Allot - Earnings Call - Q2 2025

Transcript

Speaker 4

Good day to all of you and welcome to Allot's conference call to discuss its financial results for the second quarter of 2025. I would like to thank Allot Management for hosting this conference call. All participants are at present in a listen-only mode. Following the formal presentation, instructions will be given for the question and answer session. As a reminder, this conference call is being recorded. If you have not received the company's press release, please check the company's website at www.allot.com. With me today on the line are Mr. Eyal Harari, CEO, and Ms. Liat Nahum, CFO. 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 the financial highlights, and net risks, including those we typically discuss in the conference call, in today's earnings press release. Before we start, I would like to point out the following safe harbor statement. This conference call may contain projections or other forward-looking statements regarding future events or the future performance of the company. Those statements are only projections, 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 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.

Also, the financial tables on results in this call will be presented mainly on a non-GAAP basis. Allot believes that these non-GAAP financial measures provide more consistent and comparable 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 includes the GAAP to non-GAAP reconciliation tables. With that, I would now like to hand the call over to Eyal Harari, CEO. Eyal, please go ahead.

Speaker 0

Thank you, Kenny. We are exceptionally pleased with our second quarter 2025 results from both a financial and strategic perspective. Most notable was the accelerated and very strong performance of our SIKA Gold section. SIKA's AARL was up 73% year over year. We ended the quarter at $25.2 million AARL. SIKA has contributed over a quarter of our revenues for the first time, and in line with our strategy, it is becoming a sizable and increasing portion of our overall revenue with each passing quarter. We also reported a 9% year-over-year overall revenue growth with improved margins, growth in profitability, and solid operating tax generation. In the quarter, the highly successful launch of Horizon Business View mobile offering, My Business Plan, contributed meaningfully to our results. Toward the end of June, we significantly strengthened our balance sheet.

We completed a share offering, and combined with our positive operating cash flow, we ended the quarter with over $72 million in net cash and equivalents and no debt. We have a strong balance sheet and expect to continue generating positive operating cash flow. We are executing well on our strategies and are driving sustainable profitable growth. Focusing on some of the trends within the business, I first want to discuss our SIKA's growth engine, the cybersecurity as a service business. We continue to see strong momentum and growing traction amongst major telcos for our Security-as-a-Service solution. We are increasingly seeing the fruits of our long-term investment in this solution. As you may remember, in February, we signed our largest SIKA deal to date with Horizon Business, a division of one of the largest and most prestigious wireless providers in the U.S. and in the world.

In April, Horizon launched its new service called My Business Plan, a customizable wireless plan geared towards small and mid-sized businesses. The service includes, as a default option, mobile internet security, which is built on Allot's cybersecurity protection. Reportedly, customers automatically opt in to this service at the start, and Allot gets paid by Horizon for each account that is connected to the My Business Plan service. This new service is being actively marketed to Horizon Business mobile customers, which is over 30 million subscribers. It is also an attractive flexible package for new potential business subscribers. This exciting land and expand win represents a significant targeted addressable market and long-term growth opportunity for Allot. Horizon Business reported that the new offerings are resonating well with customers and driving strong sales momentum. We believe the long-term potential for Allot from this deal is substantial.

A few weeks ago, we announced Play, a leading converged operator in Poland, selected our DNS Secure solution to provide cybersecurity protection services to its six broadband customers. This win brings additional services to our existing network-based solution that Play deployed back in 2021 for their mobile customers. Play's six broadband customers and mobile customers now have a unified converged user experience using Allot's cybersecurity protection. We also announced earlier this week that MassMobile, a telecom operator in Panama, selected Allot Network Secure to provide its mobile and six customers with network-native cybersecurity protection. Our SIKA strategy is built on the following four growth drivers. First, increasing the number of CSPs that we work with to launch cybersecurity services. Strong existing relationships include Horizon Business, Vodafone, O2, and Telefónica, just to name a few.

We continue to see the potential to add new SIKA telcos and CSP customers such as MassMobile, which we just announced, and we have a solid pipeline of opportunities. After launch, we aim to expand our services to new end-user segments at the CSP, for example, expanding from mobile to broadband customers with Play being the most recent example. We also aim to increase the penetration of our cybersecurity protection services among our customers and users. We have a strong group of telecom customers, and we are working closely with them to ensure that their customers, the end users, know about the solution and understand the significant added benefit they will get at only a marginal increase to their monthly bill. Finally, we look to upsell and cross-sell new applications and products to the CSP.

