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Operator
Welcome to the conference call services. You are now being placed in the conference. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Bye. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Ladies and gentlemen, thank you for standing by. The call will begin shortly. Ladies and gentlemen, thank you for standing by. Welcome to a Lotz 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, 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?
Kenny Green
Thank you. Good day to all of you and welcome to Allot's conference call to discuss its financial results for the quarter. I would like to thank Allot's management for hosting this conference call. With me today on the call are Mr. Eyal Harari, Following Eyal's prepared remarks, we will open the call for the question and answer session, and both Eyal and Liat will be available to answer those questions. You can all find the highlights of the quarter, including financial highlights and metrics, including those we typically discuss on the conference call, in today's earnings release. Before we start, I'd like to point out the following Safe Harbor Statement. This conference 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 changing market trends, delays in the launch of services by a lot of customers, reduced demands, and the competitive nature of the securities services industry, as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission. Also, the financial results in this call will be presented mainly on a non measures to help investors understand Allot's operating performance in the quarter. For all the data, please refer to the financial tables published in the results press release issued earlier today, which also include the gaps of non-gap financial reconciliation tables. And with that, I would now like to hand the call over to Eyal Harari, CEO. Eyal, please go ahead.
Eyal Harari
Thank you, Kenny. I would like to welcome all of you to our result conference call and thank you for joining us today. I am pleased with the results of the second quarter as we have clearly made good progress. Most notably, I am happy that Allot generated positive operating cash flow and increased its overall net cash position for the first time in three years. This success was driven by our efforts, which drove a significant decrease in operating expenses, while also stabilizing revenue and gross margins. In the past couple of quarters, we have significantly optimized operational expenses, which are approximately 25% lower than last year. We undertook these actions to bring the business to sustainable profitability and to grow the cash position. I want to spend a few moments talking about the various parts of our business. starting with AdoptSecure, our main growth engine. We continue to invest in our CCAS growth engine, and the business continues to gain traction. In the second quarter, CCAS revenue increased by 54% year over year. Our extensive list of Tier 1 customers enabled us to pursue further expansions within these large accounts, while also providing us with high-quality references as we look to attract new logos. We recently signed an expansion agreement with one of our Tier 1 European CSP customers for the provision of CCAS to its customer base. The expansion agreement should start contributing to our revenue at the end of this year, representing additional CCAS growth potential for a lot in 2025. Our most exciting CCAS launch last year was with Varun. The engagement continues to be mutually beneficial, and as a result, we are discussing several potential expansion opportunities within Verizon's different customer segments. I want to point out that Verizon highlighted Allot's contribution to their security solution in the recent published 2024 Mobile Security Index Report, validating Allot as one of their trusted partners in protecting their network and customers. Specifically, the report noted that the growth of the mobile computing and IoT is exponentially expanding the attack surface that needs protection, which in turn would require a matching focus on ensuring sufficient mobile security processes, policies, and investments. Overall, I believe the SICA solution is a key long-term growth driver for a lot in the security space. For Allot Smart, in the second quarter, we saw increasing traction, converting some of our pipeline into contracts. We achieved an improved level of sales to new customers, as well as an expansion of sales to current customers. Allot is a trusted, long-term supplier of its smart products to a strong customer base. This is highlighted by our relationship with Rakuten Mobile. Rakuten is the fourth mobile network operator in Japan with a fully virtualized cloud-native network. Allot has been working closely with Rakuten since 2019 when they were rolling out their network infrastructure. Rakuten recently announced that their subscriber base crossed 7 million. Allot continues to provide Rakuten with solutions as they grow the network to support an expanding subscriber base. Since joining Galot earlier this year, I have been meeting with our key customers and partners globally. I am focused on identifying ways we can leverage our technology to better serve our customers with a goal to reignite growth by expanding within our installed base. Galot has a long tradition of innovation. We differentiate a technology and a top-tier global customer base. I have spent time with employees We have a strong team of professional and talented individuals, many with deep technology know-how and capabilities in the networking and the security space, which stands at the epicenter of TIT's spending priorities. I'm currently working closely with the board and management, including our new CFO, Liat Nahum, who joined us at the beginning of Q3. to formulate a strategic plan to drive renewed revenue growth and long-term profitability. I want to share my initial thoughts. We are looking for long-term profitable growth