Allot Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Alot's first quarter 2023 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 section of the company's website at www.alot.com. I would now like to hand over the call to Mr. Kenny Green of EK Global Investor Relations. Mr. Green, please go ahead.

Thank you, Operator. Welcome all to Allot's first quarter 2023 conference call. I would like to welcome all of you to this conference call, and I would like to thank Allot's management for hosting this call. With us on the call 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. 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, 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 a lot cannot guarantee that they will in fact occur. A lot does not assume any obligation to update that information. Actual events. All 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 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'd now like to hand the call over to Erez Entevi. Erez, please go ahead.

Thank you, Kenny. I'd like to welcome all of you to our conference call. Thank you for joining us today. Our first quarter revenues were $21.1 million, 34% lower than comparable revenues last year. In March 2023, our CCAS ARR was $9.3 million, slightly above our CCAS ARR in December 2022, and 58% higher than our CCAS ARR for March 2022. The beginning of 2023 was challenging for us. The transition of the business into CCAS recurring revenue model has proven to be slower than we originally anticipated. In addition, our core DPI business experienced some headwinds. While we don't expect those challenges to disappear in the near term, given the tough economic backdrop, we continue to make progress with the aspects of the business that we can control. I remain optimistic about our 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 we discussed in our previous earnings call, we remain committed to reaching profitability for the full year 2024. While our OPEX may fluctuate from quarter to quarter because there are many factors that affect the total OPEX, We intend to continue tightly controlling our expenses in order to reduce our loss in 2023 as we look forward toward reaching profitability for the full year 2024. Our OPEX in the first quarter was $22.4 million, a reduction of 19% compared to our OPEX in the fourth quarter of 2022, some of which was due to one-time items. During the second quarter, we implemented another reduction of our workforce to further control our expenses, the impact of which we will start seeing in the third quarter. During the first quarter, our cash balance fell by $9.1 million. We experienced some delays in collections as a result of some of our customers implementing tighter cash controls. I see this as a timing issue, and I do not see a risk in these collections. This cash burn is, of course, higher than we would like it to be, and we expect to lessen the cash burn during the third and fourth quarters of this year. Specifically, as our cost-cutting efforts come into effect, together with a projected increase in revenues, we expect to reduce our operating loss and improve our cash flow. Our gross margin in the first quarter was 67% due to lower revenues and our deal mix. We continue to target the gross margin of 70% for 2024. Now, I would like to discuss our different product lines. I would like to start by discussing our traffic management and analytics business addressed by our ALOT smart, excuse me, 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 product. Many CSPs today are re-looking at their network needs. In developing countries, we see a growing number of opportunities where CSPs are looking to replace end-of-life DPI products. In developed countries, we are seeing some rethinking of network needs as CSPs look at deploying new 5G standalone, quote-unquote, cores. We continue to see multiple opportunities globally where CSPs currently using our competitors' products are considering a change. We are working closely with quite a few such CSPs to win their trust and 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 previously won. Specifically, during the first quarter, we won a project in EMEA to install a DPI system for a new customer that did not have such a system before. As we stated on the last earnings call, 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, and the total number of DPI bids for CSPs we are seeing is not growing. I believe this has to do with the general economic environment and tighter expense control by CSPs. Second, 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. As we stated during our last earnings call, while we have a strong pipeline of large deals for the year, the dynamics I just discussed together with potential lumpiness of large deals makes it challenging to predict the timing of revenue recognition for our DPI business. And 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. Our receivables will reduce this quarter by $4.5 million. In the previous earnings call, I noted that we had some growth in our receivables from sales to resellers in Africa and Latin America who are late on their payments to us. While we have not yet collected these amounts, we reassessed 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, a lot 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 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 with respect to speed, coverage, and reliability. As they look for differentiation, network-based security is emerging as an important element. Because it is a service native to the operator's network, network security 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 previously. Recently, we announced that we signed a deal with a Tier 1 fixed broadband operator in Latin America to provide security services to their customers. In addition, we announced that PPF Group in Central and Eastern Europe is expanding its cooperation with us. Following a successful service launch in Bulgaria, PPF decided to expand and provide security services in four other European countries. I believe these deals are a testament to the importance CSPs see in providing businesses and consumers with network-based security services. 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, I want to remind you that we changed our strategy for a lot secure business. We are putting more emphasis on strategic accounts that can have a 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 the number of deals we sign, it will allow us to get to profitability sooner. We remain excited about our CCAS opportunity as we have a differentiated and scalable solution for CSPs. Our CCAS revenues for the first quarter were $2.3 million, and the CCAS ARR at the end of the first quarter was $9.3 million, a significant growth year over year. As of March 31st, 2023, we have 27 signed customers, but eight of them are canceled and discontinued, mainly to our strategy to focus on large 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. There are several more launches planned for this year. As we have discussed previously, our main challenge today in 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. A major challenge we have is the marketing aggressiveness of the CSPs 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 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 success of this field. I believe Far East Tone in Taiwan is a strong testimony to the value generated when the CSP views security as a strategic offering and the executive decision is to launch the service aggressively. In only three months from the service launch, Far East Stone reached nearly 200,000 subscribers in service, and the number is continuing to grow rapidly. As we discussed in the previous earning call, and in line with what I discussed above, we changed certain elements of our approach to the market. One, we shifted our focus from quote-unquote land grab for market share and number of CSPs to CSPs that have significant revenue potential. We are approaching the CSPs as partners, not as customers. We are pushing very hard to have CSPs we engage with contractually commit to an aggressive go-to-market strategy. 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 may not. I expect these changes will reduce the number of new CSPs we sign up. However, it will allow us to focus our resources on a smaller number of CSPs that see more strategic value in the CCAS service, which should drive profitable revenue growth for Alot. As I look at the deals we signed 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 expectations for 2023. As I stated, we remain committed to reaching profitability for the full year 2024. This will be achieved through some revenue growth, mainly in CCAS, combined with tight expense control. We continue to believe our net cash reduction and our operating loss for the year 2023 will be between $15 million and $20 million. We expect CCAS revenues for 2023 to be between $11 million and $13 million. We expect the CCAS ARR for December 2023 to be between $15 million and $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 the second quarter, we expect the second quarter revenues to be approximately $25 million. Given the lumpiness of the DPI business that we mentioned earlier, we do expect notably higher quarterly revenues as we move into the second half of 2023. Our strategy remains the same. While we believe that our DPI business has limited growth potential, we think we can maintain a stable level of revenues through new use cases and market share gains. 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 Q&A. and Ziv and myself will be available to take your questions. Operator?