. And with that, I'd 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 second quarter revenues reached $32.8 million, 7% lower than comparable revenues last year. After 17 straight quarters of revenue growth year over year, this is the first quarter that our revenues have not grown. And while this is what we expected, I am not pleased with this. In June 22, 2022, our CCAS ARR was $6.9 million, up 17% from March 2022. As you will have seen from our earnings release, Despite overall progress and confidence in our long-term vision, we are facing headwinds that have led us to further lower our forecast 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 Allot Smart product line. 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 either replace a direct competitor's product that is installed or provide a DPI solution where there was no such capability before. For example, the deal we announced with Ethio Telecom, the Ethiopian CSP, will be a new AllotSmart installation where such capability did not exist before. 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 and DPI or by providing new capabilities. 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 cost of expansions. Several sizable deals that we expected to book and be able to partially deliver in the second and third quarters were delayed and are now not expected to close before the fourth quarter. We did not lose any of them, and we believe they will close by the fourth quarter, but we cannot be assured of that. Given the delay in closing the deals, and uncertainty regarding the exact time when we will close the deal and the exact terms required to recognize revenue, we cannot be assured that all the revenues we expected from them in 2022 will be recognized this year. As a result of the above, we are reducing our revenue forecast for the third quarter and for the remainder of the year. Looking at the DPI market in general, we see many opportunities and an overall solid DPI market. Many of the more significant opportunities we see are either new customers or competitor replacement opportunities. However, this makes the opportunities more concentrated and the revenues lumpier. We continue to see a good win rate for Alok. In addition, We see that it is taking us longer to close DPI deals than it took in the past. We don't know why this is. In part, this may be due to larger sizes of the deals. It may also be related to the general economic environment, and we do not know if this will be a continuing trend. I am fully aware of the challenges we are facing and that it is becoming more challenging to estimate the timing of deals and to provide accurate forecasts. I would like to stress again that as I see it, the DPI market is solid. We have many large opportunities in our pipeline, and we are continuing to win against competition. I want to turn our attention now to what we see in our cybersecurity business and how that market is developing. As I've said in previous calls, Alot is transforming into a cybersecurity company, and this is where we see most of our future revenue growth coming from. We are engaged worldwide with CSPs that are looking to provide their customers with network-based CCAS. As we look at the market, we see the direction and momentum of operators interested to launch network-based security services continues to be very positive. We see that the number of engagements, the level of engagements, a lot 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. This results in continuing to close additional CCAS deals with more operators. During the second quarter, we signed several additional CCAS deals. With Vodafone, we signed a CCAS deal to launch security services to fixed broadband customers using a low home secure product with the intention to deploy in seven different European countries. In addition, we also signed agreements with the Mobile CSP and APAC who plans to launch our network secure and with the Central and Eastern European Mobile CSP Group that plans on launching our DNS security offering in a few countries. In addition, we are in contract negotiations with several other operators in North America, Latin America, EMEA, and APAC, where we were awarded deals but have not signed the contracts yet. I would like to say a few words on the North American market. As we previously announced, ALOT has already signed CCAS deals with three operators in North America, one of which is DISH. None of these operators have launched yet. As I previously mentioned, we were awarded by a fourth North American operator and are engaged in contract discussions with them. In addition, I would like you to know that we are in the process of closing a CCAS contract with a fifth North American operator, initially targeting a specific segment of their customer base. While we cannot assure you the contracts will be signed, we are very optimistic. These potential contracts represent an MAR of dozens of millions of dollars. In addition, we are in serious discussions with additional operators. North America is the largest telecom market globally. ALORT was traditionally much stronger in other regions, and the advancement we are making with North American operators represent a significant change for ALOC and will be key to generating CCAS revenues in 2023 and beyond. Our main challenge is to translate the contracts into revenues. The first challenge is to launch the service. This process involves many stakeholders, 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. We have increased our efforts to assist in these processes, and in some cases, we can help. During the last seven months, we spent significant and concentrated efforts to try and speed up the launches of every operator we signed with. Unfortunately, we 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 will change our approach and focus future efforts of speeding up launches mainly on larger opportunities that we believe can contribute significantly to revenues. I will talk more about this and other changes we are making in our focus and how we run the business a bit differently. During the second quarter, two additional CSPs launched CCAT services. One of them is Tango in Luxembourg, and another is a predominantly prepaid CSP in our APAC region. As