Allot - Q1 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to the Allot conference call to discuss today's announcement, Allot'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.allot.com or call GK Investor Relations. I would now hand over the call to Allot Investor Relations Officer, Mr. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin?

Kenny Green (EK Investor Relations)

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 today are Mr. Eyal Harari, CEO, and Mr. Ziv Leitman, CFO. Following Eyal's prepared remarks, we will then open the call for the question and answer session, and both Eyal 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 statement. This conference call contains projections or other forward-looking statements regarding future events 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.

Eyal Harari (CEO)

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 Allot as the CEO a few weeks ago, and I am super excited to work with the board and the entire leadership team to drive Allot 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, a Nasdaq 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 months, I will be focused on learning about the business and the 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.

Allot made progress in the quarter towards reaching the break-even 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, improved 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, SECaaS, achieve revenues of $3.4 million, up 48% year-over-year.

In March, the SECaaS ARR was $13.7 million, 47% higher than our SECaaS ARR as of March 2023. SECaaS 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 SECaaS 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 operating expense and lower 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 the business to breakeven 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, Allot Smart and Allot Secure. On the Allot Smart front, 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 macroeconomic 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 resources 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, SECaaS revenues continue to grow at a high double-digit rate with a tier one 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 one customers who have launched network-native security services for their customers, including Verizon, Vodafone, Telefonica, and Hutchison, just to name a few.

This strong customer base is a testament to the quality of our solution and demonstrates the long-term potential to further expand within these customers, as well as additional Tier 1 accounts. I see SECaaS solution as a key potential long-term growth driver and believe we are well positioned with existing customer as well as potential new customers. We are focusing our efforts on our existing SECaaS customers. We believe that more aggressive go-to-market strategy can help them expand their customer base, to whom our services are offered. For new SECaaS 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 Allot Network Secure. The launch is going well, and today Verizon is the largest signed SECaaS opportunity for Allot.

The number of customers continue 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 SECaaS growth engine. We see SECaaS 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 Allot 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 4.5 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. Allot has significant untapped potential, a highly experienced 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. Now, I would like to open the call for Q&A, and Ziv and myself will be available to answer your questions. Operator?

Operator (participant)

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

Eyal Harari (CEO)

Operator, we have a question?

Operator (participant)

Yes. The first question is from Nehal Chokshi of Northland Capital Markets. Please go ahead.

Nehal Sushil Chokshi (Analyst)

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

Eyal Harari (CEO)

Hi, good morning. So as the company already updated as of last year, the decision is to be very focused and selective on the SECaaS business we are pursuing. So we identify a key strategic accounts that we want to work with. Some of them are, of course, our key tier one 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 2024 with the same strategy.

Nehal Sushil Chokshi (Analyst)

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

Eyal Harari (CEO)

So I joined Allot a bit more than two weeks ago, and I'm in this stage, mainly busy on learning and listening to the employees, customers, partners, and establishing my plan moving forward. I came from. I have a lot of experience in the telco industry, and I worked over 20 years with the many Tier 1s globally, and I'm looking to see where we need to focus and adjust in order to make Allot as successful as possible.

As mentioned already in previous calls, we are looking this year to be a turn-on year, turnaround year, and get the company to towards break-even point, allowing us to stabilize the business and align moving forward to a strategic focus that we are now analyzing to make sure that we are using all the potential of the company. 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.

Nehal Sushil Chokshi (Analyst)

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

Eyal Harari (CEO)

So the Smart product line is based on very advanced deep technology that was invested in along the many years and hundreds of R&D man years, and it's very unique and advanced in the market. We feel that the technology we have is advanced and very competitive. While in parallel, 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 the 5G network adoption. I'm confident that the unique technology we have, we can capitalize on our assets.

We are looking to find the right differentiators and use cases that will provide us the advantage over our competitors, 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.

Nehal Sushil Chokshi (Analyst)

Okay. And then you mentioned actually that-

Eyal Harari (CEO)

And Neil-

Nehal Sushil Chokshi (Analyst)

Yes.

Eyal Harari (CEO)

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 SECaaS business. And for instance, this quarter, the SECaaS revenues are 50% higher than the comparable quarter. 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 SECaaS business, while the Smart business will remain stable.

Nehal Sushil Chokshi (Analyst)

Got it. And your SECaaS ARR was up $1 million quarter-over-quarter. A little less than 10%. What was the driver of that sequential increase in your SECaaS ARR?

Eyal Harari (CEO)

So 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 add 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 subscriber in the next quarters.

Nehal Sushil Chokshi (Analyst)

Okay. You mentioned that Verizon is your largest opportunity. Are they also the largest SECaaS ARR contributor?

Eyal Harari (CEO)

Yes. In general, they are definitely our biggest opportunity, as Verizon is a very large CSP with a potential to expand into many services in many areas. We don't detail a per customer ARR, but they are definitely a very important and strategic customer.

Nehal Sushil Chokshi (Analyst)

Okay. All right. Thank you.

Operator (participant)

There are no further questions at this time. Before I hand back the call to Allot, I would like to remind you, the recording of this call will be available from Allot's website at investors.allot.com within the coming hours. Now, I would like to hand back the call to Mr. Kenny Green, Allot's investor relations, to make his concluding statement.

Kenny Green (EK Investor Relations)

Thank you, operator. So over the coming months, we will be organizing calls and meetings for Allot's new management with all our investors. If you're interested in meeting or speaking with us, please feel free to reach out to me or anyone in the Allot investor relations team. On behalf of Allot, I'd like to thank all of you for joining this call and your interest in Allot, and I would 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.