Allot - Q3 2024

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by. Welcome to Allot's third quarter 2024 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 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 section of the company's website at www.allot.com. I would now like to hand over the call to Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin, please?

Speaker 3

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, 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 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 call may contain 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 customers, reduced demands, 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 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 include the GAAP to non-GAAP financial reconciliation tables. And with that, I would now like to hand the call over to Eyal Harari, CEO.

Eyal, please go ahead.

Speaker 1

Thank you, Kenny. I would like to welcome all of you to our results conference call, and thank you for joining us today. I'm very pleased with the third quarter results, which show the strong progress we have made. These results demonstrate a return to financial stability and renewed revenue growth at Allot. We achieved our first non-GAAP operating net profit in three years, a positive operating cash flow, and importantly, our net cash level has increased for two quarters. Building and refining our long-term strategy is an ongoing process, which is aimed at leading us into an era of profitable growth for years to come, and I will address this in a few minutes.

We are especially excited about the continued momentum in our growth engine, the security business, where we see strong opportunities and revenues which are rapidly expanding to become a larger part of the mix as each quarter passes. Our third quarter security as a service revenues increased by 69% year over year, in line with our expectations. This growth is largely driven by our extensive and growing list of top-tier customers, as well as increased traction of our security solution among the subscriber base of those customers. I want to highlight a few examples of recent new service launches. Just recently, we announced that Vodafone UK expanded its cybersecurity services to protect fixed broadband customers by launching Security Net Home, powered by Allot's SECaaS solution.

Vodafone's new offering to its customers will be part of their mobile security services, enhancing threat protection across both mobile and broadband networks and cross all customer devices on the home network. We also announced that Mio, a leading telecommunication service provider in Portugal, introduced a new cybersecurity service built on our security solution for their fixed broadband customers. Our solution complements their existing mobile cybersecurity service, bringing customers a unified, converged solution for both their mobile and home networks. These new security deployments, built on our SECaaS solution, will allow us to continue to accelerate subscriber growth and further bring us long-term recurring revenue and growth. We continue developing our strategic plan, aiming to leverage our core strengths in security and network intelligence to drive long-term profitable growth.

We are positioning Allot as a security-first company, consolidating our focus around a unified business unit that builds on our unique security offering. This strategy is designed to maximize synergies between our existing network intelligence assets and our security offerings, allowing us to deliver a differentiated and fully integrated solution for customers. This combination creates a compelling value proposition, and only a handful of companies are as uniquely positioned as Allot to offer such an integrated approach. We believe it will strengthen our market position, enhance our customer offerings, and make us a more agile and innovative company. We are reorganizing ourselves to be more customer-centric and a more efficient organization, structured to better support evolving customer needs. Our business units will have a regional focus on sales and customer success, empowering them to function more effectively while enabling a more personalized approach.

We believe this will allow us to open new opportunities for expansions within our installed base, as well as gain new customers. We are exploring the potential of our products to provide additional value to customers focused around cloud and 5G markets, including enterprise customers. In particular, we see the potential demand for our traffic management and cybersecurity solutions, which can be implemented in the cloud. The process of refining and finalizing our strategic plan remains ongoing. I look forward to providing more insights and detailed discussion on our strategy and progress during our full-year results that we will report early next year. In summary, Allot is entering a new chapter as we approach 2025. We are on a positive trend towards financial stability and renewed growth. We are very excited to improve this quarter both our profitability and cash position.

The core security business continues to gain strong momentum, as demonstrated by the expansion of our partnership with major telecom providers like Vodafone and Mio, which significantly expands our potential recurring revenue base. Looking ahead, we continue to refine the strategy for long-term growth and profitability. I'm increasingly optimistic with the direction that Allot is headed and excited about the growing opportunities before us. As I have said, our target is a sustainable and profitable growth for Allot over the long term. And now, I would like to hand it over to our CFO, Liat Nahum, for the financial summary. Liat, please go ahead.

Speaker 2

Thanks, Eyal. We reported revenue of $23.2 million in the quarter, representing a year-over-year increase of 3% and up 5% versus the prior quarter. Revenue from our growth engine, SECaaS, was $4.7 million in the quarter, in line with our expectations and up 69% year-over-year, comprising 20.1% of our revenue in the quarter. Our SECaaS's annual recurring revenue as of September 2024 was $17.2 million. As we discussed in our press release, we expect a double-digit growth year-over-year for full-year SECaaS's revenue and SECaaS's ARR. I will now discuss the non-GAAP financial measures. For all our financial results, including the GAAP financial measures and the various other breakdowns of our revenue, please refer to the table in our press release. Our non-GAAP gross margin in the quarter was 71.7%. In the third quarter of last year, our non-GAAP gross margin was 47.9%, and in the prior quarter, it was 70.6%.

