Allot - Q3 2022

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to Allot's third quarter 2022 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 received by now the company's press release. If you have not received it, please contact Allot's Investor Relations team at EK Global Investor Relations at 1-212-378-8040, or view it in the news sections on the company's website at allot.com. I would now like to hand the call over to Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin, please?

Kenny Green (Co-Founder and Director)

Thank you, operator. Welcome to Allot's third quarter 2022 conference call. I would like to welcome all of you to this conference call, and I'd like to thank Allot's management for hosting this call. With us on the line 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 this quarter. We will then open the call for the question and answer session, where both Erez and Ziv will be available to answer those questions. You can all find the financial results and metrics, including those we typically discuss on this 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 Allot cannot guarantee that they will, in fact, occur. Allot does not assume any obligation to update that information. Actual results for events may differ materially from those projected, including as a result of 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. With that, I would now like to hand the call over to Erez Antebi. Erez, please go ahead.

Erez Antebi (President and CEO)

Thank you, Kenny. I'd like to welcome all of you to our conference call, and thank you for joining us today. Our third quarter revenues reached $25 million, 35% lower than the comparable revenues last year. In September 2022, our CCaaS ARR was $6.9 million, same as June 2022. This was a challenging quarter for us. While these are the results we anticipated for the quarter, I am not pleased with them. As we look into the fourth quarter and into 2023, I definitely expect to see significant improvement, and I remain optimistic on the fundamentals and the 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.

Before discussing in detail our different product lines, I would like to address some corporate news I think are important. Today, we issued a press release announcing our deal with Verizon Business to provide network-based security to Verizon SMB, small and medium businesses, and IoT, Internet of Things customers. I believe this is the most significant SECaaS contract Allot has signed to date, and I am very proud that Allot has been chosen by Verizon to be the technology solution behind their intended security service. In another press release, which made public today, we announced that Allot board of directors has decided to nominate Cynthia L. Paul to serve as a director on our board, subject to shareholder approval. I am very pleased that Ms. Paul accepted our board's nomination.

Having known her over the last years, I believe her capabilities, vast experience, and business expertise will greatly benefit Allot, and I look forward to her joining our board. I would like to also mention a couple of elements affecting us company-wide that I believe we should be aware of. One, as anticipated in our previous earnings call, in early September, we implemented some cost-cutting measures that also included reduction of our workforce. We intend to continue with the policy of tight control of our expenses in order to significantly reduce our loss in 2023, and reach profitability in 2024. Two, exchange rates have fluctuated significantly during this year. A significant part of our revenue is in non-US dollars, and the depreciation compared to the US dollar had an impact on our revenues as well.

Future fluctuations in exchange rates are, of course, hard to predict and may have impact on us going forward as well. Now I would like to move to discuss our different product lines. I would like to start by discussing our traffic management and analytics business addressed by our Allot Smart 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, or terrorism. We are seeing growing interest in our products in this area as well.

Many CSPs today are reexamining the composition of their. This may be because they are moving to 5G or because they need to replace end-of-life products or other reasons. As they do so, we see multiple opportunities globally where CSPs currently using our competitor's product 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 won before. We are also investing in new ways to help wireless operators manage congestions on their networks and save on the cost of expansions.

I think we have developed some very interesting capabilities in this area with much value for wireless operators, and I will be happy to share with you more details in the future as we progress and as we are prepared to make this public. In the previous earnings call, I discussed several sizable deals that we expected to book and be able to partially deliver in the second and third quarters, and that were delayed. We did not lose any of them, and we believe they will close during the coming months, but we cannot be assured of that.

As I mentioned in the previous earnings call, given the delay in closing the deals and uncertainty regarding the exact time when we will close the deal and the exact terms required to recognize revenue, we cannot be assured that the revenues we expected from them in 2022 will be recognized this year. Looking at the DPI market in general, we see many opportunities and an overall solid DPI market. Many of the more significant opportunities we see are either new customers or competitor replacement opportunities. However, these opportunities are larger niche and make revenues more concentrated and lumpier. We see that it's taking us longer to close DPI deals than it took in the past. We continue to analyze the reasons for these delays. In part, this may be due to the larger size of the deals.

