Allot Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Allot's third quarter 2022 results conference call. All participants are at 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 EK Global Investor Relations at 1-212-378-8040 or view it in the news sections on the company's website at alot.com. I would now like to hand the call over to Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin, please?

Thank you, Operator. Welcome to Allot's third quarter 2022 conference call. I would like to welcome all of you to this conference call, and I'd like to thank Allot's management for hosting this call. With us on the line 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 this 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 results and metrics, including those we typically discuss on this conference call in today's earnings press release. Before we start, I'd like to point out the safe harbour 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 a lot cannot guarantee that they will in fact occur. A lot does not assume any obligation to update that information. Actual results. or events may differ materially from those projected, including as a result of changing market trends, delays in the launch of services by 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 Entebbe. 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 third quarter revenues reached $25 million, 35% lower than the comparable revenues last year. In September 2022, our CCAS ARR was $6.9 million, same as June 2022. This was a challenging quarter for us. And while these are the results we anticipated for the quarter, I am not pleased with them. As we look into the fourth quarter and into 2023, I definitely expect to see significant improvement and I remain optimistic on the fundamentals and the future. During today's call, I will discuss the challenges we are facing, the opportunities we see, and why I am confident in the future. Before discussing in detail our different product lines, I would like to address some corporate news I think are important. Today, we issued a press release announcing our deal with Verizon Business to provide network-based security to Verizon SMB, small-medium businesses, and IoT, Internet of Things, customers. I believe this is the most significant CCaaS contract Alok has signed to date. and I am very proud that Alot has been chosen by Verizon to be the technology solution behind their intended security service. In another press release, which made public today, we announced that Alot Board of Directors has decided to nominate Cynthia Paul to serve as a director on our board, subject to shareholder approval. I am very pleased that Ms. Paul accepted our board's nomination. Having known her over the last years, I believe her capabilities, vast experience, and business expertise will greatly benefit Alok, and I look forward to her joining our board. I would like to also mention a couple of elements affecting us company-wide that I believe we should be aware of. One, as anticipated in our previous earnings call, in early September, we implemented some cost-cutting measures that also included reduction of our workforce. We intend to continue with the policy of tight control of our expenses in order to significantly reduce our loss in 2023 and reach profitability in 2024. Two, exchange rates have fluctuated significantly during this year. A significant part of our revenue is in non-US dollars, and the depreciation compared to the US dollar had an impact on our revenues as well. Future fluctuations in exchange rates are, of course, hard to predict and may have impact on us going forward as well. And now, I would like to move to discuss our different product lines. I would like to start by discussing our traffic management and analytics business addressed by our Alup Smart product line. The main use cases we see today in CSPs continue to be in traffic management, congestion management, quality of user experience, especially for video, policy and charging control, and digital enforcement. As governments look to fight crime and terrorism, we see a growing interest globally in being 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. Many CSPs today are reexamining the composition of their networks. This may be because they are moving to 5G or because they need to replace end-of-life products or other reasons. As they do so, we see multiple opportunities globally where CSPs currently using our competitor's product are considering a change. We are working closely with quite a few such CSPs to win their trust in business, becoming their next choice for DPI. Most of these processes are through a competitive bidding process and some are potentially negotiated deals. In addition, we are working on expanding deals that we won before. We are also investing in new ways to help wireless operators manage congestions on their networks and save on their costs of expansions. I think we have developed some very interesting capabilities in this area with much value for wireless operators, and I will be happy to share with you more details in the future as we progress and as we are prepared to make this public. In the previous earnings call, I discussed several sizable deals that we expected to book and be able to partially deliver in the second and third quarters and that were delayed. We did not lose any of them and we believe they will close during the coming months, but we cannot be assured of that. As I mentioned in the previous earnings call, 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 the revenues we expected from them in 2022 will be recognized this 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, these opportunities are larger than average and make revenues more concentrated and lumpier. We see that it's taking us longer to close DPI deals than it took in the past. We continue to analyze the reasons for these delays. In part, this may be due to the larger size 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. However, it is becoming much clearer to me that our challenges are more on forecasting the timing rather than on the market size or our share of the market. We have a very strong pipeline of deals expected to close in the coming months. we are competing on or negotiating multiple large deals and forecasting their timing is challenging. I am convinced that the DPI market is solid and our competitive position is strong. I want to turn your attention now to what we see in our cybersecurity business and how the 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 growth coming from. We are engaged worldwide with CSPs that are looking to provide their customers with network-based CCaaS. As we look at the market, we see that the direction and momentum of operators interested to launch network-based security services continues to be very positive. the various operators provide services that are on par on speed, coverage, and reliability. As they look for differentiation, network-based security is emerging as an important element. This is even more important since network security is a service native to the operator's network and is directly coupled to the access network itself. There are several Tier 1 operators who have reached the conclusion that providing network-based security to their customers is of significant importance to them, and they are discussing with us how to do so. As we announced earlier, we recently signed a CCaaS deal with Verizon. This deal is intended to place a lot of network security in the Verizon network and provide an embedded security solution that will include fixed wireless SMB customers and Internet of Things connections. As Verizon said in their quote, this offering paves the way for a network-based portfolio that will simplify their customer experience and help provide their customers peace of mind. Alot has been working with Verizon both technically and commercially on this opportunity for quite a while. Our network secure platform has already been installed in Verizon Labs for quite some time and has been vigorously tested for several use cases. This contract is the most meaningful CCaaS contract Allot has signed to date. I view Verizon's choice of Allot to provide