Allot - Earnings Call - Q4 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by. Welcome to Allat's Fourth Quarter and Full Year twenty twenty 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 Elotte's investor relation team at GK Investor and Public Relations at +1 (646) 688-3559 or view it in the new section of the company's website at www.elotte.com. I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr.

Helft, will you begin, please?

Speaker 1

Thank you, Operator. Welcome to Allot's fourth quarter and full year twenty twenty conference call. I would like to welcome all of you to the conference call and thank Allot's management for hosting this call. With us on the call today are Mr. Erez Anteti, President and CEO and Mr.

Ziv Leitman, CFO. Erez will summarize the key highlights, followed by Ziv, who will review Allot's financial performance of the quarter. We will then open the call for the question and answer session. Before we start, I'd like to point out that this conference call may contain 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 effect, 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 impact due to the COVID nineteen pandemic, changing market trends, reduced demands, and the competitive nature of the security system industry, as well as other risks identified in documents filed by a company with its Securities and Exchange Commission. And with that, I would now like to hand over the call to Erez. Erez, go ahead, please.

Speaker 2

Thank you, Eud. I'd like to welcome all of you to our conference call, and thank you for joining us today. Our fourth quarter was another quarter of solid growth. Revenues grew 28% year over year for the fourth quarter and reached $39,100,000 Revenues for the full year 2020 grew 23% compared to 2019 and reached $135,900,000 Our revenue growth in 2020 accelerated compared to our revenue growth rate in previous years. In the fourth quarter, we also achieved non GAAP operating profit of 5,000,000 This is our twelfth straight quarter of double digit revenue growth year over year, and I am very pleased with the results we achieved during the fourth quarter.

During 2020, we succeeded in signing recurring security revenue deals with an aggregate MAR of $192,000,000, 37% above our original goal for the year, a goal which we declared prior to the onset of the global pandemic. I am very pleased with these results, and I believe it shows we are on track and successfully executing on our plan. Our business is expanding across our product lines and markets, and we are increasing our market share, especially in the cybersecurity business, as I will describe in more detail. As we see our opportunities grow, we increased our investments to capitalize on the significant number of opportunities that we see. Ziv will provide more details on our financials and forecast later.

The fourth quarter was clearly a very strong finish for a very successful 2020. 2020 was a different year, not in the least as a result of COVID and its impact on business, reduced travel, and significant changes in our mode of operation. I think we can all get a clearer picture if we summarize 2020 as a whole at this point rather than focus on the fourth quarter. I want to start by describing what we see in our cybersecurity business and how the market is changing favorably for Allot. Allot is rapidly transforming into a cybersecurity company, and this is where we see most of our future growth coming from.

Looking at the market, I see what I would call a, quote, unquote, perfect storm. Consumers are under attack, and this notion is accelerating during COVID. Phishing, for example, has become more prevalent than ever. In a recent study by Deloitte, we see that nearly half of individuals fall for phishing scams while at home. In a LOT study, we found that phishing attacks are more than half of all the cyber threats targeting consumers and SMBs.

On the other hand, CSPs or communication service providers are looking to monetize their networks. They are looking for subscriber services that drive revenues, loyalty, and brand differentiation. To quote a senior VP for wireless products in a major North American operator I recently talked to, quote, we are hungry for ARPU generating services. And if what you are showing us is true, this is a real ARPU growth generator, unquote. In discussions we have with many CSPs, we see this drive becoming accelerated by their five g deployments.

The design of five g networks for higher bandwidth and multiple Internet connection points makes it makes them more open to threats. In addition, the investment required is very large. All these make five g networks, in my view, a catalyst for cybersecurity solutions. End users, consumers, and SMBs are looking for a simple zero touch cybersecurity service. They prefer a simple security service and not have to do anything technical like downloading an app to each device and configuring it.

A network based cybersecurity solution is the only way to deliver all of this. A growing number of CSPs want to launch a cybersecurity service for their customers, for their consumer and SMB customers. Previously, even a year ago, many CSPs thought that reselling a security app was sufficient for their customers. This, in my view, has changed significantly in 2020, and now we see that no CSPs we talk to understand that they need to provide a network based cybersecurity service. North American operators have, based on our interaction with them, quote, turned the corner, end quote, on cybersecurity services for consumers.

We are closely interacting with multiple North American operators that are now seriously looking into launching network based security services for the mass market. This was not the case a year ago. While we cannot be assured, of course, of any success, the requirement from the operators is now clearly there. Operators worldwide can typically charge for network based security services anywhere from 5% to 7% of the consumer's ARPU and around 15% of the SMB's ARPU. The preferred business model that most, but not all, operators worldwide are accepting of is a monthly fee.

Whether a revenue share or monthly per subscriber fee, 30% to 50% of the perceived end user value is considered a reasonable range for all for an all inclusive security service package. As a result of all the above, our deal pipeline is very robust and it has grown significantly. The total MAR of all the opportunities we are actively engaged with is higher than in any previous time. I would now like to look at Allot and how we are uniquely positioned to turn these exciting market developments into accelerated growth. I will start with our platform and product.

The Allot Secure three sixty platform is a clear differentiator. To remind us all, Allot offers a unified management, threat database, policies, user experience, reporting, and user control, protecting families across all devices. This can be done regardless if the connectivity is mobile, fixed, or even off network. Allot provides enforcement points for the security in the mobile network, four gs or five gs, in the home router, in the business router, and even security apps on the devices for off network protection. These holistic capabilities are unique in the industry and are very appealing to many operators.

I believe we have today the widest range of security enforcement points available from any competitor. I am not familiar with other technology companies that can provide such a unified experience across access means, devices, and threats. Recently, we announced an agreement to develop together with PowerDNS, a DNS security enforcement product, DNS Secure, that will be an integral part of the Allot Secure platform. I explained in the past that DNS security is inherently inferior to network secure and cannot provide the same level of protection. This is true for our DNS secure solution as well.