While the non-GAAP gross margin depends on the specific product mix sold in the quarter, the long-term target for our gross margin is expected to be at the range of 70%. We reduced expenses considerably over the past year, with the non-GAAP OpEx at $15.6 million, similar to that of last quarter, and down by over 29% from the third quarter of last year. Allot has 508 full-time employees as of September 2024. As part of our strategic process of reorganization as a unified business unit and realign the business around customer success, we intend to improve efficiencies and moderately reduce our headcount in specific areas, potentially also recruiting other areas. We reported a non-GAAP operating income of $1.1 million, which is a significant improvement compared with the operating loss of $11.1 million in Q3 last year and operating loss of $1 million in the prior quarter.

This is the highest quarterly operating income reported in the past seven years. In terms of non-GAAP net profit, we reported $1.3 million in the quarter, or a profit of $0.033 per diluted share, compared with the non-GAAP net loss of $10.8 million, or a loss of $0.28 per basic share in the third quarter of last year, and compared to a net loss of $0.8 million, or a loss of $0.017 per basic share in the previous quarter. We reported positive operating cash flow in the third quarter of $1.9 million. Cash, certain bank deposits, and investment as of September 30, 2024, totaled $54.5 million, an increase compared to the $53.2 million at the end of prior quarter, demonstrating stability in cash levels. Cash, certain bank deposits, and investment as of year-end 2023 were $54.8 million.

In terms of guidance for the fourth quarter of 2024, we expect to remain around the break-even on a non-GAAP operating profit basis and to generate positive operating cash flow, contributing to a further improvement in the balance sheet net cash position. Management reiterates double-digit growth year-over-year for full-year SECaaS's revenue and SECaaS's ARR. That ends my summary. Eyal and myself would now be happy to take your questions.

Speaker 0

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 pulled in the order they are received. Please stand by while we pull for your questions. The first question is from Nehal Chokshi, from Northland Capital Markets. Please go ahead.

Speaker 4

Yes, thank you, and congratulations on the strong profitability results. Got a bunch of questions. Let's start with the ARR growth guidance. I think the question says, "Double-digit SECaaS's ARR growth." I believe you're saying that on a year-to-year basis, yeah. And so technically, that could mean a Q-to-Q decline in SECaaS's ARR, just mathematically. I don't believe that's viewed as a possibility given the ARR was up 62% year-to-year in the September quarter. So can you first verify? Has not the expectation. Can you indeed expect the ARR to be up Q-to-Q?

Speaker 1

Thank you, Nehal. Yes, we are definitely excited from the good results in the first quarter of generating operating profitability for a while and our strong cash increase this quarter. As for the SECaaS's ARR, we continue to see growth, and we expect to see growth also next quarter, and we are still projecting double-digit growth on the numbers. As you could see, this quarter, we had higher revenue for the SECaaS compared to the ARR, and this is due to some catch-up revenue we had with one of the customers that paid us some services that are not recurring for the future. This is why our ARR is a bit lower than the revenue that is higher this quarter due to this catch-up.

We are expecting to further grow the ARR next quarter as we see further increase of use by our existing customers, as well as some additional customers in the forecast that we are expecting to be launched over the quarters.

Speaker 4

All right. Okay, great. That's super helpful. And then why are you expecting any flattish to a slight decline in operating profit on a Q-to-Q basis? I guess it probably is related to the non-recurring SECaaS's revenue that was recognized in the September quarter.

Speaker 1

Exactly. So I think most importantly, we are now focused on our strategic plan to drive the company into a long-term strategic sustainable profitable growth. As you know, we are still heavily reliant on CapEx bills and non-recurring revenue, which is harder to predict. While we are improving and transforming the company into a more recurring model, and as our SECaaS become a more and more dominant part of our revenue, we are starting to see more stability and more predictability in the results, but it's still a process. So in the next quarter, we are looking to continue with this trend, and we are looking to continue to have good performance. A lot would be dependent on Q-to-Q deals that it's a matter of timing. So this is why we are more, I would say, conservative with our guidance.

Speaker 4

Okay, great. And then the ARR, SECaaS's ARR, did increase, I think, a record amount on a Q-to-Q basis. What's the driver of that record amount of Q-to-Q increase in SECaaS's ARR?

Speaker 1

It's a mix. Yeah, it's a record amount, and it's a mix of new services launched by our existing customers. We had a couple of press releases with Vodafone in the U.K. and MEO in Portugal that are increasing the partnership, expanding the partnership with Allot into additional services. We also continue to see increasing take rates and increasing the customer base from many of our customers. Overall, all of that contributes into our ARR increase.