Our WorkNet solution is an example of a new product which has a significant value added to the CSPs because it ensures that the end users can remain connected and protected by the CSP even when the end user is not on their network. Because we already have a strong working relationship with CSPs and telcos, the sales cycle for these types of new add-on services is significantly reduced. The strong launch at Horizon Business, together with the growing traction among our customers that have recently launched our SIKA offering, gives us improved visibility and makes us increasingly comfortable that we will exceed our regional SIKA growth estimates. As such, this quarter, we increase our SIKA growth outlook. We expect 2025 year-end SIKA AARL to show an exceptionally strong year-over-year growth in a range of 55% to 60%.

Our SMART product for network intelligence remains an important part of the overall Allot Ltd. business. Built on decades of Allot Ltd. experience, offering best-in-class technology and innovation, this solution continues to be a market-leading offering. Today, our SMART product is being sold as part of our unified security-first platform. In the past few months, we have signed several multimillion-dollar agreements with new customers, as well as a very significant agreement with the Tier 1 telco, all of which will contribute significantly to our overall future growth. Our new integrated solution is enabling us to generate increased demand in 2025, and we are seeing a higher backlog and improved visibility. I wanted to discuss the landmark deal that we announced a few weeks ago. This new business win was with the Tier 1 telco operator in EMEA.

It is a pivotal win for Allot Ltd., the largest in five years, and it validates our ability to expand our security and network intelligence footprint. The agreement is valued in the range of tens of millions of dollars. The project will be executed over 2023 to 2027. It includes a long-term recurring revenue tail, maintenance, and support revenues. We see additional growth potential for further projects at this customer over the coming years. The integrated solution will offer both our network intelligence and cybersecurity solutions for this customer's converged 4G and 5G mobile network and six fiber networks. This solution will be delivered via a unified service gateway based on our recently launched SD-SERVICE3 platform. We launched this new service gateway at the end of last year. It is geared toward top-tier telco operators because it offers unparalleled visibility into network traffic under one unified platform.

This partnership is highly valuable for Allot Ltd., not only from a financial perspective, but also because it brings us a major new telco customer with a large subscriber base. It also allows us to demonstrate the value of our unique technological advantages and core expertise for major telco players in both cybersecurity and network intelligence. We continue to see further interest in the SD-SERVICE3 platform, and it is another contributing factor to our current strong pipeline. We see interest from both existing customers that we want to upgrade to our new platform, as well as new customers that appreciate the value added that this new product can bring them. Towards the end of June, we successfully completed a follow-on share offering, receiving strong support from the capital markets and our largest shareholder, Lynrock Lake.

The proceeds were used to pay down our convertible debt, as well as for general corporate purposes and to strengthen our balance sheet. We are very happy with the strong vote of confidence we have received from the capital markets. The offering added multiple new supportive and long-term focused institutional investors to our older base. We also gained support from a number of leading Wall Street investment banks that we continue to work with to bring additional interest to our company. In particular, I want to thank the Lynrock team for their ongoing and meaningful long-term support of our company. Given our strong performance in the first half of 2025, as well as our improved visibility and growing backlog into the second half, we are introducing revenue guidance for the full year, and we are also increasing our SIKA's growth expectation.

For 2025, we expect overall revenues of between $98 million to $102 million, positioning us for a year of profitable growth. As I mentioned earlier, we increase our 2025 SIKA's ARR growth expectations to between 55% and 60%. In summary, we are exceptionally happy with our second quarter 2025 performance and continue strong momentum into the second half of the year. We showed significant success with the new contract with the major telco player, worth tens of millions of dollars, which will be executed over 2026 and 2027. We are especially excited about the increasing traction and the very strong growth of our SIKA solution. Looking ahead, our visibility has improved, our backlog is strong, and our pipeline continues to be broad with many opportunities. I'm increasingly optimistic about our long-term future and looking to continue progressing on our security-first strategy.

Now, I would like to hand over to our CFO, Liat Nahum, for the financial summary. Liat, please go ahead.

Speaker 2

Thanks, Eyal. We reported revenue of $24.1 million in the quarter, up 9% year-over-year. Revenue from our growth engine, SIKA, was $6.4 million in the quarter, in line with our expectations and up 73% year-over-year, comprising 27% of our revenue in the quarter. Our SIKA's annual recurring revenue ARR as of June 2025 was $25.2 million. I will now discuss the non-GAAP financial measures. For all financial results, including the GAAP financial measures and other various breakdowns of our revenue, please refer to the table in our results press release. Our non-GAAP gross margin in the quarter was 17.4% compared with 70.6% in the second quarter of last year. Non-GAAP operating expenses for the quarter were $16.4 million, 2% below $16.7 million in the second quarter of last year. Allot Ltd. had 487 full-time employees as of June 2025.