However, DNS based security is a much lighter touch on the network and requires less hardware. We believe our DNS security solution will expand our addressable market to include fixed networks, especially in low ARPU countries where the perceived dollar value of a security solution is lower. When we look at our recurring security revenue growth path, we see our revenues growing in three dimensions. One, signing up and launching cybersecurity services with additional CSPs. Two, in a CSP that launched the service, having more end users sign up for this security service and three, CSPs expanding the security offering to the market from an initial market segment, such as mobile, to additional segments, such as the home or off net protection or the SMB market.

I believe this threefold growth opportunity is what can make our recurring security revenues grow very rapidly. I would like now to turn our attention to the deals we signed in 2020 and the results in services the operators launched. In 2020, we signed multiple new security deals with operators who intend to launch the security service in 2021. Most of these deals, primarily due to COVID related delay delays, were signed in the 2020. These deals were with CSPs in EMEA, APAC, and Latin America.

They include network secure, home secure, and endpoint secure. In 2020, several operators who started with one product, typically network secure for mobile, decided to expand the service to include endpoint secure for off net protection and home secure for fixed network protection. Another interesting area we see is the SMB segment. A growing number of operators see SMB as a lucrative segment. Several of the deals we signed in 2020 are either focused exclusively on SMB or have specific plans to service this specific segment.

During 2020, several operators in Europe and Asia Pacific who previously signed deals with us launched the services to their customers. The take up rates we see in these operations are very encouraging. I will note that the actual rates depend significantly on the go to market strategy the operator takes. The more aggressive the go to market, the higher the rate of customers signing up. We see that selling in shops is a very effective means of adding new customers.

When offered as a paid value excuse me. When offered as a paid value added service, one operator is seeing that over 80% of new customers who join their network in shops choose to add the security service option. Moreover, a year after they purchase the service, two out of three customers keep it. These are very high conversion and longevity numbers. Another operator who launched the service as a paid on service offered to customer with every operator interaction managed to get 10% penetration in less than six months.

While this is a truly outstanding penetration rate that we should not expect to replicate in many operators, it shows the appeal and potential of the service to consumers. On the other hand, operators who launched the service with less aggressive go to market plans, such as digital means only, achieved significantly lower take up rates. Our marketing team is heavily engaged with these operators' marketing teams to show them how they can improve the results. On average, the penetration rates we are seeing in the services launched are very encouraging. We also continue to see take up rates from SMB, typically higher than the average rate for consumers.

One SMB service reached more than 44, percent penetration in eighteen months. I will note though that there are much fewer SMBs than consumers, so the potential value of SMB deals is typically lower than that for consumers. As I mentioned in previous calls, Allot not only enables the CSPs to protect consumers and SMBs, but we also protect the CSP network itself from attacks. In the four g world, we protect the network with our DDoS secure product. As five g networks are rolling out, they are more susceptible to volumetric DDoS attacks.

As a result, we are seeing significant traction for our NetProtect product. As I discussed in our previous call, Allot has a unique position to play in securing the user plane in five g networks. Our combination of being able to analyze in real time the full traffic flow, ability to mitigate DDoS attacks in line very quickly, and protect the network from rogue IoT devices puts us in a unique position to help operators secure their five g network. Allot comes to the five g world with a very strong telco grade technology, products that scale easily to the five g bandwidth requirements, and full multitenancy support to enable differentiated services. These abilities are key differentiators for us in the future five g five g deployments.

We are currently working on several five g NetProtect deals. And while we cannot ensure we will win, I hope we will be able to close one of these deals in the coming months. To summarize, I believe the market for cybersecurity services by ISPs to consumers and SMBs is taking off, and our pipeline is stronger than ever. I believe Allot is uniquely and very well positioned to take advantage of this this and grow significantly. New deals with CSPs still take time, usually between twelve and eighteen months.

And with COVID, some even take twenty four months. Once signed, it takes nine months to launch the service and start gradually building a revenue base. COVID nineteen may cause even several months further delays in launch of services after the deal is signed. Factoring in all this, we expect recurring security revenues in 2021 to be between 6,000,000 and $8,000,000 Looking farther ahead, we expect recurring revenues from security deals in 2022 to be $25,000,000 and to keep accelerated growth year after year after that. We also expect to sign in 2021 new recurring security revenue deals totaling at least $180,000,000 of MAR.

Before turning to the DPI or Allot Smart Market, I would like to say a few words on the changes we went through in 2020 and their impact on the company. As with many companies, COVID dramatically restricted our international travel and ability to be physically present at customer sites and meet customers face to face. As a result, we made a series of changes to adapt our mode of operation. Our sales team transformed the way we initiate interaction and generate leads. From mostly physical meetings, conferences, customer gatherings, etcetera, we partially adopted targeted digital means to approach the relevant decision makers and potential customers.

This has been successful for us and opened up quite a few interesting opportunities for recurring revenue security deals both for consumers and for SMBs. Implementation was harder this year as we could not send engineers to install systems on-site. Work was done mostly by remote connection. In one case, we had to install a complete network in a country we had never worked in before and were not even familiar with local integrators. Everything was built and preinstalled in racks in Israel and shipped to the country whole.

We identified a local integrator, trained them remotely with video clips on how to install and turn on the service, and succeeded to pass acceptance without stepping into the country. Internally, we modified our structure this year to fit the changing needs. As we discussed in our previous call, we created two separate product business units, one for Secure and one for Allot Smart. In the short months that passed since the change, I can see the value that focusing on each product line is already bringing to product development and to new deals. In our global support services, we moved headcount and resources from expensive region to lower cost geographies, mostly to India and Colombia.

This transition and transfer of knowledge was not easy. We succeeded to complete the task this year while reducing the number of open trouble tickets despite the growth in revenues and the growth in our installed base. In addition, we strengthened significantly the number of salespeople focusing solely on security deals worldwide. But I think perhaps the biggest change for us resulted from a political change. The Abraham Accords and peace treaties that Israel signed with Arab countries.