opportunities that leverage a lot of core capabilities. The cybersecurity market continues to experience rapid growth as threats continue to emerge and increase in sophistication. The mobile cybersecurity market is projected by analytics to be an $8 billion market with over 20% compound average growth over the next decade. Cybersecurity is one of a lot growth engines, and we are considering improvements and innovations to our SICA solution to bring additional value and even better cyber protection to our customers. We are also looking at additional go-to-market strategies for CCaaS to expand our customer base and address the market. Another trend we are looking at is 5G revolution. As new 5G networks continue to be rolled out, the demand for advanced security solution is growing significantly, with analysts expecting compound annual growth rate in excess of 40% over the next five years. A recent report indicates that around 70% of large companies and 40% of small businesses have adopted at least one cloud service to date. The movement to the cloud is being driven by the increasing need for remote work solution, digital transformation initiatives, and the desire to optimize cost and enhance business agility. We are exploring the potential of our products to address and provide additional value to the cloud and 5G markets as we strive for further penetrating these markets. While our go-to-market strategy is global in its outlook, we are under-penetrated in North America market. Allot has seen initial success in the region in recent years, and we have strong references, including Verizon. We are exploring ways in which we can leverage our early success to deepen our engagement in this region, which today is leading many of the security growth trends. We see a significant opportunity for Allot in North America. Allot works with many large enterprises and leading CSPs, and it is clear that customer success and deepening relationships are key drivers to potentially expanding our business within our install base. we are looking at ways to make a lot more customer-centric as we strive to further cement customer relationships, enabling us to penetrate further into organizations with our products and services. A goal would be to structure our organization to better support our customers' business goals, as we believe this will allow us to increase business from existing customers. I am working closely with the board and the management on a strategic plan term profitability. We will provide more details as we progress. In summary, with the research management, we believe we are at the start of a new chapter for Halot. In the second quarter, we stabilized revenues and significantly reduced expenses. We returned the business to the operating profit break-even range with positive cash generation. I believe we are well positioned to drive sustainable, profitable long-term growth, and I am optimistic that Talot will execute on the many opportunities ahead. And now, I would like to hand it over to our CFO, Liat Nahoum, for the financial summary. Liat, please.
Liat
Thanks, Eyal. We reported revenue of $22.2 million in the quarter, representing a year-over-year decline of 12%, but up 1% versus the prior quarter. Revenue from our growth engine, CCAS, were $3.7 million in the quarter, up 54% year-over-year, and comprising 17% of our revenue in the quarter. Our CCAS annual recurring revenue as of June 2024 was $14.6 million. As we discussed in our press release, full-year CCAS revenue and CCAS ARR are expected to continue experiencing accelerated growth at around 50% year-over-year, You can find various breakdowns of our revenue in the table in our press release. Our gross margin in the quarter was 70.6%. In the second quarter last year, our gross margin was 71.4%, and in the prior quarter, it was 70.4%. While the gross margin depends on the specific product mix sold in the quarter, the long-term target for gross margin is an average of 70%, and we are pleased with the return to the 70% level in the first half of 2024. As Eyal mentioned, we reduced expenses considerably over the past year, with the non-GAAP OPEX at 16.7 million, similar to that of last quarter, and down by over 25% from the second quarter of last year. A lot had 500 full-time employees as of June 2024. The non-GAAP operating loss showed significant improvement, with a 95% reduction on a non-GAAP basis, from 18.9 million in Q2 last year and 1.2 million in last quarter to 1 million in Q2 2024. For the second half of 2024, we expect a non-GAAP operating profit at around breakeven. In terms of non-GAAP net loss, we reported 0.8 million in the quarter, or a loss of 2 cents per share, as compared with and net loss of 0.9 million or a loss of 3 cents per share in the previous quarter. Operating cash flow in the second quarter was 1.2 million. Cash, short and bank deposit and investment as of June 30, 2024, totaled 53.2 million, an increase of 0.6 million versus 52.6 million at the end of prior quarter, demonstrating stability in the cash levels. Looking ahead, we expect our net cash position to not decrease below the current point. Cash short on bank deposit and investment as of year end 2023 were $54.8 million. That ends my summary. Eyal and myself would now be happy to take your questions.
Operator
Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press the star followed by the one on your touchtone phone. If you wish to decline from the polling process, please press star followed by a 2. Your questions will be polled in the order they are received. The first question is from Nihal Chokshi of Northland Capital Markets. Please go ahead.
Nihal Chokshi
Nihal Chokshi of Northland Capital Markets. Please go ahead. Thank you and good to talk with both of you here. I'd like to focus on the guidance, especially a CCAS ARR guidance. When you say around 50% year-over-year growth, that translates to an ARR of around $19 million, correct, versus $14.6 million at the end of the June quarter?