Speaker 4

Got it. Could you potentially parse that 2.5 million Q-to-Q increase between new versus existing SECaaS customers? Is it about 50/50, or is it more weighted towards new?

Speaker 1

It's not something we share.

Speaker 4

Okay. Understood. Is it fair to say, though, that because over the past two quarters, at least, the SECaaS's ARR was increasing about $1 million each quarter, I believe largely due to existing customers and probably most specifically good success of Verizon's wireless access within the S&D segment? So is it fair to say that at least that particular part continues to see a similar sort of momentum?

Speaker 1

Again, as I said, we see both growth in our SECaaS's ARR is coming from three parts. One is increased usage and higher penetration with the accounts we already work with. Then we have additional services, new service launch within the customer we work with, like we announced on MEO Portugal and Vodafone UK. And of course, new customers that are joining to our installed base. What we see is overall, we are very happy with the progress on all three fronts, and we are looking to further invest in order to expand in all in order to continue this high growth rate in the years to come.

Speaker 4

Okay. And then last quarter, you did talk about a perpetual license customer agreeing to the SECaaS's model. I believe that that's Vodafone, and that the Vodafone UK announcement is part of that. The question here is that is it just limited to one region? Is the SECaaS's agreement limited to just one region with that perpetual license customer, or is it going to be rolled out to additional regions beyond the UK?

Speaker 1

We are working with our customer to deploy in all possible countries. We don't provide any more specific details on that, and if we will have anything we can share in later quarters, we will be happy to share.

Speaker 4

Okay. Great. Just a few more questions. For gross margin, it did improve 113 basis points Q-to-Q. Is that largely due to that non-recurring true up in SECaaS's revenue?

Speaker 1

Yes, can you take that?

Speaker 2

Yes, sure. So as Eyal said, yes, part of it is indeed the increase in SECaaS's due to the one-time catch-up that we have. But also, as we always say, it's related to the specific type of deal that we have in the quarter. So overall, we can say that we are very happy with the gross margin, and we intend to continue with this trend and be in the range of 70% and make sure that also the product mix is supporting that.

Speaker 4

Got it. Okay. Great. And what's the driver behind the improved gross margin outside of SECaaS's revenue? Is it a more benign competitive environment, or is it something else?

Speaker 1

So overall, we are putting a lot of emphasis on making sure we are taking the right deals. We want to make sure we are engaged with customers in a model that is making sense for Allot. And that with the increased mix of the SECaaS that is in general more higher gross margin, this is what drives our overall improvement.

Speaker 4

Okay. Great. And then I did notice that the R&D line did come down another $1 million on a Q-to-Q basis. Are there any particular R&D programs that have been cut due to this R&D reduction?

Speaker 1

No. So the R&D, compared to last year, was reduced as the company was doing some optimization about a year ago. In the last quarter, we didn't see any decrease. What you might see is part of some government support we receive for R&D funding that is part of our Q3 numbers. But overall, we are expecting to see similar R&D level on the yearly basis.

Speaker 4

Yeah, and that government support, is that continuing for a foreseeable future, or was it just a one-time thing?

Speaker 1

It's a yearly grant that we expect to continue, but it's a per-year decision. So overall, it's a good estimate to take similar levels.

Speaker 4

Got it. Great.

Speaker 1

As for performance, we are continuing to invest in our R&D as we want to create more innovation. I highlighted we are now running under a single business unit to drive more innovation around security, and we are looking to further enhance our unique offering to provide customers innovative software and drive more growth. Essentially, this is our long-term growth engine, and we want to further continue to invest in it.

Speaker 4

Okay. Great. And then early thoughts on calendar 2025, especially with respect to non-SECaaS revenue?

Speaker 1

It's a bit too early. We are now busy on our planning for next year, but overall, we are looking to continue to grow. We are at relatively high double-digit growth in the SECaaS. There is no reason why not to continue. We want to have it as part of our three-year plan. We want to have it as a significant growth path, and we will be able to share more information next quarter once we share our 2025 plan.

Speaker 4

What would you see as the potential drivers of being able to achieve growth on the non-SECaaS portion of the business?

Speaker 1

On the non-SECaaS part, it's very hard to predict. As mentioned, this is non-recurring revenue. We see that the competitive environment is favorable. We see some large deals in our pipeline that can influence, and we believe we have great technology in this space that can drive also potential growth. Longer term, we focus on security, and we believe we have a unique combination of traffic management with security offering that not so many companies globally can offer, and this is where we are unique, and this is where we believe we can generate growth.

Speaker 4

Great. Thank you for taking all my questions.

Speaker 1

Thank you, Eyal.

Speaker 0

There are no further questions at this time. Thank you, everyone, and with that, the call is concluded.