Allot Ltd. (NASDAQ:ALLT) Q4 2023 Earnings Call Transcript

Allot Ltd. (NASDAQ:ALLT) Q4 2023 Earnings Call Transcript February 15, 2024

Allot Ltd. misses on earnings expectations. Reported EPS is $-0.43 EPS, expectations were $-0.14. ALLT isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Allot's Fourth Quarter 2023 Results Conference Call. All participants are 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?

Kenny Green: Thank you, operator. Welcome to Allot's Fourth Quarter and Full Year 2023 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 Antebi, President and CEO; and Mr. Ziv Leitman, CFO. Erez will provide an opening statement and summarize the key highlights of the quarter. We will then open the call to the question-and-answer session, and both Erez and Ziv will be available to answer those questions. You can also find the highlights, the financial highlights and metrics, including those we typically discuss on the conference call in today's earnings press release. Before we start, I'd like to point out the Safe Harbor statement.

This conference call contains projections or other forward-looking statements regarding future events or the future performance of the company. Those statements are only predictions, and Allot cannot guarantee that they will, in fact, occur. Allot does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of changing market trends, delays in the launch of services by our 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. And with that, I would now like to hand the call over to Erez Antebi, CEO. Erez, please go ahead.

Erez Antebi: Thank you, Kenny. I'd like to welcome all of you to our conference call. Thank you for joining us today. I would like to start with a summary of 2023. Our fourth quarter revenues were $24.3 million, 26% lower than the comparable quarter last year. Our total revenues for the full year 2023 were $93.1 million, 24% lower than our revenues in 2022. In December 2023, our SECaaS ARR was $12.7 million, 20% higher than our SECaaS ARR in September 2023 and 38% higher than our SECaaS ARR for December 2022. Our cash and equivalents as of December 31st, 2023, were $54.9 million, down from $86.4 million at the end of 2022. Our backlog, our backlog as of December 31st, 2023, was $58.8 million, down from $87.7 million at the end of 2022.

This includes a reduction of approximately $26 million of previous year's recorded booking we removed from the backlog after applying a new and more stringent framework. Our total FTE or full-time employee count as of December 31st, 2023 was 559, down from 749 at the end of 2022. We expect Q1 2024 to end with approximately 510, which is a reduction of about 35% compared to when FTE peaked in September 2022. Our non-GAAP operating loss for the year 2023 was $55.2 million compared to $23.1 million loss for 2022. The operating loss in 2023 includes approximately $23 million of reserve for credit loss as we already reported in previous press releases. The transition of the business into SECaaS recurring revenue model has proven to be slower than we originally anticipated.

During 2023, two large operators we expected would launch services, one in North America and one in Europe, decided to cancel their launches for now due to their own internal issues. These cancellations were the main reason for our 2023 SECaaS revenues but whereas 2023 SECaaS revenues ended up lower than we had expected at the beginning of the year. In addition, our core DPI business is experiencing macro-related headwinds. Budget tightening by both governments and CSPs led to lower 2023 smart bookings and revenues than we expected at the beginning of the year. After reassessing our ability to collect on several deals we had signed in previous years, we took a significant reserve for credit loss. I will emphasize that we have not given up on these debts and are continuously working to secure their payments.

As a result of these issues, our negative net cash flow was $31.5 million. We went through several rounds -- we went through several rounds of cost cutting and restructuring through the year and ended 2023 with a significantly reduced cost base. 2023 was extremely disappointing for us all. We have made significant changes in the company as we look to drive improved results going forward. All of us, our board, the management team and myself personally are all fully committed to turning the situation around. We are committed to doing whatever is needed to stop the losses and cash lead in 2024 and put Allot on the track for profitable growth. I would like to turn now to discuss the changes we made in Allot and what to expect going forward as a result.

Over the past couple of years, there were several changes to our Board. David Reis, joined as our new Chairman. Cynthia Paul, Raffi Kesten and Efrat Makov, joined the Board as well. Several long-serving board members stepped down, including Yigal Jacoby, who is a Co-Founder of Allot and until recently was our Chairman, as well as Itsik Danziger and Manuel Echanove. I want to take this opportunity to thank the various board members. I would like to especially thank and acknowledge Yigal Jacoby, whose contribution to Allot was immeasurable. As we announced in July, given the challenges facing our business, the Board formed an executive committee that has been working with management to identify and recommend opportunities for further improvement with a focus on driving sustainable profitability and enhancing shareholder value.

Management, together with the executive committee worked together to form the budget and operating plan for 2024. As I stated earlier, we had several rounds of cost cutting, primarily by reducing headcount. Our FTE is down from a peak of 770 in September 2022 to 559 at the end of 2023. I expect our FTE to be around 510 by the end of Q1, about 35% lower than when it peaked in September 2022. At a high level, our plan for the company in 2024 is to reach breakeven, while also investing in the business to drive profitable multiyear growth. As you know, Allot operates in two business lines, Allot Smart and Allot Secure. On the Allot Smart front, while we continue to see growing interest globally from governments as they look to block illegal activities such as drug trafficking, child pornography and terrorism.