It may also be related to the general economic environment, and we do not know if this will be a continuing trend. I am fully aware of the challenges we are facing. However, it is becoming much clearer to me, the challenge on forecasting the timing rather than on the market size or our share of the market. We have a very strong pipeline of deals expected to close in the coming months. We are competing on or negotiating multiple large deals, and forecasting their timing is challenging. I am convinced that the DPI market is solid and our competitive position is strong. I want to turn your attention now to what we see in our cybersecurity business and how the market is developing. As I've said in previous calls, Allot 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 SECaaS. As we look at the market, we see that the direction and momentum of operators interested to launch network-based security services continues to be very positive. The various operators provide services that are on par on speed, coverage, and reliability. As they look for differentiation, network-based security is emerging as an important element. This is even more important since network security is a service native to the operator's network and is directly coupled to the access network itself. There are several tier one 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. As we announced earlier, we recently signed a SECaaS deal with Verizon.

This deal is intended to place Allot NetworkSecure in the Verizon network and provide an embedded security solution that will include fixed wireless SMB customers and Internet of Things connections. As Verizon said in their quote, "This offering paves the way for a network-based portfolio that will simplify their customer experience and help provide their customers peace of mind." Allot has been working with Verizon both technically and commercially on this opportunity for quite a while. Our NetworkSecure platform has already been installed in Verizon labs for quite some time and has been vigorously tested for several use cases. This contract is the most meaningful SECaaS contract Allot has signed to date.

I view Verizon's choice of Allot to provide cybersecurity protection for their SMB customers as a testimony to the strength of our solution, and I am extremely proud to have been selected by Verizon. Allot was selected here to provide our solution only for a very specific subset of Verizon customers. We are, of course, hopeful that perhaps sometimes in the future, after we have proven ourselves in practice, there may perhaps be opportunities to address some other segments with our offering, but we cannot be assured of that. In our previous call, I mentioned that we had signed deals with three North American and in contract negotiation with the fourth. For sake of clarity, Verizon is this fourth operator. North America is the largest telecom market globally.

Allot was traditionally much stronger in other regions, and the advancements we are making with North American operators represent a significant change for Allot and will be key to generating SECaaS revenues in 2023 and beyond. While the Verizon deal is extremely important on its own, I am confident that other CSPs globally will consider Verizon's decision when they make their own decisions on providing network-based security to their customers. In addition, negotiations with several other operators in North America, Latin America, EMEA, and APAC, we were awarded deals but have not signed the contracts yet. These potential additional contracts represent a projected MAR of $ dozens of millions. On top of that, we are also in serious discussions with additional operators where we have not been awarded yet. Our main challenge today in our SECaaS 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. During the year, we increased our efforts to assist in those processes, and in some cases, we managed to help and expedite the process. As discussed in the previous earnings call, we unfortunately concluded that while in some cases we managed to speed up things, overall, our ability to positively impact the launch date is very limited. As a result, we changed our approach, and we will focus our future efforts on speeding up launches mainly on few targeted, larger opportunities that we believe can contribute significantly to revenues.

I will talk more about this and other changes we are making in our focus and how we run the business a bit differently. During the third quarter, no CSP launched a new CCaaS service with our technology. This is obviously disappointing. As of September 30, 2022, of the 25 signed customers, only 11 launched commercially. Most of them are relatively small operators, and most of them launched the service only to a portion of their subscriber base. We do, however, expect 1 or 2 additional launches before the end of 2022. Our CCaaS revenues for the third quarter were $1.7 million, and the ARR at the end of the third quarter was $6.9 million.