These agreements opened up the Gulf market to Allot, especially in The UAE and Bahrain. My first and only international trip after COVID started was actually to Dubai in December. Little could I have guessed that a year ago. I am very pleased to say the business atmosphere in the Gulf Region is very positive towards working with SALOT, and we are actively engaged in several opportunities in both DPI and security. I would like to turn now to discuss our visibility and control business addressed by our Allot Smart product line.

This business grew well for us in 2020. The main use cases we see today are in congestion management, quality of user experience, especially for video, policy and charging control, and digital enforcement. We won several deals this year where we replaced a direct competitor's product that was installed, one of them in a tier one in Europe. We are discussing similar opportunities with other CSPs using our competitor's product. In addition, we are involved in several RFPs with operators who do not have such systems today on their networks.

While we cannot be assured of success, we are optimistic regarding our chances in some of these opportunities. Our enterprise business grew and had a record year. The deal we signed in the 2020 with Broadcom to position Allot as the replacement for Packeteer product, which is end of life, is starting to show results. We signed new distributors for our enterprise products in several countries, including The US, and we expect continued growth of the enterprise business in 2021. To summarize, I believe demand for the Allot Smart product line, including congestion management, traffic management, analytics, digital enforcement, and enterprise use cases will remain healthy with growth for Allot in the years to come.

I would now like to summarize the overall picture and key messages. We are proceeding according to our plan and continuing to grow the business. In the Allot Smart product line, we see a strong pipeline. Multiple use cases such as congestion management, digital enforcement, and the enterprise business are growing. Overall, we see a solid demand for Allot Smart.

The security area is where we see our long term growth. We are very encouraged by the pipeline growth we see and by the consumer and SMB take up rates as they sign up for the for the service. We signed significant deals for our various products and succeeded in exceeding our MAR target for 2020. While these deals always take time to close, COVID nineteen pushed the closure of several deals a bit more. It is also postponing services commercial launch in some of the deals that were already signed.

Overall, the pipeline is robust and growing. Across our product lines, we see positive signs from the market. To take advantage of these growth opportunities, we decided to continue our significant investment in developing the full breadth of Allot Secure products and our solutions for five gs as well as in our sales and support teams. Ziv will discuss the numbers in more details later. Looking at our backlog, the market demand as we see it now and the pipeline of deals that we are working on, our revenue guidance for 2021 is between 145,000,000 to $150,000,000 including between $6,000,000 to $8,000,000 of recurring security revenues.

We further expect to sign additional recurring security revenue deals with an MAR exceeding $180,000,000 And now I would like to hand the call over to Ziv Leitman, our CFO. Ziv, please go ahead.

Speaker 3

Thank you, Erez. Before I begin reviewing the financial results for the quarter and for the year, I would like to inform everybody that on this call, unless otherwise noted, I will refer entirely to the non GAAP financial measurements when discussing operational results, which is what we use internally to judge the performance of our business. Non GAAP financial measures differ in certain respects from the generally accepted accounting principles and exclude share based compensation expenses, revenue adjustments due to acquisition, restructuring expenses, expenses related to M and A activities, amortization of certain intangible assets, exchange rate differences, changes in tax related items and changes in deferred taxes. Now regarding the financial results. We are pleased with the revenues for the 2020, which were $39,100,000 growing by 28% compared with those of the 2019.

Revenues for the full year of 2020 were $135,900,000 growing 23% compared to 2019 and in line with our expectations despite a much more difficult year than anyone could have anticipated at this time last year. Our year end backlog was $110,000,000 You may remember, we said backlog would be below that of year end 2019 because of the outstanding order that were received in the 2019. For the year 2019 and 2020 together, the book to bill ratio was 1.17. Now I would like to give you some more color regarding the revenues breakdown and the diversification. The geographic breakdown for the 2020 was as follows: America was $1,900,000 or 5% of revenues EMEA was $29,600,000 or 76% of revenue and Asia Pac with $7,600,000 or 19% of revenue.

For the full year of 2020, geographic breakdown was as follows: Americas with 8,100,000 or 6% of revenues EMEA with $104,300,000 or 77% of revenues and Asia Pac with $23,500,000 or 70% of revenues. Regarding the breakdown between products and services, for the fourth quarter it was as follows: Product revenues were $28,800,000 compared to $18,200,000 last year. Professional services revenues were $2,500,000 compared to $3,300,000 last year. Support and maintenance revenues were $7,800,000 compared to $9,100,000 last year. For the full year of 2020, the breakdown was as follows: Product revenues accounted for $94,400,000 compared to $67,400,000 last year.

Professional services revenues were $11,400,000 compared to $8,500,000 last year. Support and maintenance revenues were $30,100,000 compared to $34,200,000 last year. Portion of communication service providers revenues out of total revenues were 82% in the fourth quarter compared to 76 in Q4 last year 84% for the full year of 2020 compared to 81% last year. It is worthwhile mentioning that the enterprise revenue in dollar terms slightly increased versus 2019 to a level of $21,000,000 and we do expect a double digit increase in 2021 enterprise revenue, mainly because of the healthy pipeline which was generated due to our deal with Broadcom. Security revenues in 2020 were $22,800,000 or 17% of total revenues.

This is compared to twenty six point three million dollars or 24% of total revenues in 2019. I would like to stress that we are in the process of shifting from security CapEx deals to a revenue share model of recurring revenue. By nature, the outcome of such transition is typically a short term reduction in the security revenue. While the long term ongoing revenue potential from the security as a service deals will be significant, the new CCaaS deals will take time to ramp and they are typically nine to twelve months before signing with a customer and the commercial launch. After the launch, revenue should start to ramp up slowly over many months as the subscribers sign on to the new service and the penetration gradually increases.