We expect this to gradually increase towards 500 full-time employees by year-end. We reported a non-GAAP operating income of $1.2 million, compared with the non-GAAP operating loss of $1 million in the second quarter of last year. In terms of non-GAAP net profit, we reported $1.5 million in the quarter, or a profit of $0.03 per diluted share, as compared with the non-GAAP net loss of $0.8 million, or a loss of $0.02 per share in the second quarter of last year. During the quarter, we completed a $46 million follow-on share offering, of which $40 million in gross proceeds were received before the end of the quarter, and the remaining $6 million in gross proceeds were received after the close of the quarter.

We used $31.4 million to repay the convertible notes that our larger investor, Lynrock Lake, held, and they converted the remaining $8.6 million of debt to 1.25 million Allot Ltd. shares. Our shares outstanding following the offering and the conversion of the convertible notes were 47.2 million shares outstanding. We reported positive operating cash flow in the second quarter of $4.4 million. Cash, bank deposit, and investments as of June 30, 2025, totaled $72 million versus $69 million as of December 31, 2024. As part of the follow-on share offering, we repaid the $40 million convertible notes, and as of June 30, 2025, the company has no debt. That ends my summary. Eyal and I are now happy to take your questions.

Speaker 4

Okay. We'll now take questions. If you have a question, please press star one on your phone. If you want to be removed from the queue, please press star two. We will now call for questions. Our first question is going to be from Shaul Eyal of CD Town. Shaul, you may go ahead.

Speaker 3

Thank you. Hi. Good afternoon. Good morning. Eyal and Liat, congrats on the results and outlook. Eyal, wondering what has been driving the strong ARR growth metrics? Maybe for Liat, healthy performance on the gross margins front, what has been driving that improved performance across the board? Thank you.

Speaker 0

Thank you, Shaul. We are happy with the results of the quarter, and definitely, the SIKA's AARL growth is at 4% high this quarter. As mentioned in the prepared remarks, the growth in the AARL is driven both by new customers, new services we launch with existing customers, increased adoption within the services already launched, and upsell of new applications. In the recent couple of quarters, we announced about Vodafone's expansion on specific Horizon My Business Plan new service plans. They are starting to contribute to AARL, and with other increased integration with other accounts, we see a very significant growth this quarter. Liat, maybe you want to comment on the gross margin side?

Speaker 2

Yes, sure. In general, we see improvement in our gross margin in the last few quarters. As SIKA is becoming a higher percentage of our revenue, it is driving a higher gross margin. In addition, the revenue mix, which we had in the second quarter, was in favor of more software expansion deals, which contributed to a higher gross margin. As we stated before, our gross margin is dependent on the revenue mix, and going forward, we do expect to remain in the range of 71% to 73% gross margin.

Speaker 4

Many thanks. Thanks, Shaul. Our next question will be from Jonathan Frank Ho of William Blair. Jonathan, you may go ahead and ask your questions.

Speaker 3

Hi. Good morning and congratulations on the strong results. Can you give us a little bit more color on the My Business Plan opportunity and how you expect that to potentially ramp over time?

Speaker 0

Thank you, Jonathan. As I shared last quarter, Horizon Business decided to launch a new flagship My Business Plan. This is their main service offering for their business customers, focused on the SMB customers, mobile business phones. As part of the launch of this add-on, they decided to offer Allot's cybersecurity protection as a default add-on to the package. They see cybersecurity as very important for business customers, and as part of a value added to customers to move to this new plan, they decided to bundle our solution with it as a default. Horizon Business is now promoting their My Business Plan with a lot of focus and capacity. They were mentioning this successful launch in their earlier call, and we are actually getting subscribers here for any new subscriber that is joining the plan.

From past experience with other carriers, we know that it takes between two to three years to get into the pit. We are just now in one quarter to the penetration of this service. Obviously, now it moved from zero to starting to where they are at, so growth is affecting a lot. We expect the growth to continue in the next two to three years as more carriers, more customers are moving to this My Business Plan. This is what we expect. Again, it depends on the Horizon Business go-to-market approach. It's not something they are committing to us. It's not something we have full visibility, but based on what we see from other carriers in similar cases. Now we have one quarter to go, but we expect two to three years' growth from this service launch.