While the number of subscribers grew during the third quarter, this revenue growth was offset by negative impact of currency exchange rates, leading to flat quarter-over-quarter CCaaS revenues and ARR. In the fourth quarter, we expect continued growth from existing customers and some modest revenues from new networks. Therefore, we expect CCaaS revenues to be higher. A major challenge we have is the marketing aggressiveness of the CSP when launching the CCaaS 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, et cetera. The degree to which a CSP will be aggressive in their go-to-market approach is primarily determined by the perceived value of the service. Unfortunately, we have learned that merely adding revenues to the CSP is not a strong enough motivation.

CSPs have multiple value-added services, and these typically have low penetration rates, which CSPs seem to be content with. If security is perceived as another value-added service, the expectation of it will be low, the targets given to the working level and the CSP will be low, and the results will be low. This can also result in the CSP not prioritizing the launch of the service. On the other hand, when an operator sees security as presenting a strategic value, the motivation and results change.

What is strategic will change from one operator to another, and this can include elements such as differentiation in the market compared to competitors or motivation to transition customers from 4G legacy service to a 5G service, or overall brand perception of the operator as a "secure broadband provider," or motivation to transition a customer from a low-tariff plan to a more expensive one, and others. 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 important to our long-term success. Bringing all the above into account and in line with what we discussed in the previous earnings call, we changed certain elements of our approach to the market.

1, going forward, we are shifting our focus from “land grab” for market share and number of CSPs to CSPs with revenue potential in the next couple of years. This means we will focus on CSPs that have a significant revenue potential, even at the expense of market share. I can share with you that during the third quarter, we decided not to close with a certain CSP where we were awarded because we felt the potential revenues were too small compared to the commitment we needed to make. 2, we will push very hard to have CSPs we engage with contractually commit to an aggressive go-to market.

In fact, we are discussing today with multiple CSPs, including tier ones, the possibility of launching the security service as part of their regular price plans to a whole segment of customers, such as all premium plans, for example, in exchange for a lower per sub price to Allot. As CSPs try to differentiate themselves and as they understand the importance of network-based security, we find some of them very receptive to the idea. If implemented, it will mean many more customers much faster, without necessarily reducing the overall future revenue potential of that CSP to Allot. Of course, we will not always be able to get such a commitment, and we remain pragmatic as we may have to agree to a different approach depending on the CSP.

3, 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 will not. I expect these changes will have an impact also on the number of new CSPs we eventually sign up. However, it will allow us to focus our resources on the smaller number of CSPs that see more strategic value in the CCaaS service, and it will ultimately drive our revenues. As I look at the deals we have done and those that are in the pipeline, I am convinced that the size of this market remains huge.

While I'm disappointed with the current pace at which our revenues are materializing, I remain very confident in our ability to achieve our long-term goals. In the previous call, I spoke about the challenge of integrating our HomeSecure Router agent in specific routers and our efforts to simplify this process and therefore help expedite launches of HomeSecure solutions with CSPs. As part of this continuing effort, we announced recently that Allot has joined forces with Vantiva, formerly Technicolor, to become part of their ecosystem and pre-integrate our solution on Vantiva home and SOHO routers. I think this is an important step forward to make integration and launches easier for CSPs, and we are pursuing additional steps to make such integrations even easier. Looking ahead, I want to summarize our expectations for 2022.

For the remainder of the year, the CCaaS revenues and ARR are composed at this point almost entirely of the projected performance of the 11 networks we launched, plus some projected revenue of new networks yet to be launched. We continue to forecast CCaaS revenues for the whole of 2022 to be approximately $7 million, and our December 2022 ARR to be approximately $9 million, with the main risk being possible exchange rate changes and new launches. Despite the change in our approach to future CCaaS deals, as I explained before, we expect to achieve approximately $180 million of new MRR in 2022. It is important to know that while MRR is a good indicator for long-term market opportunity, it is not a good predictor for short-term revenue.