Eyal Harari
Yes, this is correct. We continue to see... increased demand for our CCAS service, and we reported, as we reported this quarter, a 54% growth. We expect this trend to continue in the coming quarters.
Nihal Chokshi
Okay. So when you think about your CCAS ARR guidance, how do you build up that guidance? Are you thinking about what are the incremental subscriptions you're going to likely see over the September and December quarter? or are you really thinking more in terms of if this is the year of your growth that can be sustained?
Eyal Harari
So the SICKUS goals is comprised from multiple things. The first is obviously winning new accounts that are implemented in our SICKUS service. This adds to our install base and provide additional revenue. But we also see that within the existing customers, we are able to expand our SICAS to additional services and address additional time, and by that, expand our business and revenue from our existing partners. I will also mention that some of the nature of the business is after we win and launch a service, it takes some time for the service to uptake, and as the operator is starting to market and offer this service to its customers, And therefore, even within the specific service, there is a potential to grow. So overall, we see a mix of three dimensions that are progressing and can grow. Obviously, in some services, we reach to that plateau where the operator reaches the max level of revenue that it can generate. And the 50% is built out of those three goals that we foresee. both role of use of the service within what we already launched, launching new services with our existing base and winning new accounts and starting to launch services with them.
Nihal Chokshi
Okay, that's great. That's really helpful. So now thinking about the, in terms of like the actual incremental CCAS ARR that you're guiding to for the rest of the year, that's basically, you know, four to five million here, which would represent the most incremental CCAT they are for two quarters in a row, or are you expecting that most of this four to five million is going to come in the fourth quarter as opposed to being distributed between the third and fourth quarter?
Eyal Harari
It will come gradually. I would say more in the last quarter, but we will also foresee increase in Q3. Some of the goals will come in Q3 and higher goals in Q4.
Nihal Chokshi
Okay. And you mentioned that there is a something that's happening at the end of the calendar 24 that's going to be a driver to CCAS ARR. What is that driver there at the end of calendar 24?
Eyal Harari
So one of our existing customers we got into agreement to expand our SICA services to its customers. This is going to be implemented in the coming couple of quarters, and by end of the year, we are looking to expand our SICA service with this EMEA customer. After it will be launched, we are looking to see goals in 2025 for this new service. This is a very encouraging agreement that we got as this customer was using our SICA service in a perpetual way and a one-time fee, and now it's going to contribute to our SICA revenue moving forward.
Nihal Chokshi
Got it. Okay. So I think you guys had a relatively well-known perpetual CCAS customer in Vodafone, one of the geos with Vodafone, so presumably that's the one that you're referring to?
Eyal Harari
We didn't reveal the name as we are subject to NDAs, but one of our customers that is working with us is going to contribute in the CCAS revenue. I think most important is not the exact customer, but the ability and the importance of the service as a critical for them and they are looking to continue a long-term relationship with us providing the customer the right security protections. Right, true. Very good point. And I guess the key point here is that this is a customer that had a professional license for an existing set of customers and now that they see the value of that
Nihal Chokshi
presumably they would have preferred to get another perpetual license, but because of the strong value, they've agreed to the CCAS revenue sharing? Yes. Okay, great. And then, and so what's your level, what's the level of risk that this customer's intentional rollout to additional, to next set of customers flips out
Eyal Harari
into calendar 25 as opposed to launching within calendar 24 and if that does occur you know what's the you know potential impact your guidance then so the we have very good visibility in terms of our uh sikas revenue and this is uh based on the agreement already in place of course as some of the projects we have implementation time that might fluctuate as we are implementing within the telco environment that is always requires some integration and some work and things may take time but overall we are feeling very confident with the progress and this is why we indicate this guidance. Now it might move Some of the projects might move a quarter, but it's based on our already secured agreement. So you might say it's quite secured.
Nihal Chokshi
Okay. All right. And then looking at the June Q CCAS ARR results, that was an incremental $0.9 million of CCAS ARR, very close to $1 million that you reported for the March quarter. And I don't believe you had any new CSPs that launched within the June quarter. So can you talk about what was the driver of sustaining basically $1 million of incremental ARR in the June quarter?