Speaker 3

Excellent. Maybe this is a follow-up. Can you talk a little bit about the large European telecom deal that you signed or a CSP deal that you signed? Is this mostly SIKA, or is there any sort of a networking component as well? Any color would be helpful. Thank you.

Speaker 0

Sure. What we call the landmark deal of tens of millions of dollars we issued at Eyal a few weeks ago is a deal around our network intelligence product line, the SMART. It's not part of our SIKA's. This win is for a leading CSP in EMEA, which decided to purchase our SD-SERVICE3 platform to cover both mobile and fixed networks with our solution. The SMART product line includes both our traffic management capabilities, which allow them to better manage the performance of their network, but it also includes some of our cybersecurity engines to protect their network. This is a CapEx deal that, as mentioned before, is expected to be executed in the coming years, and we expect most of the revenue to come in 2026 and 2027. As a CapEx deal, this should then be providing additional services, mainly support and maintenance, during the following years.

Speaker 3

Great. Thank you.

Speaker 0

Thank you, Jonathan.

Speaker 4

Thanks, Jonathan. Thank you. Our next question will be from Nehal Sushil Chokshi of Northern Capital Markets. Nehal, please go ahead.

Speaker 3

Thank you. Congrats on an excellent quarter. Really, really strong CSPs ARR. That's fantastic to see. I just want to point out that this is the second quarter in a row of record incremental ARR, this quarter being $4 million versus $3 million in the March quarter. That's fantastic. Just to be clear, that increase in the record incremental ARR for the June quarter, it sounds like that is being driven by a full quarter of Horizon Business My Business Plan being available, or is that due to increased attach rates, as Horizon pushes the My Business Plan harder?

Speaker 0

Thank you, Nehal. The growth is coming mainly from a full quarter of promotion of the My Business Plan. The service was launched around mid-April, so it's the first time we see the contribution of the My Business Plan to our AARL growth. The growth is also coming from the Vodafone launch we announced a few quarters ago that now is coming to full capacity and contributes to the AARL. As you recall, Vodafone was a security customer but was not using the SIKA service. During the last few quarters, we migrated them to the new solution, and now they are contributing into a fuller extent of the AARL. The mix of the two is what helps us to drive this exceptional growth this quarter.

Speaker 3

Got it. It kind of sounds like both of them are kind of equal contributors to the increase in the incremental ARR. Is that?

Speaker 0

Both of them are significantly contributing to the AAR, yes.

Speaker 3

Okay. Fantastic. Can you comment on what has been the profile of attach rates as users within the Horizon Business Mobile and users within Vodafone come up for potential device renewal, which is often the opportunity to attach their SIKA service? Are you seeing any sort of change in those attach rates?

Speaker 0

With Vodafone, it's a mature customer. For them, it's not a new service. They were offering network security based on our previous platform for years. This is a more stable customer. For the My Business, as this is offered by default for everyone that is moving to join the My Business plan, obviously, the attach rates are exceptionally high. You can decide to opt out if you really want to, but it's included in the bundle. It's not going to save you any cost. Very few are choosing that. It's really a very, very high attach rate, close to 100%, something in the 90s. It's mainly now about how many Horizon customers are joining to the My Business. They have their own marketing campaigns in order to move their business customers.

They have more than 30 million business customers, and they have their campaigns, how and when to migrate them to the My Business. Obviously, changing devices, new customers that are joining in are opportunities for touch points for them with the end customer and offer this service. As I answered before, we expect it to be a process of two to three years in order to grow to the maximum penetration of this service as these processes take time. For example, devices you change every two to three years, and then you conclude the cycle of migration. Those that join My Business, we see very, very high rates of attachment because it's added by default.

Speaker 3

Great. Fantastic. Moving to the landmark deal that you announced this quarter, you've characterized the pipeline as very strong, I think. Can you, presumably, you know that landmark deal was in the pipeline a quarter ago, and so that must have represented a significant portion of the pipeline a quarter ago. Are you saying that your pipeline has actually increased relative to the quarter despite this landmark deal exiting the pipeline successfully?

Speaker 0

Yes. We finished this phone pipeline despite the orders that were very high this quarter. Obviously, we did the tens of millions of dollar deals. As mentioned also before, we have additional multimillion-dollar opportunities, some of them even eight-digit opportunities, with a good mix of existing and new customers. We're still very keen that we have good visibility to continue to exit as well on the small quarter plan.