I would now like to say a few words on our expectation for the company's overall performance in 2022. We still expect the full year 2022 revenues of $125 million-$130 million, trending towards the lower end. Our forecast for support maintenance revenues remains at $41 million-$43 million. As I stated, we have already implemented some cost-cutting measures, and as a result, we expect our OpEx for the year to be between $109 million and $111 million. We continue to expect our loss for the full year 2022 to be between $23 million and $24 million. Likewise, we believe our net cash reduction for the year will also be as previously guided between $35 million-$38 million.

While 2023 guidance will be provided in our February 2023 earnings call, I do want to give you at this time a peek into the direction we are looking at. In 2023, we currently expect growth in both CapEx revenues and CCaaS revenues. We currently expect total revenue growth to be close to 10% compared to 2022. We remain committed to reach profitability for the full year 2024. This will be achieved by some revenue growth, mainly on CSPs business, but also through tight expense control. Thus, we expect loss in 2023 to be significantly lower than in 2022. I believe we are on track to achieve this. I am fully aware of the challenges that we face. I believe our DPI business is solid and will continue as such.

Our SECaaS business is where we see our significant future growth. While our SECaaS revenues are happening later than we would like and later than we expected, I remain convinced of the very large potential of this business, and I'm confident that it will grow very significantly in the coming years. I have full faith in our company, in our team and our products, and I believe the actions we are taking make these goals achievable. Now I would like to open the call for questions and answers, and Ziv and myself will be available to take your questions. Operator?

Operator (participant)

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you have a question, please press star one. If you wish to cancel your request, please press star two. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. The first question is from Eric Martinuzzi of Lake Street Capital Markets. Please go ahead.

Eric Martinuzzi (Senior Research Analyst)

Hey, congratulations on the Verizon contract. It's definitely a high-profile customer. Wanted to get a feel for their potential impact, not necessarily in 2022, but do you have any numbers you can give us for their revenue impact in 2023 or beyond?

Erez Antebi (President and CEO)

Unfortunately not, Eric, as much as I would like to. You know, it's a significant operator, and we hope for a good and positive impact. I can't share any numbers then or commit to them.

Eric Martinuzzi (Senior Research Analyst)

Okay. You did give a little bit of color. Well, let's just talk about 2023 and the opportunity for a 10% growth there. Obviously, 2022 is gonna be a down year for you. As we look to a return to potential double-digit growth in 2023, where is that recovery coming from?

Erez Antebi (President and CEO)

It's coming, I think, from both areas of the business, some from DPI and some from the SECaaS. I expect both of them to grow next year. Now, to what degree and so on, that it's premature for me to estimate that.

Eric Martinuzzi (Senior Research Analyst)

Okay. You know, last quarter, the disappointment around the CapEx deal delays really took the wind out of 2022. It doesn't sound like any of those delayed transactions have closed. Do I understand that you don't expect them to close in 2022, or the current guidance doesn't anticipate them to close in 2022?

Erez Antebi (President and CEO)

Right now, you know, I would like to close them this year. They may or may not close this year, but I've been, as you know and understand, incorrect in forecasting when they will close previously, hence the delay. I'm much more cautious at this point. I'm not gonna commit that they will close this year. We know, but I think we see our path to the revenue points that we gave.

Eric Martinuzzi (Senior Research Analyst)

The guidance doesn't anticipate them closing, is what you're saying, 2022.

Erez Antebi (President and CEO)

Like many things in the guidance, you know, there are several options that will happen. Some of them will happen, some of them won't. We take that into account when we build our forecast.

Eric Martinuzzi (Senior Research Analyst)

Okay. Last question from me. On the operating expense side, you are now talking about a range of $109-$111 for 2022. Where do you expect the operating expenses next year?

Erez Antebi (President and CEO)

I think that's probably better left for a more detailed guidance on 2023 when we discuss it in February. Ziv, you may wanna have additional comment on that.