Furthermore, the COVID-nineteen pandemic has increased the time it takes to sign new deals and the pandemic has somehow somewhat delayed the launch of already signed deals. Also please note that the revenue breakdown, whether geographical or by product line or any other, may fluctuate from quarter to quarter depending on the specific revenues and deals we recognize in the specific quarter. Our top 10 ms customer made up 71% of our revenues in 2020 compared with 56% in 2019. Looking further down to the income statement, gross margin for the quarter was 70.9% compared to 68.7% in the fourth quarter of last year. Gross margin for 2020 was 71.2 percent compared to 70.2% in 2019.

The variation between the quarter reflects the product mix sold and it is not indicative of any specific trend. Operating expenses for the quarter were $27,300,000 compared to $22,800,000 as reported in the 2019. For 2020, operating expenses were $100,200,000 compared to $85,300,000 in 2019, which primarily reflects an increase in headcount, mainly an increase in R and D expenses in order to capitalize on the opportunities we see in our markets. The total worldwide market number of full time employees as of 12/31/2020 was six seventy six. This is an increase of 82 full time employees compared with that of the 2019, which stood at five ninety four.

Operating income for the quarter was $475,000 compared with an operating loss of $1,800,000 in the 2019. Net income for the quarter was $382,000 or $01 earnings per share versus a loss of $1,700,000 or $05 loss per share in the 2019. Net loss for 2020 was $3,600,000 or $0.01 per share versus $7,500,000 or $0.22 per share in 2019. For the three months ended December 2020, the number of basic shares was 35,300,000.0 and the weighted average number of fully diluted shares was $37,600,000 Turning to the balance sheet. Our cash reserve comprised of cash, cash equivalents and investments as of 12/31/2020 totaled $99,400,000 compared to $107,200,000 as of September 2020 and $117,600,000 as of December 3139.

I note that toward the 2019, we received large advance payment from deals signed in 2019 and the comparative cash decrease between December 3139 and the year end 2020 was primarily due to debt. We are expecting a negative cash flow in 2021 in the range of $23,000,000 to $25,000,000 while our operating loss is expected to be between 6,000,000 to $8,000,000 The reason for the gap between the expected loss and the cash flow is mainly due to the following: First, know to highlight that in 2019 and 2020, we had a typical high advanced payment a typical high advanced payment from customers, which led to a low level of year end account receivables of $21,000,000 We are not expecting to receive such high level of advances in 2021, so the accounts receivables level at the end of the year is expected to be significantly higher than the AR level at the end of 2020. Second, expect increased revenues in 2021, which will lead to even a higher AR. Third, as part of our accelerated growth of security revenue share deal deployment, we will need to invest a few million dollars in CapEx. We expect gross margin for 2021 to average around a similar level as in previous years at around 70%.

However, it is important to understand that gross margins may fluctuate on a quarterly basis as a result of a deal mix and revenue recognition. As we continue to invest in sales and marketing and R and D to facilitate the growth of the company, we expect 2021 operating expenses to be in the range of $110,000,000 to $111,000,000 This increase in expenses is expected to be a combination of increase in headcount, negative effect of exchange rate to the U. S. Dollar and others. The outcome of the above is expected to generate an operating loss in 2021 of 6,000,000 to $8,000,000 as I mentioned earlier.

I want to highlight that we have actively taken the decision to increase our investment in R and D and sales and marketing. With a balance sheet, with a significant amount of cash, we feel that investment to capitalize on the opportunities we see for strong long term growth is much more important and trumps short term profitability considerations. Our view is that eventual profitability will come via growth and we do not feel it is necessary right now to anchor to a short term profit target. In 2020, we signed CCAP deal with an MAR of $192,000,000 which bring us an accumulated MAR of $280,000,000 We believe that in 2021, we will sign additional deals with MAR of $180,000,000 I would like to remind everybody that MAR, which stands for Maximum Annual Revenue Potential of Concluded Transaction, was estimated by Allot upon transaction signature and constitutes an approximation of the theoretical annual revenue Allot would receive if 100% of the customer subscribers, as estimated by Allot, sign up this service. As I have explained, it takes a lot of time from contract day to commercial launch and then the ramp up of penetration.

Therefore, in 2020, we booked CCaaS revenues of only $1,900,000 Since most of twenty twenty new CCaaS deals we signed towards the end of the year, the expected recurring security revenue in 2021 will be in the range of 6,000,000 to $8,000,000 To sum up my comments, we are very pleased with the low 2020 achievements and growth hitting our targets. This is even more impressive when we take into account the COVID-nineteen headwinds throughout 2020. We are expecting to continue our growth and investment in 2021 in order to fortify the company foundation and capitalize on the potential given the expected accelerated growth starting 2022. That concludes my remarks. We would be happy to take your question now.

Operator?

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 1. If you wish to cancel your request, please press 2. If you are using speaker equipment, kindly lift the headset before pressing the numbers.

Your questions will be pulled in the order they are received. Please stand by while we poll for your questions. The first question is from Alex Henderson of Needham and Company. Please go ahead. Alex?

Speaker 4

Sorry. I forgot to unmute. Thank you very much. I heard a little crackle on the line when you gave the book to bill comment. Could you just restate what you said about book to bill for 2020?

Speaker 2

And for for

Speaker 3

April? For 2020, it was around point point eight. But for 2019 and 2020 together, it was 1.17. That's what I said.

Speaker 4

Ah, okay. I didn't catch it. It was just crackle. Thanks. So as I'm looking at the numbers here and the mechanics associated with them, looks like the growth in 2021 at the low end of the band, you're looking at essentially 2% kind of growth excluding the security business.

And with the comments about double digit growth in enterprise, it would suggest that you would actually see maybe some a little bit of shrinkage in the service provider and more traditional business. Is that mechanically corrected? Is that a function of the obviously drawdown and backlog that occurred over the course of 2020, which ultimately is a reflection of COVID and the like. Am I doing the math right there?

