WW International Q2 2024 Earnings Call Transcript

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August 27, 2024

There are 7 speakers on the call.

Operator

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.

Operator

Liat Nahum, CFO. Following Eyal's prepared remarks, we will open the call for the question and answer session, and both Eyal and Lia will be available to answer those questions. You can all find the highlights of the quarter, 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 statements. This conference call may contain projections of other forward looking statements regarding future events or the future performance of the company.

Operator

Those statements are early predictions and Allot cannot guarantee that they will in fact occur. Allot does not assume any obligation to update that 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 securities 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.

Operator

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 pleased with the results of the as we have clearly made good progress. Most notably, I'm happy that Allot generated positive operating cash flow and increased its overall net cash position for the first time in 3 years. This success was driven by our efforts, which drove a significant decrease in operating expenses, while also stabilizing revenue and gross margins.

Speaker 1

In the past couple of quarters, we have significantly optimized operational expenses, which are approximately 25% lower than last year. We undertook these actions to bring the business to sustainable profitability and to grow the cash position. I want to spend few moments talking about the various parts of our business. Starting with Allot Secure, our main growth engine. We continue to invest in our CCaaS growth engine and the business continued to gain traction.

Speaker 1

In the Q2, CCaaS revenue increased by 50 4% year over year. Our extensive list of Tier 1 customer enable us to pursue further expansions within these large accounts, while also providing us with high quality references as we look to attract new logos. We recently signed an expansion agreement with 1 of our Tier 1 European CSP customers for the provision of 3 Cast to its customer base. The expansion agreement should start contributing to our revenue at the end of this year, representing additional CCaaS growth potential for Allot in 2025. Our most exciting CCAT launch last year was with Verizon Business.

Speaker 1

The engagement continues to be mutually beneficial and as a result, we are discussing several potential expansion opportunities within Verizon's different customer segments. I want to point out that Verizon highlighted Allot's contribution to their security solution in the recent published 2024 Mobile Security Index Report, validating Allot as one of their trusted partners in protecting their network and customers. Specifically, the report noted that the growth of the mobile computing and IoT is exponentially expanding the attack surface that needs protection, which in turn would require a matching focus on insurance sufficient mobile security processes, policies and investments. Overall, I believe the SECA solution is a key long term growth driver for Allot in the security space. For AllotSmart, in the Q2, we saw increasing traction, converting some of our pipeline into contracts.

Speaker 1

We achieved an improved level of sales to new customers as well as an expansion of sales to current customers. Allot is a trusted long term supplier of its smart products to a strong customer base. This is highlighted by our relationship with Rakuten Mobile. Rakuten is the 4th mobile network operator in Japan with a fully virtualized cloud native network. Allot has been working closely with Rakuten since 2019 when they were rolling out their network infrastructure.

Speaker 1

Rakuten recently announced that their subscriber base grossed 7,000,000. Allot continues to provide Rakuten with solutions as they grow the network to support an expanding subscriber base. Since joining Allot earlier this year, I've been meeting with our key customers and partners globally. I am focused on identifying ways we can leverage our technology to better serve our customers with a goal to reignite growth by expanding within our installed base. Allot has a long tradition of innovation with differentiated technology and a top tier global customer base.

Speaker 1

I have spent time with employees. We have a strong team of professional and talented individuals, many with deep technology and know how and capabilities in the networking and the security space, which stands at the epicenter of TIP spending priorities. I'm currently working closely with the Board and management, including our new CFO, Liat Nahum, who joined us at the beginning of Q3 to formulate a strategic plan to drive renewed growth and long term profitability. I want to share my initial thoughts. We are looking for long term profitable growth opportunities that leverage our lost core capabilities.

Speaker 1

The cybersecurity market continues to experience rapid growth as threats continue to emerge and increase in sophistication. The mobile cybersecurity market is projected by analysts to be an 8,000,000,000 dollars market with over 20% compound average growth over the next decade. Cybersecurity is one of our growth engines and we are considering improvements and innovations to our Sika solution to bring additional value and even better cyber protection to our customers. We are also looking at additional go to market strategies for CCaaS to expand our customer base and address with analysts expecting compound annual growth rate in excess of 40% over the next 5 years. A recent report indicates that around 70% of large companies and 40% of small businesses have adopted at least 1 cloud service to date.

