Allot Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to the Allote Conference Call to discuss today's announcement, Allote's 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, please check the company's website at www.allote.com or Call EK Global Investor Relations. I would now hand over the call to Allot Investor Relations Officer, Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin?

Thank you, Operator. Good day to all of you and welcome to Allot's conference call to discuss the results of the first quarter 2024. I would like to thank Allot's management for hosting this conference call. With me on the line Following AL's prepared remarks, we will then open the call for the question and answer session, and both AL and Ziv will be available to answer your questions. You can find the highlights of the quarter, including the financial results 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 following Safe Harbor statements. This conference call contains projections of other forward-looking statements regarding future offence or the future performance of the company. Those statements are early 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 of changing market trends, delays in the launch of services by Allot's customers, reduced demand and the competitive nature of the security services 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 Eyal Harari, CEO. Eyal, please go ahead.

Thank you, Kenny. I would like to welcome all of you to our first quarter 2024 call, and I would like to thank you for joining us today. I joined a lot as the CEO a few weeks ago, and I am super excited to work with the board and the entire leadership team to drive a lot to success. I am devoting my time to learning, listening, and planning the best strategy for the company to achieve long-term profitable growth. I bring over 20 years of experience working with top-tier telco customers, most recently as CEO of Radcom and as the company, a leader in automated service assurance solution for telecom operators running 5G and 4G networks. Already in my first few weeks, I see an amazing organization with great potential, with professional people who are highly experienced and motivated. I see a company with a long tradition of innovation and excellence, with fantastic technologies, and a base of top-tier leading customers. In addition, we have a growth engine which has already shown strong double-digit revenue growth, and I believe it has significant long-term potential. Over the coming month, I will be focused on learning about the business and opportunities, as well as meeting our key customers and partners. I intend to work with the board, the leadership team, and employees to ensure that we fully capitalize on the opportunities that will drive the company to achieve long-term, sustainable, profitable growth. I decided to join Allot as I see a bright future ahead. I believe strongly in Allot's potential. While I joined only after the first quarter was already over, I will provide a short summary of the first quarter results. A lot made progress in the quarter towards reaching the breakeven level in terms of operating profit and net cash flow. To summarize, first quarter revenue was $22 million, 4% ahead of Q1 last year. Gross margins returned to the 70% range. a strong improvement over the average gross margin in 2023, which was 60%. Stable revenue in true gross margin and a significant decrease in operating expense, which were 25% below those of the first quarter of last year, brought us much closer to the break-even level. We reported an operating loss of $1.4 million, negative cash flow of $2.4 million, and EBITDA loss just below break-even at $0.1 million for the quarter. We saw our growth engine SICAS achieve revenues of $3.4 million, up 48% year-over-year. In March, the CCAS ARR was 13.7 million, 47% higher than our CCAS ARR as of March 2023. CCAS revenue now makes up 16% of our total revenue and are becoming a more important part of the overall revenue mix. We continue to see CCAS as our growth engine, and we believe it will continue to grow as a percentage of revenues. With the goal of driving improved performance and profitable growth, the company has made significant changes in recent quarters. There have been several rounds of cost-cutting and restructuring through the last year, and as a result, we have significantly optimized our operational expense and lowered our break-even point. Allot's full-time employees count as of March 2024 was 505 compared to 749 at the end of 2022. Employee headcount has been reduced by 35% since the peak in September 2022. Our goal is to bring business to break-even during 2024. At the same time, we intend to maintain disciplined investments in the parts of our business that we believe will drive profitable long-term growth. I would like now to provide you with a short update on the two business lines, a lot smart and a lot secure. On the allot smartphone, I believe we have highly competitive product. However, there remains market weakness due to the cutbacks in spending by our customers as well as challenging macroeconomy trends. Looking ahead, we have a healthy pipeline with good mix of opportunities in different stages and across different territories. Despite the reduction in overall resource due to the cost-cutting initiatives, we have increased resources for Allot Smart Sales in very specific areas where we believe that we can capitalize on the pipeline. On the Allot Secure front, CCAS revenues continue to grow at a high double-digit rate with a Tier 1 customer base. From what I have seen so far, Allot Secure is a very effective and highly differentiated product. We are a market leader in network native security solution for the mass market. The clearest evidence of our leadership and the differentiation of our product is the significant list of Tier 1 customers who have launched network native security services for their customer, including Verizon, Vodafone, Telefonica, and Hutchison, just to name a few. This strong customer base to the quality of our solution and demonstrate the long-term potential to further expand within these customers as well as additional Tier 1 accounts. I see Sika's solution as a key potential long-term growth driver and believe we are well positioned with existing customers as well as potential new customers. We are focusing our efforts on our existing Sika's customers. and help them expand their customer base to whom our services are offered. For new SICAS customers, we are being very selective and focusing on specific strategic opportunities. Our most exciting launch in 2023 was Verizon Business, which successfully launched its network-native security service, incorporating Galot Network Secure. The launch is going well. and today Verizon is the largest signed CCAS opportunity for a lot. The number of customers continues to grow, and we are discussing with Verizon several potential expansion opportunities for different customer segments. We remain excited about the long-term potential of our CCAS growth engine. We see CCAS opportunities as operators continue to be interested in launching network-based security service with our differentiated, scalable solution. Before we move on to the Q&A, I want to highlight that our CFO, Ziv Leitman, will be leaving Galot at the end of June. And joining us will be Liat Nahum as the new CFO. Liat brings more than 20 years of experience, great talent and skill, both in finance and business leadership with top-tier high-tech companies, most recently at Amdocs, a public NASDAQ-listed multinational telecom technology company. I am confident she will significantly contribute to our finance and business strategy ahead. On behalf of the employees, management, and the board, I would also like to thank Ziv for his four and a half years of financial leadership and wish him every success going forward. In summary, I am optimistic that Allot will execute on its opportunity to drive sustainable, profitable, long-term growth. untapped potential, a high-experience and motivated workforce, strong technological edge, a powerful growth engine, and range of top-tier leading customers. I look forward to capitalize on our strengths to fully realize the opportunities ahead. And now, I would like to open the calls for Q&A, and Zivit and myself will be available to answer your questions. Operator?

