Allot Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Elote's fourth 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 Elote's investor relations team at ekglobalinvestorrelations.com. 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. I'd like to welcome everyone to Allot's fourth quarter and full year 2022 results conference talk. I'd like to welcome all of you to the conference call, and I would like to thank a lot of management for hosting this call. With us on the line today are Mr. Erez and Tebi, President and CEO, and Mr. Ziv Lightman, 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, and both Erez and Ziv will be available to answer your 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 State of Harvard Statement. This conference call contains projections and 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 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 services industry, as well as other risks identified in the documents filed by this company with the Securities and Exchange Commission. And with that, I'd now like to hand the call over to Erez Entebbe, CEO. 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 revenues reached $33 million, 20% lower than comparable revenues last year. Our full year 2022 revenues were $122.7 million, 16% lower than our comparable full year revenues in 2021. In December 2022, our CCAS ARR was $9.2 million, 33% higher than our CCAS ARR in September 2022, and 77% higher than our CCAS ARR for December 2021. Our total ARR, including support and maintenance, grew 10% year over year and reached $51.7 million for December 2022. 2022 was a challenging year for us. the transition of the business into CCAS recurring revenue model has proven to be slower than we originally anticipated. In addition, we had some headwind on our core DPI business. While we don't expect those challenges to disappear in 2023, we continue to make progress in this transition. 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. As discussed in our previous earning call, we implemented cost-cutting measures that also included reduction of our workforce. We intend to continue with a policy of tight control of our expenses in order to reduce our loss in 2023, and we reiterate what we stated previously. that we remain committed to reach profitability for the full year 2024. 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 AllotSmart 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, and terrorism. We have solutions that address these issues, and we are seeing growing interest in our products. 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. Specifically, during the fourth quarter, we won two competitive bids, one in EMEA and one in APAC, where we will replace an existing DPI system provided by a competitor of ours. In addition, we also want two projects in EMEA to install a DPI system for new customers that did not have such a system before. While we continue to see in our pipeline a similar combination of replacement opportunities and new deals, and while we remain excited about these opportunities, we also recognize that we are facing several challenges that continue to make it more difficult for us to provide a definite forecast. First, as discussed in previous earning calls, it is taking us longer to close DPI deals than in the past. I believe this has to do with the general economic environment and tighter expense control by CSPs. Second, the total number of DPI bids for CSPs we are seeing is not growing. Third, in the enterprise market, we believe the growth we saw as a result of the Broadcom deal has peaked, and we do not expect further growth in this market. We have a strong pipeline of large deals for the year. We believe that the DPI market remains solid and that we can continue to gain market share. However, the three dynamics I discussed previously and the potential lumpiness of large deals make it challenging to predict the timing of wins and revenue recognition for our DPI business. As a result, we do not expect to see growth in our DPI segment for 2023. However, we also do not believe that the contraction will be more than 5 to 10% in 2023. I would like to point out one item with respect to our account receivables. As you might have noticed on our financial statements, our account receivables grew by $11.6 million during 2022. A majority of this growth came from sales to resellers in Africa and Latin America who are late on their payments to us. We learned that the cash flow of these resellers was impacted by a failure to receive payments from end customers which in turn affected their ability to meet the payment terms to which they agreed with us. We have assessed the late payments and determined that the payments remain collectible. I want to turn your attention now to what we see in our cybersecurity business and how the market is developing. As I have 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 CCAS. As we look at the market, we see that the direction and momentum of operators interested in launching network-based security services continues to be very positive. We see that in many markets, 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. The largest signed CCAS opportunity for Alot with a Tier 1 operator is the contract we signed with Verizon Business, which we discussed in the previous earning calls. During the fourth quarter, we signed two additional CCAS deals, one in Latin America and the other in APAC. Both will utilize our home secure product. In addition, we are in contract negotiations with several other operators globally, where we were awarded deals but have not yet signed