Speaker 1

And moving to the cloud is being driven by the increasing need for remote work solution, digital transformation initiatives and the desire to optimize cost and enhance business agility. We are exploring the potential of our products to address and provide additional value to the cloud and 5 gs markets as we strive for further penetrating markets. While our go to market strategy is global in its outlook, we are underpenetrated in North America market. A lot has seen initial success in the region in recent years, and we have strong references, including Verizon. We are exploring ways in

Speaker 2

which we can leverage

Speaker 3

our early

Speaker 1

We are exploring ways in which we can leverage our early success to deepen our engagement in this region, which today is leading many of the security growth trends. We see a significant opportunity for a lot in North America. As it works with many large enterprises and leading CSPs, and it is clear that customer success and deepening relationships are key drivers to potentially expanding our business within our installed base. We are looking at ways to make a lot more customer centric as we strive to further cement customer relationships, enabling us to penetrate further into organizations with our products and services. A goal would be to structure our organization to better support our customers' business goals as we believe this will allow us to increase business from existing customers.

Speaker 1

I'm working closely with the Board and the management on a strategic plan for renewed revenue growth and long term profitability. We will provide more details as we progress. In summary, with the research management, we believe we are at the start of a new chapter for Allot. In the Q2, we stabilized revenues and significantly reduced expenses. We returned the business to the operating profit breakeven range with positive cash generation.

Speaker 1

I believe we are well positioned to drive sustainable profitable long term growth, and I'm optimistic that Allot will execute on the many opportunities ahead. And now I would like to hand it over to our CFO, Liav Nakhoum, for the financial summary. Liav, please.

Speaker 4

Thanks, Eyal. We reported revenue of 20 $2,200,000 in the quarter, representing a year over year decline of 12%, but up 1% versus the prior quarter. Revenue from our gross engine, CCaaS, were $3,700,000 in the quarter, up 54% year over year and comprising 17% of our revenue in the quarter. Our CCAS annual recurring revenue as of June 2024 was $14,600,000 As we discussed in our press release, full year CC CCAS revenue and CCAS ARR are expected to continue experiencing accelerated growth at around 50% year over year. You can find various breakdowns of our revenue in the table in our press release.

Speaker 4

Our gross margin in the quarter was 70.6%. In the Q2 last year, our gross margin was 71.4% and in the prior quarter, it was 70.4%. While the gross margin depends on the specific product mix sold in the quarter, the long term target for gross margin is an average of 70%, and we are pleased with the return to the 70% level in the first half of twenty twenty four. As Eyal mentioned, we

Speaker 3

reduced expenses considerably over the past year, with a non GAAP

Speaker 4

OpEx at 16 point over the past year, with a non GAAP OpEx at $16,700,000 similar to that of last quarter and down by over 25% from the Q2 of last year. Allot had 500 full time employees as of June 2024. The non GAAP operating loss showed significant improvement with a 95% reduction on a non GAAP basis from $18,900,000 in Q2 last year and $1,200,000 in last quarter to $1,000,000 in Q2 twenty twenty four. For the second half of twenty twenty four, we expect a non GAAP operating profit at around breakeven. In term of non GAAP net loss, we reported $800,000 in the quarter or a loss of $0.02 per share as compared with a non GAAP net loss of $18,300,000 or a loss of $0.49 per share in the Q2 of last year and net loss of $900,000 or a loss of $0.03 per share in the previous quarter.

Speaker 4

Operating cash flow in the 2nd quarter was $1,200,000 Cash, short term bank deposits and investment as of June 30, 2024, totaled $53,200,000 an increase of $600,000 versus $52,600,000 at the end of prior quarter, demonstrating stability in the cash level. Looking ahead, we expect our net cash position to not decrease below the current point. Cash short term bank deposit as of year end 2023 were $54,800,000 That ends my summary. Eyal and myself would now be happy to take your questions.

Speaker 5

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. The first question is from Nehal Chokshi of Northland Capital Markets. Please go ahead.

Speaker 3

Yes. Thank you. And good to talk with both of you here. I'd like to focus on the guidance, especially a CCAD ARR guidance. When you say the same 50% around 50% year over year growth that translates to ARR of around $19,000,000 correct versus $14,600,000 at the June quarter?

Speaker 1

Yes, this is correct. We continue to see increased demand for our Zika service and we reported as we reported this quarter, the 54% growth. We expect this trend to continue in the coming quarters.