Speaker 3

Yes. The numbers are okay. But as we said in the past few times, we think that the DPI market, including the enterprise, is supposed to grow single digit each year. But since it's not such a huge market and there might be big deals, so there might be fluctuation fluctuation. One year, it might grow more and another it might grow less.

And and hopefully, we'll do more than the lower the lower range of our guidance.

Speaker 4

Look, I'm not saying that it's a bad thing. Just wanted to make sure I had the calculus correctly. So the second question is around the acceleration in investment to drive this security business, which I think is probably the right thing to do. Certainly, the opportunity here is significant and the MAR that you've already delivered is outstanding. But can you give us some sense of the mechanics around that?

Have you already started that investment in the fourth quarter? Are you going to ramp it from there sequentially into the March? Or is it going to be spread out over the course of the year? What's the tempo of that acceleration in investment?

Speaker 3

As we said, the total OpEx for the year will be between 110,000,000 to 111 And this includes everything and it will be spread all over the year. It's not going to be a one time investment in Q1.

Speaker 4

Okay. So it's it's fairly evenly distributed in terms of the sequential increase. And is it more in sales and marketing, more in r and d? How do we split between the growth in those two?

Speaker 3

I I would say it's more in r and d, but also in sales and marketing. Okay. It's more in r and d. Now the if if you take it even evenly and you take the 110 divided by four, you see that it's similar to the expense level of Q4.

Speaker 4

I see. Okay. In terms of the ramp of programs that you just signed, obviously very heavily skewed to 4Q. One of the obvious questions is what kind of programs are the customers putting in place in terms of marketing? Are they the more aggressive programs?

Are they do they tend to be more conservative coming out of the COVID environment? Can you qualitatively talk a little bit about you know, what you're hearing and seeing from them in terms of their marketing programs against that very large MAR number?

Speaker 2

We're seeing a mixture. Some are some are looking at it very aggressively. Some are looking at it less aggressively. But this is this is still in discussions between us and them and for the operators also internally. So until they actually launch, you know, these plans can change.

Hopefully, we will help convince them to change for the more aggressive route. But I think that from the get go, it's really there's a mix. Each operator has his own view on what he wants to achieve with this. Those that are more skewed towards let's get let's get revenues and get revenues quickly are taking aggressive go to market. Those that are looking more at at overall brand recognition, and that's their and that's their beginning, maybe a bit more hesitant on how aggressive to go.

But we're working very very tightly with them to show them the advantages, what they can do, and how they could go more aggressively.

Speaker 4

I got it. Great. I'll see the floor. Thank you.

Speaker 0

The next question is from Tal Liani of Bank of America Merrill Lynch. Please go ahead. Tal? The next question is from Mark Silk of Silk Investment Advisors. Please go ahead.

Speaker 5

Thanks for taking my questions. Excuse me. A lot of information there. So the first question is on your the 10,000,000 the the on the European tier one customer with 10,000,000 users. Initially, how many companies were you competing with?

Speaker 2

I'm not not quite sure which customer I mentioned with 10,000,000 users. So maybe you want to refresh me with

Speaker 5

In in Jan in January, you met there were two deals you mentioned in Europe.

Speaker 2

Ah, with with the okay. Don't name. Yeah. We did yeah. We didn't name the the customer.

We were competing

Speaker 5

You can tell us if you want.

Speaker 2

Hope no. Yeah. I I want to. It's not my it's not my lack of want. We were competing with at least two competitors on that deal.

Speaker 5

At least two. And then was that the same for the other deal in Europe as well?

Speaker 2

That's I'd say that's a typical number. I mean, I don't wanna now tell you if somebody else has a third or or one less, but that's a typical number.

Speaker 5

So that's that's pretty small. So, basically, does that mean that there's not that many people that can kinda do what you can do? Is that a good assessment of that?

Speaker 2

There are not many there are not many companies that do what what we can do. Or I would say there are not many companies at all in the in the network security for CSPs to enable them to sell to the mass market, which is where we're in. Most of the security companies that are out there are focusing on the enterprise market, where we are, I would say, more unique and where we think that that there's a there's an interesting place in the market is to enable telecom operators to provide security as a service precisely to the mass market, to consumers, to SMBs, and so on. There are few companies like us that are targeting this exact segment. I believe that this segment is growing significantly now.

And like I said on the call, then I think that many operators are understanding that they need to provide this service. So there aren't a whole lot of companies that they can go to to to get technology and product to enable that, which is good for us, of course.

Speaker 5

That's great information. So can you tell us kind of why you would pick for those, let's just say those two recent deals? Why were you chosen? Again, it just gives us more light as far as how, you know, important you are or how different you are.

Speaker 2

Look, I think it's always a combination of several factors. Right? I think one is the fact that we're really the only ones there today that offer a three sixty holistic approach. So if an operator works with us, he can see his past not only with what he wants today. Say an operator today says, I wanna launch security as a service to the mobile customers.

But if he works with Allot, he can see his path to to now expand that service also to the fixed access market, to his fixed customers. He can see how he can add to that off network protection. He can see how he can expand that to to small medium businesses. And he can see how he can do all that with with fundamentally the same the same user experience, the same spread databases, the same management system, etcetera. That's something that nobody else provides today.

That's a very key differentiation even if the operator wants to start with only one specific segment. So that's one reason. Second reason is specifically on mobile networks, what we do today with our network secure product is superior, simply provides a much higher, say higher security level, better functionality, it's safer and so on, than what we regularly see as our competitors in that market, which is DNS based security. So it's also a better product. And third, we are focusing on this market to a large extent.

So customers that talk to us see our commitment, our drive, the fact that we know how to know how to help them in their marketing their marketing endeavors, and we bring our marketing team as part of our value to show them how they can do better and what will what will work better, what will work not as good, and so on. And last but not least, today on network based a network based security solutions, we're a we're a market leader. So which is also a good reason to choose us. Now, yeah, operators choose us for any any kind of combination and different weights of all of these.