Eyal Harari
So yes, as pointed out before, we did see increase of usage that some of our existing customer managed to penetrate deeper into the market. installed base, so more of their customers are using now our service, as well as some of the customers launched additional protections. For example, a couple of our customers launched Home Secure to not only cover and protect their customers from the network side, but also protect them from the home router. So these are incremental extensions between those existing customers that contribute to the revenue goals and we expect this trend to continue as we still have in our install base customers that didn't fully maximize the potential of their revenue and penetration and this is why we are expecting growth to continue even within the install base.
Nihal Chokshi
Okay. And so I think this is a third quarter availability within the Verizon SMB. How does the trajectory of the tax rates within Verizon look? Is that continuing to stay steady from when you launched, or has it started to, you know, the tax rates have started to come down here?
Eyal Harari
No, so overall we feel that the The trend is to continue to grow and adoption should increase. We still have a big potential of install base of business customers to address. We are working closely with Verizon to see best ways to market our solutions into their customers. Also, as pointed out in my previous comments, looking into expansion to additional services. I believe the Verizon relationship is something we need to look long-term strategically, and we are very optimistic on our ability to further grow within Verizon.
Nihal Chokshi
Okay. Just to be clear, when I was talking about the tax rate, my impression is that, you know, when you get an incremental subscriber through an existing CSP, it's usually because that CSP has signed up a new subscriber. It's at that point of sale that the CK has attached most likely occurs. So that's the attach rate that I'm talking about, the attach rate to new subscribers for a given CSP.
Eyal Harari
Yeah, so we see both new attached subscribers. Verizon are reporting growth in their business customers on the fixed wireless service, and we are enjoying this growth. We also have the install base of existing customers with our potential to use our service, and not all the install base is already leveraging that. And we are looking on ways to both capture as much, as big a share as possible from the new subscribers as well as the install base. So in overall, we see more potential to grow them.
Nihal Chokshi
Got it. Okay. And so the bottom line is that the attach rate to new subscribers for the fixed wireless customers of Verizon has stayed relatively steady from the March 2 to June 2.
Eyal Harari
You can say that.
Nihal Chokshi
Okay. All right. Great. And is that in contrast to most of your prior CST launches?
Eyal Harari
No, we see that, you know, it depends on the business model the operator decides to promote the service. Some of them might offer it as a bundle and included as part of the package. So some offer it to everyone and some offer it as an upsell. And if you offer it as an upsell, like Verizon offers it as an incremental service, then It's an opportunity to increase over time. It also depends on the network service that we are connected to. It's different if you are protecting the mobile consumer that already, we know it's a saturated market, everyone has a phone, and you need to find the right timing for engagement with the customer to do this upsell, as opposed to fixed wireless actors that is a new service to the operator, and it's still growing And it's one of the growth engines of many of the carriers, for sure, in North America. And we are attached to a growing service. And by that, we are expecting to grow as part of the natural service growth in the foreseen future.
Nihal Chokshi
Great. And then shifting over to DPI portion of the business, I believe key competitor Sandvine reported significant layoffs. Is this part of the increased pipeline that you're talking about?
Eyal Harari
We are mainly focused on what we do and what we approach with our customers. We know that we have a very competitive product for the smart, for the traffic management and PPI. Overall, we know that this market is a legacy market with a specific customer requirements that we know that there are not so many competitors that can fulfill and we are happy to see more and more requests from customers who we don't know if necessarily come from our competitor situation we mainly focus on our ability to deliver but still we see that there is the demand is still lower than previous years. We are looking to see ways how we can increase our pipeline in this area as well and how we can leverage the short-term opportunity that might be raised due to market dynamics.
Nihal Chokshi
Okay. And so can you give some quantification of how much improved is the pipeline that you're seeing and is it showing up in bookings already?
Eyal Harari
So it's too early to say, and it's not something we are sharing our pipeline information. I would say that it's now being under analysis, and we are looking for the best way to leverage the business potential.
Nihal Chokshi
Okay, great. And then I did notice that you had a relatively large cap tax in the quarter of $1 million relative to prior quarters. Any particular reason to call out for that?
Eyal Harari
The CapEx is a mix of SICA customers that we invest and some CapEx investment into our own environment. Liat, maybe you want to add?
spk00
No, so nothing special. Basically, just additional investment around the business as usual and, as Yael mentioned, SICA.
Nihal Chokshi
Okay. Thank you for addressing all my questions.
Operator
Thank you.
Nihal Chokshi
Yeah.
Operator
If there are any additional questions, please press star one. If you wish to cancel your request, please press star two. Please stand by while we pull for more questions. There are no further questions at this time. This concludes the second quarter 2024 please go. Thank you for calling in.
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