of June 30, 2022, of the 24 signed customers, only 11 launched commercially. Most of them are relatively small operators, and most of them launched the service only to a portion of their subscriber base. The second challenge we have is the marketing aggressiveness the CSP when launching the CCAS 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, etc. The degree to which a CSP will be aggressive in their go-to-market approach is primarily determined by the perceived value of the service. Unfortunately, we have learned that merely adding revenues to the CSP is not a strong enough motivation. CSPs have multiple value-added services and these typically have low penetration rates which CSPs seem to be content with. If security is perceived as another value-added service, the expectations of it will be low, the targets given to the working level in the CSP will be low, and the results will be low. This can also result and the CSP not prioritizing the launch of the service. On the other hand, when an operator sees security as presenting a strategic value, the motivation and results change. What is strategic will change from one operator to another. And this can include elements such as differentiation in the market compared to competitors, motivation to transition a customer from a 4G legacy service to a 5G service, overall brand perception of the operator as a secure broadband provider or motivation to transition a customer from a low-tariff plan to a more expensive one and others. 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. Bringing all of the above into account, we decided to change certain elements of our approach to the market. One, going forward, we will focus on CSPs that have significant revenue potential, even at the expense of market share. Two, we will push very hard to have CSPs we engage with contractually commit to an aggressive go-to market. Of course, we will not always be able to get such a commitment, especially if the CSP is a major tier one operator, and with such major operators, we may have to agree to a practical approach. Three, 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, will be 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 have an impact on the number of CSPs we eventually sign up. However, it will allow us to focus our resources on the smaller number of CSPs that we see more strategic value in, the CCAS service, that will ultimately drive our revenues. 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'm 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 2022. The CCAS revenues and ARR in 2022 are composed of the projected performance of the 11 networks we launched, plus the projected revenue of new networks yet to be launched. As I noted, unfortunately, Launch dates are hard for us to predict reliably. Launches continue to get delayed, and so far during the first six months of this year, we launched a disappointing number of only three operators. We continue to see launch dates delayed by the CSPs for a variety of reasons. Some of the reasons for those delays, as I mentioned in previous calls, are budget allocation, team resource allocation and prioritization within the CSP, especially in the IT department, internal issues between group headquarters and national operating entities, and also product maturity and integration issues with our DNS secure and home secure. I would like to note that we expect to launch additional CCS networks during 2022, despite the above delays. But the total number of launches in 2022 will be lower than what was expected in the beginning of the year. As we are getting closer to year end and given that usually There are also a few months of free service and ramp-up time. We don't expect them to have significant contribution to 2022. Most of our CCAS revenues are tied to the Euro. From January till today, the Euro fell about 10% compared to the US dollars. This has a negative effect on our revenues. We continue to forecast CCAS revenues for the whole of 2022 to be $7 million, But due primarily to additional delayed launches, we now expect our December 2022 ARR to be around $9 million. Despite the change in our approach to future CCAS deals, as I explained before, we still expect to achieve $180 million of new MAR in 2022. 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. I would now like to say a few words on our expectation for the overall company performance in 2022. Bringing into account our reduced capex revenues as described earlier, we are now forecasting total revenues for 2022 to be between $125 to $130 million. We expect third quarter revenues to be around $25 million, substantially lower than previously expected and with a much stronger fourth quarter. Our forecast for support and maintenance revenues remains at $41 to $43 million. We expect our gross margin for the year to remain around 70% despite our near-term headwind. We have already implemented some cost-cutting measures, as can be seen from the lower OPEX for 2022 than the previous guidance, and we will continue to closely control our expenses. The changes I discussed earlier in our approach to CCAS contracts will also help us reduce upfront costs. As we continue to adjust our expenses, we expect our OPEX for the year to be between $111 and $115 million. As a result, we expect our loss for the full year 2022 to be between $23 and $24 million, the same as we expected at the beginning of the year. Likewise, we believe our net cash reduction for the year will also be, as previously guided, between $35 to $38 million. Our goal is to further reduce our loss in 2023 and reach profitability for the full year of 2024. We have set our goal to be profitable in 2024 by growing our CCAS revenues and closely controlling our expenses. I am fully aware of the challenges that we face. I believe our DPI business is solid and will continue as such. Our CCAS business is where we see our significant future growth. While our CCAS revenues are happening later than we would like and later than we expected, I remain convinced of the very large potential of this business, and I'm confident that it will grow very 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 Q&A. Zeva and myself will be available to take your questions. Operator?