Thank you. Ladies and gentlemen, at this time we'll begin the question and answer session. If you have a question, please press star 1. If you wish to decline from the process, please press star 2. Please stand by while we poll for your questions.

Operators, we have a question.

Yes, the first question is from Michal Chokshi of Northland Capital Markets. Please go ahead.

Yes, hi. Thank you for taking our questions. You talked about how you want to focus more on existing CCATS customers. Can you delve deeper on to why you're wanting to choose to focus more on existing CCaaS customers?

Good morning. So as the company already updated as of last year, the decision is to be very K strategic accounts that we want to work with. Some of them are, of course, our K-1 existing customers and selective new additional customers we are pursuing. In order to be very focused and build a relationship with those customers, we see the highest potential for long-term success. So in this respect, this is not new. And we are continuing in 2024 with the same strategy. Got it.

Understood. Okay. And new CEO and CFO, what changes, if any, do you expect to bring to the table?

So I joined a lot a bit more than two weeks ago. employees, customers, partners, and establishing my plan moving forward. I have a lot of experience in the telco industry, and I work over 20 years with many telcos globally, and I'm looking to see where we need to focus and adjust in order to make a lot as successful as possible. And as mentioned already in previous calls, we are looking this year to be a turnaround year and get the company towards break-even point, allowing us to stabilize the business and align moving forward to a strategic focus using all the potential of the company. So in this stage, I have nothing yet to share. Give me some time to continue learning, analyzing, and suggesting, and I'm sure that within a few quarters, I will be able to give you some more color about the new directions and the adjustments.

Okay, great. And then... On the core DPI business, we talked about that there's still market declines. I think there was, for Sandbine, a credit downgrade, implying that they're also seeing significant declines as well. What are you seeing in terms of market share structuring and growth? what appears to still be a declining market?

So the smart product line is based on very advanced, deep technology that was invested along the many years and hundreds of R&D menus, and it's very unique and advanced in the market. we see that the CSPs, the operators, are now under pressure to cut costs and reduce capex due to the macroeconomy and the overall delays with 5G network adoption. I'm confident that with the unique technology we have, we can capitalize on our assets. We are looking to find the right differentiators and use cases and eventually provide the most value to our customers, and eventually when you provide the right value, business will follow. So we continue to invest in this very important business line and making sure we have the right solutions for the customer demand. Okay. And then you mentioned actually that yesterday,

And Neil, if I may add, in our strategy, let me remind all of you, is that we assume that the DPI market is stable, and our strategy for profitable growth will come from the increase in the CCAS business. And for instance, this quarter, the CCAS revenues are 50% higher than the comparable quarter. And and this was also the growth rate in previous years. So we cannot promise the same growth rate for the future. It can be higher, it can be lower, but no doubt that this is the growth engine of the company, and the profitable growth will come from the secret business, while the smart business will remain stable.

And your CCAS ARR was up 1 million cure-a-cure, a little less than 10%. What was the driver of that sequential increase in your CCAS ARR?

Eventually we see incremental increase with most of our customers as they are continuing with their marketing plans and onboard additional subscribers to our services. This trend is expected to continue as We have more customers, more operators that use our services, and they do their marketing efforts to onboard additional subscribers to those services. And this is why we are seeing so far double-digit growth, and we are expecting to continue to see that with the addition of subscribers in the next quarters.

Okay. And then you mentioned that Verizon is your largest opportunity. Are they also the largest CCAS ARR contributor?

Yes. In general, they are definitely our biggest opportunity as Verizon is a very large field. We don't detail the customer ARR, but they are definitely a very important and strategic customer. Okay. All right. Thank you.

There are no further questions at this time. Before I hand back the call to Alot, I would like to remind you that a recording of this call will be available from Alot's website at investors.alot.com within the coming hours. And now, I would like to hand back the call to Mr. Kenny Green, Alot's Investor Relations, to make his concluding statement.

Thank you, Operator. So, over the coming months, we will be organizing calls and meetings for Alot's new management with all our investors. If you're interested in meeting or speaking with us, please feel free relations team. On behalf of a lot, I'd like to thank all of you for joining this call and your interest in a lot. And I'd like to thank Eyal and Ziv for hosting this call and wish Ziv the best of luck in his future endeavors. And with that, we end our call and look forward to speaking with you next quarter. Have a good day.