Speaker 3

Okay. So when you think about your CCAMS ARR guidance, how do you build up that guidance? Are you thinking about what are the incremental subscriptions you're going to likely see over the September December quarter? Or are you really thinking more in terms of this is the year over year growth that can be sustained?

Speaker 1

So the SECA's growth is comprised from multiple things. The first is obviously winning new accounts that are implemented in our SECA service. This adds to our installed base and provide additional revenue. But we also see that within the existing customers, we are able to expand our Sika to additional services and address additional TAM and by that expand our business and revenue from our existing partners. I will also mention that some of the nature of the business is after we win and launch a service, it takes some time for the service to uptake and as the operator is starting to market and offer this service to its customers.

Speaker 1

And therefore, even within the specific service, there is a potential to grow. So overall, we see a mix of 3 dimensions that are progressing and can grow. Obviously, in some services we reach to the plateau where the operator reach to the max level of revenue that it can generate. And the 50% is build out of those 3 growth that we foresee both growth use of the service within what we already launched, launching new services with our existing base and winning new accounts and starting to launch services with them.

Speaker 3

Okay. That's great. That's really helpful. So now thinking about the in terms of like the actual incremental CCAS ARR that you're guiding to for the rest of the year that's basically $4,000,000 to $5,000,000 here, which would represent the most incremental CCAD ARR for 2 quarters in a row? Or are you expecting that most of this $4,000,000 to $5,000,000 is

Speaker 2

going to come in the Q4 as opposed to be being distributed between the 3rd Q4?

Speaker 1

It will come gradually. I would say more on the last quarter, but we also foresee increase in Q3. Some of the goals will come in Q3 and higher growth in Q4.

Speaker 3

Okay. And you mentioned that there is something that's happening in of calendar 2024 that's going to be a driver to CCAS ARR. What is that driver there at the

Speaker 1

end of calendar 2024? So one of our existing customers got into agreement to expand our Zika services with customers. This is going to be implemented in the coming couple of quarters. And by end of the year, we are looking to expand our Zika service with this EMEA customer. After it will be launched, we are looking to see growth in 2025 from this new service.

Speaker 1

This is a very encouraging agreement that we got as this customer was using our CCaaS service in perpetual way and one time fee and now it's going to contribute to our CCaaS revenue moving forward.

Speaker 3

Got it. Okay. So I think you guys had a relatively well known perpetual CCaaS customer in Vodafone, one of the geos with Vodafone. So presumably that's the one that you're referring to?

Speaker 1

We didn't reveal the name and we are subject to NDAs, but one of our customers that is working with us is going to contribute in the FICAS revenue. I think most important is not the customer,

Speaker 2

but the ability and the importance of the service as FICAS

Speaker 1

is critical. Right. Very good point. And

Speaker 3

Right. True. Very good point. And I guess the key point here is that this is a customer that had a perpetual license for an existing set of customers and now that they see the value of that presumably they would have preferred to get another perpetual license, but because of the strong value they've agreed to the CCaaS revenue sharing?

Speaker 1

Yes.

Speaker 3

Okay, great. And then and so what's your level what's the level of risk that this customer's intention to roll out to additional to next set of customers flips out into calendar 25 as opposed to launching within calendar 24? And if that does occur, what's the potential impact to your guidance then?

Speaker 6

So we have very

Speaker 1

good visibility in terms of our So we have very good visibility in terms of our CCAS revenue as this is based on the agreement already in place. Of course, as some of the projects we have implementation time that might fluctuate as we are implementing within the telco environment that is always requires some integration and some work and things may take time. But overall, we are feeling very confident with the progress and this is why we indicate this guidance. Now it's nice move some of the projects might move the quarter, but it's based on our already secured agreement. So you might say it's quite secured.

Speaker 3

Okay. All right. And then looking at the June Q CCAS ARR results, that was an incremental That was an incremental $900,000 of CCAS ARR, very close to $1,000,000 that you reported for the March quarter. And I don't believe you had any new CSPs that launched within the June quarter. So can you talk about what was the driver of sustaining basically $1,000,000 of incremental ARR in the June quarter?