Our CSP and enterprise businesses remain soft. While some of the weaknesses due to cutbacks in spending by governments and CSPs, we also need to continue shifting our resources and focusing toward developing countries and governments as developed countries and enterprises embrace the cloud. On the Allot Secure front, while spending by CSPs remains challenging and deployments are taking longer than we previously expected, our SECaaS revenues continue to grow double digits with a strong customer base. We'd like to discuss now our Allot Smart business. I believe we have a very strong product. We are winning many of the new greenfield opportunities we see i.e. CSPs that have no DPI and wish to add one. In multiple CSPs, we are replacing our competition where the opportunity arises.

This is true for some CSPs in EMEA, APAC and North America, and this is also true in our enterprise business. The decision to replace an installed and working DPI system is not common, since it is a big and expensive decision for a CSP. But when they have decided to do so, it historically has resulted in market share gains for Allot. We have had significant challenges with collection in several large deals. As a result, we modified our sales compensation and accountability procedures to emphasize collection and significantly reduce the chances of such problems occurring again. I would like to discuss our 2024 plan for Smart. We took a conservative view of our planned bookings and revenues. Our approach was built bottom-up segment by segment and region by region from the backlog, expected maintenance and support contracts, small expansion deals and large deals with a conservative success probability.

Entering into 2024, we have a significantly larger pipeline of large deals in several geographies in the government business and in Allot Smart opportunities in low ARPU countries. As part of our plan, despite the reduction in overall resources due to cost-cutting initiatives, we have increased resources for Allot Smart sales in several areas where we see a strong pipeline. In addition, we have identified several market segments we have not focused on historically where we see a need for our solutions. These include certain specific use cases for the fixed wireless access needs and small Tier 3 or 4 CSPs. We allocated resources to go after these market segments. And while we do not expect significant sales in 2024 due to the long sales cycle, we feel it can help make a difference for us in the years ahead.

We'd like to discuss now our Allot Secure business. I believe in Allot Secure, we have a very effective and highly differentiated product. We are the leaders of network-native security solutions for the mass market. The clearest evidence of our leadership is a significant list of marquee customers who have launched network-native security services for their customers. Verizon, Vodafone, Jio, Telefonica, Hutchison, PPF Group, Far EasTon, our strong customer base is a testimony to the quality of our solution. While the relevant network-native security market for CSPs is developing slower than we had originally hoped and expected, we are experiencing strong double-digit growth. This business remains our growth driver into the future, and we believe we are well positioned with existing customers and potential new customers.

To ensure staying power, we reduced our expenses to reduce cash burn while waiting for the market to catch up. We are taking a conservative approach as we plan for 2024. While we expect to have new SECaaS launches in 2024, we built our internal revenue forecast to rely almost entirely on the revenues we expect to see from our current launched customers with their existing go-to-market. We will be emphasizing working with existing customers, in order to expand the customer base to whom the services are offered and to make for more aggressive go-to-market strategies. As we have discussed previously, for new SECaaS customers, we are focusing on a select number of interesting opportunities. One exciting new launch in 2023 was, of course, Verizon business, which has successfully launched its network-native security service, incorporating Allot Network Secure.

The launch is going well. The number of customers is growing, and we are discussing with Verizon's several expansion opportunities to different customer segments. While we cannot be assured of our success in adding additional customer segments, I believe Verizon is the largest signed SECaaS opportunity for Allot. We remain excited about our SECaaS opportunities as operators continue to be interested in launching network-based security service, and we have a differentiated, scalable solution for CSPs. Looking ahead, I want to summarize our expectations for 2024. Reaching profitability is our main goal for 2024. Accounting for what we consider an achievable revenue target together with a significantly reduced cost base, we expect to break even on our non-GAAP operating profit for the full year.

As there is seasonality in the year, with the second half typically better than the first half, we expect to start with some loss in the beginning and to make up for it in the second half. In terms of cash, we expect not to burn cash in 2024 as a whole. We expect our cash will initially continue to go down and bottom out at around $50 million, after which it will start going up to reach a similar cash level at the end of 2024 as we had at the end of 2023 i.e. $55 million. We expect our SECaaS revenue to continue to grow sequentially quarter-over-quarter throughout 2024. We have decided that this year, we will not be providing further guidance for the yearly or quarterly numbers. To summarize, we have made the tough decisions necessary to right-size our cost structure to provide us with staying power, given that SECaaS is taking longer to scale than we had initially projected.

We have scalable proven products. We have a strong customer base. It is time for us to execute and reallocate resources to the best ROI opportunities to drive sustainable profitable growth. And now I would like to open the call for Q&A, and Ziv and myself will be available to take your questions. Operator?

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

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