the contracts. On top of that, we are in serious discussions with additional operators where an award has yet to be provided. As we discussed in previous calls, and as I will address in more detail later in the call, we have changed our strategy for the AllotSecure business. We are putting more emphasis on strategic accounts that can have high revenue impact While in small to medium deals, we are looking for some customers' assurance in setting minimum revenue thresholds. While this approach might affect a number of deals we sign, it will allow us to get to profitability sooner. Our MAR of all new deals signed in 2022 was $191 million. As we mentioned several times in the past, MAR is proving to be not a good enough metric for predicting short-term revenues, and we have decided it is not beneficial anymore as a metric for our future business. We are no longer using it internally to measure new deals, and as a result, this is the last time we are reporting MAR. We recently reviewed some of the deals we previously signed and have not yet launched. After reviewing these deals, We decided to cancel some of the contracts because we no longer believe the investment in them is justified. These project cancellations with six CSPs total approximately $45 million of MAR. We are continuing to examine a few additional contracts to see if they can be turned into real revenues or if we should cancel the contracts there. We remain excited about our CCAS opportunity as we have a differentiated scalable solution for CSPs. During the fourth quarter, we launched three new CCaaS services. Two are using our DNS secure product, and one, Far East Stone in Taiwan, is using our network secure product. Our CCaaS revenues for the third quarter were $2.2 million, and the CCaaS ARR at the end of the third quarter, sorry, I'll take that back. Our CCAS revenues for the fourth quarter were $2.2 million, and the CCAS ARR at the end of the fourth quarter was $9.2 million, a significant growth from the third quarter. As of December 30, 2022, we have 27 signed customers. Unfortunately, only 14 have started to generate revenues, and most of them are relatively small operators and most of them launched the service only to a portion of their subscriber base. As we have discussed previously, 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 2022, we increased our efforts to assist in those processes, and in some cases, we managed to help and expedite the process. As we discussed in the previous earnings 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 will focus our future efforts of speeding up launches mainly on a few targeted larger opportunities that we believe can contribute significantly to revenues. 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, we're actively offering the service in every customer interaction, bundling the security offering in the price plan for some or all of the customers, etc. 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 very important to our long-term success as well as to the CSP's success in this field. 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-unquote land grab 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. As a result, we are no longer focusing our salespeople on MAR targets. Rather, their time is being spent with specific accounts. Two, we are approaching the CSPs as partners, not as customers. We will push very hard to have CSPs we engage with contractually commit to an aggressive go-to-market. 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 reduce 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 we see more strategic value in the SICA service, and that will ultimately drive profitable revenue growth for Elot. 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 am 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 expectation for 2023. As I stated, we have already implemented some cost-cutting measures and we will continue to implement more. As a result, we believe our net cash reduction and our operating loss for the year will be between $15 million to $20 million. We remain committed to reach profitability for the full year 2024 This will be achieved by some revenue growth, mainly on the CCAS business, but also through tight expense control. We expect CCAS revenues for the whole of 2023 to be between $11 million and $13 million. We expect the CCAS ARR for December 2023 to be between $15 million to $20 million and our total ARR, including support and maintenance, to be between $56 million and $63 million. We expect our total revenues for the full year 2023 to be between $110 million and $120 million. Regarding Q1, recall that Q1 is seasonally a weak quarter for revenues, and we expect the first quarter revenues to be approximately $20 million. Given the lumpiness of the DPI business that we mentioned earlier, we do expect notably higher quarterly revenues as we move through 2023, especially in the second half. Our strategy remains the same. While we believe that our DPI business has limited growth potential, we think we can maintain a similar revenue of business through new use cases and winning competitor accounts. However, the lumpiness of the business makes it difficult to forecast over short timeframes. Our CCAS business is where we see our significant future growth. While our CCAS revenues are being recognized later than we would have liked and later than we expected, I remain convinced of the large potential of this business and I'm confident that it will grow 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 questions and answers, and Zeva and myself will be available to take your questions. Operator?