cybersecurity protection for their SMB customers as a testimony to the strength of our solution And I am extremely proud to have been selected by Verizon. Allot was selected here to provide our solution only for a very specific subset of Verizon customers. We are, of course, hopeful that, perhaps sometimes in the future, after we have proven ourselves in practice, there may perhaps be opportunities to address some other segments with our offering, but we cannot be assured of that. In our previous call, I mentioned that we had signed deals with awarded and in contract negotiation with the force. For sake of clarity, Verizon is this force operator. North America is the largest telecom market globally. Alot was traditionally much stronger in other regions. And the advancements we are making with North American operators represent a significant change for Allot and will be key to generating CCAS revenues in 2023 and beyond. While the Verizon deal is extremely important on its own, I am confident that other CSPs globally will consider Verizon's decisions when they make their own decisions on providing network-based security to their customers. In addition, negotiations with several other operators in North America, Latin America, EMEA, and APAC, we were awarded deals but have not signed the contracts yet. These potential additional contracts represent the projected MAR of dozens of millions of dollars. On top of that, we are also in serious discussions with additional operators where we have not been awarded yet. Our main challenge today in our CCAS business is to translate the contracts we signed into revenues. The first challenge is to launch the service. This process involves many stakeholders on the CSP side, 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. During the year, we increased our efforts to assist in those processes, and in some cases, we managed to help and expedite the process. As discussed in the previous earning call, we unfortunately 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 changed our approach and we were, And we will focus our future efforts of speeding up launches mainly on few targeted 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 third quarter, no CSP launched a new CCAS service with our technology. This is obviously disappointing. As of September 30, 2022, of the 25 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. We do, however, expect one or two additional launches before the end of 2022. Our CCAS revenues for the third quarter were $1.7 million and the ARR at the end of the third quarter was $6.9 million. While the number of subscribers grew during the third quarter, this revenue growth was offset by negative impact of currency exchange rates, leading to flat quarter-over-quarter CCAS revenues and ARR. In the fourth quarter, we expect continued growth from existing customers and some modest revenues from new networks. Therefore, we expect CCAS revenues to be higher. A major challenge we have is the marketing aggressiveness of 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, et cetera. 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 and the CSP will be low, and the results will be low. This can also result in 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, or motivation to transition customers from 4G legacy service to a 5G service, or overall brand perception of the operator as a, quote, secure broadband provider, unquote, 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. These discussions sometimes take time and further delay the launch, but I think they are important to our long-term success. Bringing all the above into account and in line with what we discussed in the previous earnings call, we changed certain elements of our approach to the market. One, going forward, we are shifting our focus from, quote, land grab, unquote, for market share and number of CSPs to CSPs with revenue potential in the next couple of years. This means we will focus on CSPs that have a significant revenue potential even at the expense of market share. I can share with you that during the third quarter, we decided not to close with a certain CSP where we were awarded because we felt the potential revenues were too small compared to the commitment we needed to make. Two, we will push very hard to have CSPs we engage with contractually commit to an aggressive go-to market. In fact, we are discussing today with multiple CSPs, including tier ones, the possibility of launching the security service as part of their regular price plans to a whole segment of customers, such as all premium plans, for example, in exchange for a lower subprice to allot. As CSPs try to differentiate themselves and as they understand the importance of network-based security, we find some of them very receptive to the idea. If implemented, it will mean many more customers much faster without necessarily reducing the overall future revenue potential of that CSP to allot. Of course, we will not always be able to get such a commitment and we remain pragmatic as we may have to agree to a different approach depending on the CSP. 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 are 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 also on the number of new CSPs we eventually sign up. However, it will allow us to focus our resources on the smaller number of CSPs that see more strategic value in the CCAS service, and it 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 very confident in our ability to achieve our long-term goals. In the previous call, I spoke about the challenge of integrating our home secure router agent in specific routers and our efforts to simplify this process and therefore help expedite launches of home secure solutions with CSPs. As part of this continuing effort, We announced recently that Alot has joined forces with Vantiva, formerly Technicolo, to become part of their ecosystem and pre-integrate our solution on Vantiva Home and SOHO routers. I think this is an important step forward to make integration and launches easier for CSPs, and we are pursuing additional steps to make such integrations even easier. Looking ahead, I want to summarize our expectations for 2022. For the remainder of the year, the CCAS revenues and ARR are composed at this point almost entirely of the projected performance of the 11 networks we launched, plus some projected revenue of new networks yet to be launched. We continue to forecast CCAS revenues for the whole of 2022 to be approximately $7 million and our December 2022 ARR to be approximately $9 million, with the main risk being possible exchange rate changes and new launches. Despite the change in our approach to future CCAS deals, as I explained before, We expect to achieve approximately $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 company's overall performance in 2022. We still expect the full year 2022 revenues, of $125 million to $130 million, trending towards the lower end. Our forecast for support maintenance revenues remains at $41 million to $43 million. As I stated, we have already implemented some cost-cutting measures, and as a result, we expect our OPEX for the year to be between $109 and $111 million. We continue to expect our loss for the full year 2022 to be between $23 and $24 million. Likewise, we believe our net cash reduction for the year will also be as previously guided between $35 to $38 million. While 2023 guidance will be provided in our February 2023 earnings call, I do want to give you at this time a peek into the direction we are looking at. In 2023, we currently expect growth in both CapEx revenues and CCAS revenues. We currently expect total revenue growth to be close to 10% compared to 2022. We remain committed to reach profitability for the full year 2024. This will be achieved by some revenue growth, mainly on CCAS business, but also through tight expense control. Thus, we expect loss in 2023 to be significantly lower than in 2022. I believe we are on track to achieve this. 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, in 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 questions and answers, and Ziva and myself will be available to take your questions. Operator?