Ziv Leitman (CFO)

Unfortunately, we cannot relate to a specific number since we didn't provide guidance for next year. We just said that the loss will be significantly lower than this year, and that the revenues will grow roughly 10%. If we take, let's assume that this year the revenues will be $125, which means that the revenues next year would be $137.5, if I'm not mistaken, by the calculations. I cannot relate to specific number of the OpEx.

Eric Martinuzzi (Senior Research Analyst)

Well, given that you've guided the OpEx down and you're comfortable talking about a double-digit growth rate, can we assume that there's leverage on that growth, that we won't be growing OpEx by the amount that we're growing revenue?

Erez Antebi (President and CEO)

No, we said.

Ziv Leitman (CFO)

By definition, if we say that the loss will be lower, so it means that the expenses should cannot grow at the same percentage of the revenues.

Erez Antebi (President and CEO)

Eric, you know, I'd like to. I agree with what Ziv said, of course, but, you know, I would like to reemphasize again. We're fully committed to becoming profitable full year in 2024. Okay? Now, I'm not saying that each and every quarter, but for the full year of 2024 we will be profitable. The only practical way to reach that is to have a significantly lower loss in 2023. That's what we're going to do.

Eric Martinuzzi (Senior Research Analyst)

Understand. Thanks for taking my questions.

Operator (participant)

The next question is from Nehal Chokshi of Northland Capital. Go ahead.

Nehal Chokshi (Managing Director)

Yep. Thank you, and congratulations on the Verizon deal as well.

Erez Antebi (President and CEO)

Thank you.

Nehal Chokshi (Managing Director)

What are the expectations on Verizon's aggressiveness with the go-to-market with their limited set of Verizon SMB customers that this is initially committed for?

Erez Antebi (President and CEO)

Unfortunately, I think that everything has to do with, say, Verizon intentions on go-to-market, or their timing or anything like that is confidential, competitive information for Verizon, and I cannot relate to any of it.

Nehal Chokshi (Managing Director)

Okay. Does this Verizon deal change how you would assess the network security and network revenue ratio of 5%-8%?

Erez Antebi (President and CEO)

I'm not sure I followed the question. Could you repeat that, please?

Nehal Chokshi (Managing Director)

Yeah. Okay. I think from your Investor Day from, like, two years ago, you had presented a top-down view of your opportunity. One of the steps was the amount of revenue of 5%-8% intensity of network security and network revenue. My question is that, given this contract with a large provider, does it change your view on that, network security, network revenue ratio, that top-down view that you'd presented a couple years ago?

Erez Antebi (President and CEO)

I think at the top-down view, it shouldn't change it, not necessarily because it's doing better or worse or exactly on that number, but because, again, it's one deal with a single operator for a specific subsegment or subset of their customers. I don't see this. Overall, does it change my view of the overall market? I think not.

Nehal Chokshi (Managing Director)

Okay, very good.

Ziv Leitman (CFO)

Can I-

Nehal Chokshi (Managing Director)

Yes?

Ziv Leitman (CFO)

Nihal.

Nehal Chokshi (Managing Director)

Yes.

Ziv Leitman (CFO)

If I understood your question, you relate to the percentage that we said, how much customers are willing to pay for the service between 5%-8%, right?

Nehal Chokshi (Managing Director)

Correct.

Ziv Leitman (CFO)

It shouldn't be changed because of Verizon. This is on average, how much, according to our experience with many customers, how much they are willing to pay percentage-wise out of the connectivity charge or out of the current output.

Erez Antebi (President and CEO)

Now I see. Thank you, Ziv. I see. I didn't fully appreciate the question. Let me provide the response maybe from a slightly different angle. I talked during this call, I think, said it quite a few times, that we're trying to work with operators where they bundle security as a service, as part of their pricing plans and so on. When something like that happens, and I'm not talking specific to Verizon, I'm talking in general, okay? Something like that happens, then an operator will be offering a plan that is, I don't know, $X per month, whatever. Including that plan, there will be so many such speed, so many gigabytes of data and security and maybe other things.