Speaker 1

So yes, as pointed out before, we did see increase of usage that some of our existing customer managed to penetrate deeper into their installed base. So more of their customers are using now our service, as well as some of the customer launched additional protections. For example, one of the some couple of our customer launched HomeSecure do not only cover and protect their customer from the network side, but also protect them from the home router. So these are incremental expansions within those existing customers that contribute to the revenue growth and we expect this trend to continue as we still have in our installed base customers that didn't fully maximize the potential of their TCAS revenue and penetration as this is why we are expecting growth to continue even within the installed base.

Speaker 3

Okay. And so I think this is a 3rd quarter availability within the Verizon SMB. How does the trajectory of attach rates within Verizon look? Is that continuing to stay steady from when you launched or has it started to the attach rates come down here?

Speaker 1

So overall we feel that the trend is to continue to grow and adoption should increase. We are still have a big potential of installed base of the business customers to address. We are working closely with Verizon to see best ways to market our solutions into the customers. Also as pointed out in my previous comments looking into expansion to additional services, I believe the Verizon relationship is something we need to look long term strategically and we are very optimistic on our ability to further grow within Verizon. Grow within

Speaker 3

Verizon. Okay. Just to be clear when I was talking about tax rate, my impression is that when

Speaker 2

you get

Speaker 3

an incremental subscriber through an existing CSP, it's usually because that CSP has signed up a new subscriber. It's at that point of sale that the CCaaS attach most likely occurs. So that's the attach rate that I'm talking about, the attach rate to new subscribers for CSP? Yes,

Speaker 1

yes. So we see both new attached subscribers. Verizon are reporting growth in the business customers on the fixed wireless service and we are enjoying this growth. We also have the installed base of existing customers with our potential to use our service and not only installed base is already leveraging that. And we are looking on ways to both capture as much as bigger share as possible from the new subscribers as well as the installed base.

Speaker 1

So in overall, we see more potential to grow there.

Speaker 3

Got it. Okay. And so the bottom line is that the attach rate to new subscribers for the fixed wireless customers of Verizon has stayed relatively steady from the March Q to June Q?

Speaker 1

You could say no.

Speaker 3

Okay. All right. Great. And is that in contrast to most of your prior CST launches?

Speaker 1

No. We see that there is it depends on the business model the operator decides to promote the service. Some of them might offer it as a bundle and included as part of the package. So some operate to everyone and some operate as an upsell. And if you operate as an upsell like Verizon operates as an incremental service then it's an opportunity to increase over time.

Speaker 1

It also depends on the network service that we are connected to. It's different if you are protecting the mobile consumer that already we know it's a saturated market everyone has a phone and you need to find the right timing for engagement with the customer to do this upsell as opposed to fixed wireless factor that is a new service to the operator and it's still growing and it's one of the growth engines of many of the carriers, actually in North America. And we are attached to a growing service and by that we are expecting to grow as part of the natural service growth in the foreseeable future.

Speaker 3

Okay, great. And then shifting over to DPI portion of the business, I believe key competitors Sandvine reported significant layoffs. Is this part of the increased pipeline that you're talking about?

Speaker 1

We are mainly focused on what we do and what we approach with our customers. We know that we have a very competitive product for the smart for the traffic management and DTI. Overall, we know that this market is a legacy market with specific customer requirements that we know that there are not so many competitors that can fulfill and we are happy to see more and more requests from customers who we don't know if necessarily come from our competitor situation. We mainly focus on our ability to deliver. But still we see that there is the demand still lower than previous years.

Speaker 1

We are looking to see ways how we can increase our pipeline in this area as well and how we can leverage short term opportunity that might be raised due to market dynamics.

Speaker 3

Okay. And so can you give some quantification of how much improved is the pipeline that you're seeing? And is it showing up in bookings already?

Speaker 1

So it's not it's too early to say and it's not something we are not sharing our pipeline information. I would say that it's now being under analysis and we are looking for the best way to leverage the business potential.

Speaker 3

Okay, great. And then I did notice that you had a relatively large CapEx in the quarter of €1,000,000 relative to prior quarters. Any particular reason to call after that?

Speaker 1

The CapEx is a mix of CCAS customers that we invest and some CapEx investment into our own environments. Liat, maybe you want to add?

Speaker 6

[SPEAKER CARLOS GOMES

Speaker 4

DA SILVA:] No. So nothing special, basically just additional investment around the business as usual and as Rehan mentioned, CPaaS.

Speaker 3

Okay. Thanks for addressing all my questions.

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Earnings Conference Call
WW International Q2 2024
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