Speaker 5

That's a great answer. You know, when when you sign a deal, especially smaller companies, and you sign deals with, like, tier one companies, it gives you guys more legitimacy. So after announcing those last two European deals, have you maybe seen some more interest in your technology? Or maybe somebody who you were talking with is now getting more, let's just say aggressive because of those recent announcements?

Speaker 2

I I can't tie directly to those to those specific announcements. I can tell you, and and I hope it came across in the tone of what I discussed during this call, that we are seeing a significant acceleration in the interest on behalf of CSPs in the last year and specifically in the last few months. We're seeing that the interest in providing these services, the the want to provide them is definitely much larger than it was before. And we're seeing a lot more engagement from the operators that we didn't see before. Some of them, no doubt, a result of, okay, they either talk to a customer of ours who's doing this, or they heard about it and this creates interest, but I think most of it comes from the fundamental of the market where they see the need for to protect their consumers, they see the want from side of their customers to get that protection, and they see the need to monetize their network.

Speaker 5

That's what I'm seeing. Okay. So, you know, someone personally who's invested in in Israeli companies for, I don't know, more than twenty five years, that that was a nice development as far as the Arab, the opening new markets. What the conversations you've had, what products are they kind of interested in?

Speaker 2

It's really across our product line. I mean, we're talking to them both on DPI products, on security as a service products, where it's across the product line.

Speaker 5

Fantastic. You did mention, you had a conversation, and I have to ask this like every every call I do. You talked about an American company who kinda now see see a lot as a a way to generate additional revenue. Was that just initial talks or are you in an RFP or anything you any color you can give us that would be helpful.

Speaker 2

Okay. I can I can tell you that we're in in serious discussions with the operators? I do not know what the result of these discussions will be. I do not know if we will win anything or anything of that sort. But I can tell you that compared to, say, even a year ago when the discussions were more exploratory, now we see multiple American operators that think they need to do something from the network.

And that's about what I can say.

Speaker 5

And stay tuned. Right? Okay. So, you know, it's it's a few years ago when your stock was $7, I I I I said maybe use some of that cash to buy the stock at $7. But now that it's more than doubled from all your hard work, I think it's nice to see that instead of artificially I'm not flip flopping, but at these levels, I like that you're taking some of your money and investing in the company to have real earnings per share gains down the line as opposed to just artificially, you know, generating earnings per share growth.

And then the other thing is, you know, a few years ago when and I'm not comparing you to Apple, but when Apple was really more of a hardware company and they went to services and the revenue didn't really grow, these analysts were rerating it because of their the more gross margin more higher gross margin business was starting to evolve. And kind of I see the same thing with you guys is once you continue your recurring revenue model, I think that the Street is going to re rate you as well down the line. So just a great progress. I like how you take in the long term and continued success.

Speaker 3

Thank you.

Speaker 6

You're welcome.

Speaker 0

The next question is from Jacob Steven of Lake Street Capital Markets. Please go ahead.

Speaker 6

Yeah. Hey, guys. Thanks for taking my question here on behalf of Eric Martinuzzi. Just kinda wanted to drill down on the securities. Do you see that as a double digit or more of a single digit long term growth?

Speaker 3

If you are referring to the CCaaS revenues, so we were talking about accelerated growth. We said that our guidance for this year is between 6,000,000 to $8,000,000. And next year, we are expecting at least $25,000,000. So it's definitely more than a single digit. And even years after, we still see accelerated growth.

This is the whole issue of such a rev share model.

Speaker 6

Right. Okay. You guys had mentioned that you had two competitors kind of on that the Europe deals. What are you typically competing with more than two competitors or less than two in all geographies?

Speaker 2

No. I mean, typically typically, we find another two, maybe three competitors in a specific deal. If there's gonna be four, it's really very a lot of competitors. Okay? I'm still I'm talking about security deals.

Speaker 7

Yep.

Speaker 5

Okay.

Speaker 6

Switching over to the DPI business side, where do you see the long term growth rates for that?

Speaker 2

I think we continue to see at least, you know, in the next next few years, we're continuing to see something in the single digit growth rate, not more than that for the overall business. And I think that that we'll probably be, you know, some some some use cases may grow faster, some may may grow slower. But overall, the whole market, we think it's gonna grow single digit.

Speaker 4

Okay.

Speaker 6

Alright, I'll hop back in line. Thanks guys. Thank you.

Speaker 0

The next question is from John Roy of Water Tower Research. Please go ahead.

Speaker 8

Thank you. When you were describing your perfect storm in 2020 of really drivers of growth, I was curious if you could give us a little color of what elements of that you expect to continue in 2021. And as an adjunct to that, is the peace accord gonna be a substantial contributor in '21, or is that more of a 2022 event?

Speaker 2

When I described the perfect storm, I think that's the situation that we're looking at now, and I think that that's going to drive a new new recurring security deals that will be signed in 2021. And I see those I see those trends continuing. With regard to the peace accords in the Gulf Region, you know, it's it's really a completely new region for us. This is unlike anywhere else in the world. This is not some place that we that we were doing business in the past and that we know the know people and individuals and companies and so on, we're learning it.

I can say again that, you know, the the atmosphere was extremely positive and very, very acceptance. Now will we is this something is there something there that we can close already in this year, or is that gonna wait for '22? I'm I'm not expecting that to make a material difference in '21 because usually, working with operators takes time. So not knowing the Gulf Region, not working with these operators in the past, I wanna assume that they're like all other operators in terms of terms of the time it takes to close deals, which means it won't it probably won't have any material effect on '21, but I'm hopeful for for the future.

Speaker 8

Yeah. So it sounds like it might even slip into '23 given how long it takes to sign a normal deal. So

Speaker 9

thank you for that.