If they do such bundling, I think it will be great, I think, both for the operator and for us, but there is no distinct line item that says this is how much the customer is paying for security. I think that if you like, the perceived value of the security is around those numbers.

Nehal Chokshi (Managing Director)

Got it. Understood. Thanks, Ziv, for clarifying my question and Erez for the further detail there. Yesterday you did a press release based on a survey of 1,000 SMB customers of 50 employees or less. It's great that 70% are looking to their network security provider or your communications. Do you have any visibility as to what the other 30% are looking to do as far as security then?

Erez Antebi (President and CEO)

Excellent question. I do not. It wasn't the part we were focusing on, honestly, in the survey. We run surveys like this. Our marketing department runs surveys like this, for, in different countries globally, for different segments of the market, and we publish the results from time to time. What we see consistently in all these services is that a majority, percentage-wise changing, but basically a majority of customers, whether they're consumers or SMBs or so on, understand that they need to be secured, and they understand that there are threats, they understand somebody needs to help them secure it. A very, very large portion is looking at the operator as the one who will secure them.

You know, if you ask me to guess, and here I'm just guessing, the others either don't think they need security or they think that they can take care of themselves or a variety of other things like that.

Nehal Chokshi (Managing Director)

Okay. Yeah. Good. Of these large deals that have gotten delayed, how much bigger are they relative to the average size you typically see?

Erez Antebi (President and CEO)

How much are they? Sorry.

Nehal Chokshi (Managing Director)

On the DPI side, the large deals that have been.

Erez Antebi (President and CEO)

Yes.

Nehal Chokshi (Managing Director)

delayed that haven't been lost.

Erez Antebi (President and CEO)

Yeah.

Nehal Chokshi (Managing Director)

How much bigger are they than your typical average deal size that you're seeing?

Erez Antebi (President and CEO)

They're quite large. I mean, they're definitely in the, you know, in the millions of dollars. Okay? That's. I'll put it that way. It's not. We have many deals of various sizes. These are large.

Nehal Chokshi (Managing Director)

Typically, what's the size of a deal then outside of these large deals?

Erez Antebi (President and CEO)

I don't know. I know. Ziv, do you know what the average deal size we have is?

Ziv Leitman (CFO)

No, I think it's the average is not really significant since there is large the standard deviation is relatively wide. We can have a deal of $300,000, and we can have a deal of $3 million and more. The average will mean really nothing.

Nehal Chokshi (Managing Director)

Gotcha. Understood. Okay. It's just simply you have a larger proportion of large deals in the pipeline than usual.

Erez Antebi (President and CEO)

Yes. We're seeing today more large deals, I think, than we saw, you know, a couple of years ago.

Nehal Chokshi (Managing Director)

Got it. Understood. Okay. Erez, did I hear you correctly? Did you give an incremental bar target for calendar 2023? 2022.

Erez Antebi (President and CEO)

Sorry, calendar 2022. We did not give anything on 2023.

Nehal Chokshi (Managing Director)

Okay, great. Thank you.

Operator (participant)

The next question is from Marc Silk from Silk Investments. Please go ahead.

Marc Silk (CEO, Investment Advisor, Portfolio Manager, and Analyst)

Thank you for taking questions. I'll add on to the group, congratulations on the Verizon deal. It just gives your technology a lot of credibility, and hopefully that'll open up more doors to future deals. On previous calls, you've talked about on your traffic management and analytics, you've been awarded several deals where you'll be replacing a direct competitor's product. In a slowing economy going forward, why would they switch from a competitor's product as opposed to basically doing nothing?