Speaker 3

Okay. Does this landmark deal show up in the program immediately, or how is that going to show up in the balance sheet, if at all?

Speaker 2

In general, as Eyal stated, this is a deal that will be recognized as a perfect start during 2026, 2027. Therefore, there will be some deferred revenue, but of course, not all. It's a five-year deal. Overall, not everything is invoiced and going to be fed, but over time, as all deals that are project-based, we'll see some increase around the deferred revenue, and then 15 is into the revenue. Overall, during 2026, 2027, this is the trend that you will see.

Speaker 3

What about remaining performance obligations? Is that a metric that you've been reporting in your time queue, and we'll follow up on that then?

Speaker 2

Yes. As Eyal stated, there is also recurring revenue from this deal. In any network intelligence deal, there is a maintenance and support cost, which is also committed. Going forward, you will see that after we will, of course, execute this whole product.

Speaker 3

Okay, great. Thank you.

Speaker 4

Thanks, Nehal. Our next question is going to be from Matthew Ryan Calitri of Needham. Matt, you may go ahead.

Speaker 1

Great. Hey, this is Matthew Ryan Calitri over at Needham. Thank you for taking our question. I'll echo how great to see the continued momentum at this quarter and the raise to your ARR growth expectations. From a go-to-market perspective, can you provide some color on how you're working with providers to ensure effective marketing, and what are you doing internally to convert pipelines?

Speaker 0

Thank you, Matt. Working with our existing customers for SIKA is mainly about sharing with them best practices from other carriers we work with. We are trying to work closely with our customers and see what works for them and what doesn't work for them. When we see in other countries, for example, if we see something that works well in the UK, we share this success story with Horizon for the U.S. If we see something works well for Horizon U.S., we might share it with Play in Poland. They really appreciate it as they always like to see more ideas and innovation to drive their services. Mostly, they are relying on their own teams. We are working with large carriers, C1 carriers that usually have a lot of resources and a lot of knowledge and a lot of know-how. They know how to promote their services.

We are mainly there to support them and provide our expertise and any materials that can be leveraged in the campaigns, and as mentioned before, some success stories from other carriers. For new customers, this is working on business development in order to create new partnerships. We have dedicated sales executives that are working around targeted accounts. We identify countries and carriers that we feel appreciate cybersecurity, and they have a need for a solution like ours. They have a large enough call base and ability to charge for this service. We have targeted the go-to-market approach. This is the reason we are expanding our sales team to further engage with additional carriers and build more partnerships. Once we create new partnerships with the carrier, we are actually expanding our addressable market to their end customers.

We have a mix of teams that are doing more of the customer success, which are making sure that the current customers are happy, working on expansions, and working on best practices for their go-to-market. With new customers, it's more of a hunting, going after accounts with dedicated sales teams.

Speaker 3

That's great to hear and makes a ton of sense. Are you seeing any macro impact on sales cycles? More specifically, how are the multimillion-dollar deals at the European telcos progressing through the ties compared to expectations?

Speaker 0

Telco deals, and specifically large deals in the tens of million size, are always taking time. Sales cycles in telco can vary between 12 months to 24 and sometimes even longer, and this is expected. Overall, we don't see any macro influence. The telco market in the last few years is quite stable. We see overall good progress with 5G, which drives more effort by carriers. In specific, we see that the demand we are receiving is coming from the new platform we launched, SD-SERVICE3, which is unparalleled in its capacity and capabilities. The combined feature set of traffic management with cybersecurity as part of our security-first strategy that we offer is something customers really like. This is really what's driving the demand. Sales cycles are long, and the good side is we see the pipeline building up, and we can track the progress with that.

There is still always with large deals, it's zero-one. You either win the deal or lose the deal, and this could be influencing the performance over time. Since the beginning of the year, we're seeing good execution both with existing customers and new customers. We mentioned multiple deals of multiple million dollars, and this landmark deal that we were very happy to win. We have many more opportunities in the pipeline. We offer extras as well and some additional good news.

Speaker 3

Awesome. Thank you so much.

Speaker 4

Thanks, Matt. It looks like there are no more questions in the queue, so that will end our question and answer session. In the next few hours, this call will be made available on Allot's investor relations website. I would like to thank everyone for joining this call today and especially to Allot Management for hosting this call. With that, we end our call. Thank you very much.