Speaker 8

In in the broader geography, if you were to put in 2021, what is the geography where you expect to see the most growth?

Speaker 2

That's hard to say. Think, look, you know, our our it depends how you define growth. Look, you know, EMEA is and you can see it in our numbers, was our strongest area geography this year. So I I I would certainly hope and expect it to grow 21 and and further on. But then I look at North America, North America our revenues are very, very small.

So it's easier have a high percentage of growth on something that small. And there is an opportunity in North America, but I don't know to answer you what we'll actually see. I can describe the potential as I did, and I hope that all the geographies will grow.

Speaker 3

John, I think it it depends on the definition of of growth because there could be growth in terms of revenue. There could be growth in terms of MAR, which you see the revenues starting picking up maybe a year later. You can see growth in terms of bookings that will not be recognized as revenue. So there are a few dimensions. It's not Right.

So It's not only revenue. Yeah.

Speaker 8

Yeah. So if you sign one North American operator, it may take quite a while to get it going, but the MAR would be huge.

Speaker 3

Yeah. And and also, as as we said in the previously in in the call, that it takes to close a deal with an operator, it takes more than a year. It can take eighteen months. It can be even higher.

Speaker 8

Great. Well, that answers my question. Thank you so much.

Speaker 0

The next question is from Taliani of Bank of America Merrill Lynch. Please go ahead.

Speaker 5

Can you hear me now?

Speaker 7

Hopefully, I can perfect. Thank you. Sorry. I don't know how to operate mute button. I have two questions.

The first one is you mentioned book to bill 0.8 for the year. I missed parts of your prepared remarks. Maybe you explained it. But can you explain the basics why book to bill below one? Does it have to do with recognizing revenues ratably or something?

Just tell us a little bit the story behind book to bill. I have another question, not related.

Speaker 3

Year, 2019, the book to bill, if I recall correctly, was 1.63, which was extraordinary. We got a lot of bookings. And this year, we said in the guidance for this year, we said the book to bill will be lower than one. This is why I mentioned that the book to bill for 2019 and 2020 together, it was 1.17. By the way, the book to bill for the last three years, 2018, 2019 and 2020 was 1.16.

There's fluctuation between between one year to another depends if you get the order. Sometimes you can get the order in Q4, a big order that relates to the next year. Sometimes a big order slipped from one year to another. We're not talking about But We're talking about thousands and thousands of small orders.

Speaker 7

Yes. The only reason why I'm asking it is because book to bill is a reflection or it's a proxy for future business. And the question is, the fact that book to bill was point eight, and since we're always looking forward, does it mean that you're concerned with your visibility for 2021? Or does it mean that there is a likelihood of having less confidence? I don't know how to phrase it, less confidence in the numbers for 2021?

Speaker 3

For for 2020, we had a higher confidence in the number since the backlog was higher. But when we provided now the guidance for revenue between 145 to 150, we do believe this is this is achievable. This is our goal. And even though we don't have, you know, 100% visibility, we believe in those numbers. This is why we provided us the guidance.

Speaker 2

Tal, I think we feel comfortable with the guidance we provided for 2021. We're entering 2021 with a pretty strong backlog. One minute, the number.

Speaker 3

01/2010. With $110,000,000

Speaker 2

of backlog, most of which were significant enough portion will be was expected to be recognized in '21, and we're guiding to January to January. So now we feel we feel we feel really good with the guidance we gave.

Speaker 7

Got it. Second question is about the DPI business. Last year was a good year for DPI in general. There were some good quarters. Now when you look back in retrospect, can you explain the reason for the better than expected results for the year kind of throughout the year?

Was it related to COVID by chance? And then how would five g when you talk to your customers, how would five g impact DPI? Do you expect the relatively solid trends to continue into five g, or or is it still unknown at this point?

Speaker 2

I think that that COVID at the end didn't increase the business at as I had thought when COVID started. When COVID started, I thought that it would be okay. You know? A lot more working from home, a lot more bandwidth on operators and so on. They would need to buy more DPI systems, licenses, etcetera, etcetera.

That turned out to have a relatively negligible effect. They ended up buying a little bit more, but nothing really significant. So no, that didn't contribute much. Actually, COVID, if anything, has contributed to postponing deals and delaying them more than anything else. And if we you know, now it's a it's a guessing game, but if we didn't have COVID in '20 in 2020, the the year might have looked better.

I don't know for sure, but based on how I see the deals were closing, it there's a good chance it would have looked better without COVID. With regard to five g, I think five g will will generate more more interest for what I see it already generating more interest, and I think it will actually generate more business, mostly on the security side, both on providing security for the consumers and SMBs, and on the network itself as a derivative of, or partial derivative of our DPI technology on protecting the network itself. When we say protecting the network, that is protecting the use of IoT devices that the millions of IoT devices connected to the five g network, use of them as bots to attack somebody or something, or the ability to spread attacks in this very, very broad pipe so that five gs brings. Our ability to prevent that is of our DPI capability and our DDoS prevention capability, and I think that there's going to be a lot more interest for that. We see that already, and I think that that's going to generate nice business for us going hopefully also in 2021, but definitely going forward.

Speaker 7

Got it. Last question to Ziv. Ziv, just housekeeping item. How much money did you save in OpEx in 2020 from not traveling, not not doing customer engagement activities, etcetera? And then do you expect these expenses to come back in 2021?

What's your plan for the year?

Speaker 3

So we save a few billions of dollars, but we decided to invest this money in other activities. And also for 2021, we think that part of those expenses, the level of expenses to travel and other things will be higher than 2020. Maybe not the same as 2019, but more than 2020.

Speaker 7

Got it. And that's already embedded We in your

Speaker 3

have the numbers already.

Speaker 7

Got it. Okay. Perfect.

Speaker 1

Thank you.

Speaker 0

The next question is from Sean Boyd of Nextmark Capital. Please go ahead.