Erez Antebi (President and CEO)

It's because they need to do something. There are several rationales for why do they, you know, rephrase the question with your permission, why do they have to make any such move at all? Okay, why not stay with what they've got, right? That's basically your question. Reason is that they're making other changes that necessitate them to make a decision. Some of them could be because, for example, think of a mobile operator that wants to launch a 5G network, and they wanna go to a real 5G network, a standalone 5G core. They need to launch a new core. They need to add capabilities to that core. They have to do something. They can't use the 4G core that they've got.

Another example, it could be that, you know, they've made a strategic decision as an operator to move from their own data centers to some sort of shared environment, maybe on cloud and so on. Again, they will need to deploy different technologies than what they've got because what they've got doesn't cut it. It doesn't do that work for them anymore. I could give you another example where, you know, this is realistic. They have currently a certain product, whether it's from our competitor or in other fields, and that product has reached end of life, and there's no more support for it. They can't get security upgrades, et cetera, for it, et cetera. They have to do something.

They can't live with the product that has no more support, security updates, et cetera. They have to do something. All these reasons open up the issue of, okay, if they're gonna do that, now they can make a choice from scratch. You know, there are probably other examples of why they would have to do something, and they can't stay with what they've got.

Marc Silk (CEO, Investment Advisor, Portfolio Manager, and Analyst)

Basically, we're saying the companies that are going forward, a global recession is not going to basically be an option for them to have inactivity.

Erez Antebi (President and CEO)

I can't say that. That's a hard sentence for me to say. One could make the argument that, okay, if there's gonna be a global recession, it's gonna be really bad, then the company that decided to launch a 5G network is gonna say, "Okay, we're gonna delay it for a couple of years." Things like that could happen, right? I'm not gonna say there's gonna be zero effect. The strategic reason to move to make these changes is not tied to, okay, they just got tired of this platform, and they really have excess money, and they want to spend it. They're trying to do something strategically different. Each and every operator with their own rationale and direction, and that necessitates new equipment for them.

I think that, you know, in general, I think that the telecom industry, while recession will hit, if there is recession, will hit everyone. I think the telecom industry is a little bit less, the hit will be a little bit less dramatic just because, you know, maybe we'll change our iPhone less frequently, but we're not gonna give up our connectivity. At the end of the day, I doubt we will see a huge impact on telecom, the telecom operators.

Marc Silk (CEO, Investment Advisor, Portfolio Manager, and Analyst)

Makes sense. In your second quarter conference call, you announced that you signed a SECaaS deal with Vodafone to launch security services to fixed broadband customers using Allot HomeSecure products, with the intention to deploy in seven different European countries. My question is this just limited to customers using the Allot HomeSecure, or is there an even bigger opportunity?

Erez Antebi (President and CEO)

Well, you know, we're providing the Allot HomeSecure. Under this contract, we're providing Allot HomeSecure to Vodafone, and they will install it in these seven countries like I said last time. Is there a potential to expand that in the future for other things? You know, I'd say Vodafone has been a long-time customer of Allot for many things, for DPI, for network security, for other things. I hope that we'll be able to provide them technology for other things as well. At this point, the contract that we signed is limited to this.

Marc Silk (CEO, Investment Advisor, Portfolio Manager, and Analyst)

Just to be clear, your original deal with Vodafone was obviously they just paid up front, and that was basically it. Is this going to be a recurring revenue deal with you and Vodafone?

Erez Antebi (President and CEO)

That's correct. The original deal, you know, from many years ago, was for NetworkSecure that is being used today to protect their mobile customers. They paid us up front. Of course, they pay us for expansion, support and maintenance and so on an ongoing basis. This deal is recurring revenue where they pay us monthly per the number of subscribers that will be using it.

Marc Silk (CEO, Investment Advisor, Portfolio Manager, and Analyst)

Okay. That's great. Since you always bring up Vodafone's 50% penetration rate, are they going to use the same playbook in these seven European countries, or every country is gonna be different? Just because, again, you emphasize how successful they've been implementing your technology.