Speaker 9

Good morning. Can you hear me okay?

Speaker 1

That's so cute.

Speaker 9

Good morning, gentlemen. I just wanna jump in and and summarize something off the backlog comments. And you all are pointing to the book to bill with a two year average and if I heard the comments correctly, even to a three year average, which certainly makes sense. I've heard also that the pandemic and the reduction in travel and everything else has certainly impacted us a little bit on the Allot Smart side of the business, and hence our bookings were down in 2020 as expected. Can we assume there's some pent up demand there and that as we continue to progress, we should be able to see bookings growth here in 2021?

Speaker 2

We don't know. I think we'll have to see how this really progresses. I think that there is a strong demand, as I said. Will this translate into booking growth or not? I'd rather not comment on that at this point.

At the beginning of 2020, we didn't see what COVID was going to do at all, right? And now in 'twenty one, I can tell you that we still don't see what the effects are going to be of COVID, to what extent it's going to delay things, to what extent it's going to affect. I feel reasonably confident with the revenue guidance. I'm a bit more hesitant on bookings. So I'd wait and see.

Speaker 9

Got it. Okay. On the revenue guidance, this

Speaker 8

is not

Speaker 9

a question. This is more just a comment and it's an appreciation from a shareholder. I'd like to commend you all for being one of the few companies in my portfolio that actually met your revenue guidance for 2020 that you gave pre COVID. So, you know, I think that as we kind of look forward and think about what you're saying and what you have confidence in, that all helps us just a little.

Speaker 2

Well, thank you.

Speaker 9

Last question from me is on the January, deal that you announced. There were 10,000,000 subs. And when we do rough math of 10,000,000 subs at perhaps the equivalent of $0.50 a month, that could be if I'm doing it properly, that could be MAR of $60,000,000 on that single win. Am I looking at that properly? And if so, is that all in the $180,000,000 that you're targeting here in 2021?

Speaker 3

It's already included the deal that we announced in January were signed in December. So it's already part of the $192,000,000 MAR of last year. Regarding the calculation of the MAR, unfortunately, cannot disclose the MAR of any individual deal. You know the formula, how it is calculated. So, you know, it's a it's a it's a simple math.

Right. Right. I cannot disclose the real MER of such a deal.

Speaker 9

Okay. I understand that on a single deal. And I appreciate the additional color about that being part of the twenty twenty deals. Maybe coming at this one other way, let's get away from specific deals and simply look at the entire $192,000,000 in MAR that you just reported for 2020. What's the average monthly revenue share to the company from that $192,000,000 in MAR that you're pointing to?

Speaker 2

Like we said, like I said in my comments earlier, I think that well, I don't think I can tell you that a 30 to 50% of the share of of sorry. I'll rephrase that. Of whatever the operator decides that he's going to charge his end users, roughly 34 to 50% is a reasonable percentage that of what Allot will will get. I will remind you, though, that when we state the MAR numbers, those are the numbers of what Allot should get should get theoretically if 100% of the of the of the end users, of which the of the operator has actually signed up for the service.

Speaker 9

Got it. Okay. And last question for me, and I really mean it this time. I apologize for going over. On the increases in operating expenses, you've kind of got a tiger by the tail here in terms of the secure offering and what you're doing on the security side and going after these.

So I think all of us thoroughly understand you trying to optimize that and take advantage of that and grow the business as much as you can. I'm also guessing that you've got an idea of what you're getting on those incremental operating expenses. So, I'm almost thinking about kind of a return on investment, but maybe that's not the right way to think. But for each incremental dollar that you take operating expenses up right now, can you give us a feel for what kind of a payback you're thinking about it and what you see the market providing, especially on that Allot Secure side? And that's it for me.

Thanks so much.

Speaker 3

Unfortunately, we are not a project company. We are a product company. So we invest in R and D, we invest in sales and marketing. And then, of course, we can leverage on those expenses if the revenue will really grow if there will be accelerated growth. But it's not like a project, a specific project that I can tell you I invest $100 and I get a return of 50%.

It doesn't go this way because the R and D is generic and the sales and marketing is across the board, not per project. So it's very difficult to measure it this way.

Speaker 7

Right.

Speaker 9

Okay. Well, I had to try. I hear you. Good enough. Congrats on the continued execution guys.

Very great to see.

Speaker 4

Thank you.

Speaker 0

The next question is from Alex Henderson of Needham and Company. Please go ahead.

Speaker 4

Yes, I'll be very brief since we've run way over here. But I just wanted to ask, as you look at the portfolio of potential transactions from MAR in 2021, how concentrated is that? Is that a large number of smaller deals? Is it a handful of very large deals? Is it a reasonable distribution?

What does the distribution look like in terms of the size and scope of the number of deals you're looking at?

Speaker 2

I think we're looking at a reasonably broad distribution. There are some deals that are very large, obviously not a whole lot of those. There are some deals of, yeah, midsize and quite a few that are smaller. And, you know, we we just make some factor analysis of what we think we can we can close. But it's a pretty wide distribution.

Speaker 4

Great. I'll I'll see the floor. Thanks.

Speaker 2

Thank you.

Speaker 0

If there are any additional questions, please press 1. If you wish to cancel your request, please press 2. Please stand by while we poll for more questions. There are no further questions at this time. Mister Antebi, would you like to make your concluding statement?

Speaker 2

Yes. Thank you. So I want on behalf of the management and myself, I wanna thank you for your for joining us on this call, for your interest in the company, and your support of our business. We are unfortunately still not traveling, but we will be holding virtual meetings with investors. So if you we'd be happy to to meet with you that way.

Please be in touch with our investor relations team to to schedule that. Beyond that, thank you very much, and I look forward to talk to you next quarter. Have a good day.

Speaker 0

Thank you. This concludes the Allot fourth quarter and full year twenty twenty result conference call. Thank you for your participation. You may go ahead and disconnect.