Erez Antebi (President and CEO)

Even on the NetworkSecure deal, they did different go-to-market approaches in different countries. I would expect that here as well, the different opcos in different countries will be using different go-to-market approaches on the HomeSecure as well.

Marc Silk (CEO, Investment Advisor, Portfolio Manager, and Analyst)

Can you give us a ballpark of the potential MAR if all seven countries are in play or it's too?

Erez Antebi (President and CEO)

I honestly would rather not.

Marc Silk (CEO, Investment Advisor, Portfolio Manager, and Analyst)

Okay. My last question is, so I just saw that DISH is seeking $2 billion in financing for network build-out in Q1 of 2023. Is this kind of the timeline that they have given you as far as when they're gonna start or it's unrelated? Or anything you can, Kali, bring to bear on the DISH deal would be helpful.

Erez Antebi (President and CEO)

Yeah. Look, I mean, they've announced that they've started already providing commercial services, several months ago, right? They had some regulatory milestone they had to reach, and I believe they announced they reached it. Now, they still have a very, very small number of subscribers. I'm not talking about the. I forget the brand name. I think it's called Boost.

Marc Silk (CEO, Investment Advisor, Portfolio Manager, and Analyst)

Boost.

Erez Antebi (President and CEO)

Yeah, Boost. We're not talking about those, obviously. On the new network, you know, they still have a very small number of subscribers. I'm not sure when that number will start growing dramatically. I hope it will be soon, but I don't know.

Marc Silk (CEO, Investment Advisor, Portfolio Manager, and Analyst)

All right. Thank you for taking my questions, and hopefully, the Verizon deal is the start of something exciting. Thank you.

Erez Antebi (President and CEO)

Thank you very much.

Operator (participant)

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 poll for more questions. The next question is from Tal Liani of Bank of America Merrill Lynch. Please go ahead.

Madeline McNulty (Wealth Management Analyst)

Hi, you have Madeline on for the call this morning. Just one quick question from me. If I'm looking at fourth quarter revenues, about a $10-$12 million gap from where we are in the third quarter, I just wanna know the confidence in terms of guiding to that number versus, you know, maybe guiding a little bit below if we're thinking that, you know, 2 other deals or so may not materialize in this quarter. You know, around the confidence and why still holding that guide. Thank you.

Erez Antebi (President and CEO)

Ziv, you want to address that, please?

Ziv Leitman (CFO)

Our guidance for the yearly revenue is between.

A lower range. Let's assume it will be $125 million. It means that in Q4 we will have revenues of $35 million. If you ask me whether today we have all the $35 million in hand, so the answer is no. Usually in our business, most of the revenues are coming towards the end of the quarter. Currently, this is our best estimation of the revenue that we will achieve this quarter.

Madeline McNulty (Wealth Management Analyst)

Just to follow up there, you know, with macro deteriorating, that still gives you guys the confidence to say that we think 35 is gonna be the right number to guide to? I guess I'm just worried about the extra two carriers. You know, if we don't see those materialize through the quarter, what would that risk be to the revenue of $35 million?

Ziv Leitman (CFO)

Again, according to our forecast, our weighted average right now is around 35. This is what we're expecting. Since we don't have it in hand, you know, it can vary. This is right now the weighted average of our forecast, and we will work very hard in order to achieve it.

Madeline McNulty (Wealth Management Analyst)

Thank you.

Operator (participant)

There are no further questions at this time. Mr. Antebi, would you like to make your concluding statement?

Erez Antebi (President and CEO)

Yes. I want to thank you all for joining us on the call today. Thank you for your question. Thank you for your interest and support of Allot, and I look forward to seeing you on our next call or sometimes earlier. Thank you very much.

Operator (participant)

Thank you. This concludes the Allot third quarter 2022 results conference call. A recording will be available on Allot's website at www.allot.com. Thank you for your participation. You may go ahead and disconnect your lines.