Allot Communications Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 31, 2023

There are 8 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Allot Second Quarter 2023 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.

Operator

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 1212-378-8040 or view it in the News section of the company's website at www.alote.com. I would now like to hand over the call to Mr. Kenny Green of EK Global Investor Relations. Mr.

Operator

Green, please begin.

Speaker 1

Thank you, operator. Welcome to Allot's 2nd quarter 2022 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 line today are Mr. Erez Antebi, President and CEO and Mr.

Speaker 1

Ziv Blackman, 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 fact occur.

Speaker 1

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, reduced demand and the competitive nature of the security systems industry as well as other risks identified in the documents filed by the company with the Securities and Exchange And with that, I would now like to hand the call over to Erez. Erez, please go ahead.

Speaker 2

Thank you, Kenny. I'd like to welcome all of you to our conference call. Thank you for joining us today. Our 2nd quarter revenues were $25,000,000 24% lower than the comparable quarter last year. In June 2023, our CCAS ARR was $9,700,000 4 percent higher than our CCAS ARR in March 2023 and 41% higher than our CCAS ARR for June 2022.

Speaker 2

The first half of twenty twenty three was challenging for us. The transition of the business into CCaaS recurring revenue model has proven to be slower than we originally anticipated. In addition, our core DPI business is experiencing some macro related headwinds. While we don't expect these challenges to disappear in the near term, given the challenging economic backdrop, we continue to make progress with the aspects of the business that we can control. I remain optimistic about our future.

Speaker 2

During today's call, I will discuss the challenges we are facing, the opportunities we see and why I am confident in the future. During the Q2, our cash balance fell by $11,000,000 as a result of the loss, inventory increase and accounts payable decrease. This cash burn is, of course, higher than we would like it to be. As our cost cutting efforts come into effect partially in the Q4 and in full in 2024, together with the projected increase in revenues, we expect to improve our cash flow and we are reiterating our expectations to be profitable in 2024. Our gross margin in the 2nd quarter was 71% due to our deal mix.

Speaker 2

We continue to target a gross margin of 70% for 2024, despite expecting a lower gross margin in Q3 as a result of the specific deal mix. In July, we announced an increase of approximately $14,000,000 in the allowance for credit losses relating to receivables arising from sales in 3 African countries. We have been assessing the collectability of these accounts receivable on a quarterly basis. And in our most recent assessment, the company determined that these accounts previously disclosed as outstanding will not, with reasonable certainty, be collected. We are continuing our efforts to collect these amounts and believe we should be able to collect them.

Speaker 2

However, as I said, we can no longer state this with reasonable certainty, so we took an allowance for credit losses. As we announced in July, given the challenges facing our business, the Board formed an executive committee that has worked with management to identify and recommend opportunities for further improvement with a focus on driving sustainable profitability and enhancing shareholder value. The executive committee and management agreed that the right direction is to maintain CCaaS as our main growth engine. In this area, we will continue to focus on network native security solutions. In our traffic management and analytics solutions, we are modifying our initiatives to prioritize profitability.

Speaker 2

In order to conserve cash, reach profitability in 2024 and ensure that we have staying power even as CCaaS takes longer to ramp up, we are implementing a cost reduction plan. Specifically, our actions will result in a reduction of approximately 20% from our current employee headcount as well as other cost reductions. We expect this cost cutting effort to save approximately $15,000,000 per year. The relevant employees that may be affected have already been notified. This cost reduction plan will have a one time cost of approximately $2,000,000 which will be booked in the Q3.

Speaker 2

Now I would like to discuss our different product lines. I would like to start by discussing our traffic management and analytics business addressed by our ElokSmart product line. The main use cases we see today in CSP continues to be in traffic management, congestion management, quality of user experience, especially for video, policy and charging control and digital enforcement. As governments look to fight crime and terrorism, we see a growing interest globally in being able to block illegal activities such as drug trafficking, child pornography and terrorism. We have solutions that address these issues and we are seeing growing interest in our products.

Speaker 2

We will continue to pursue this direction as we believe this is a segment that will continue to grow. In CSP, we see the need for analytics continuing. In traffic management use cases such as fair use, policy based charging and congestion management, we still see quite a few opportunities from low auto countries, some of which are to replace a competitor's product. In our enterprise business, we continue to see demand for on prem systems such as ours from enterprises in developing countries where bandwidth is relatively expensive. In developed countries such as North America and Europe, we see reduced demand from enterprises that are moving to the cloud, but growing demand from government entities that require, mostly for security reasons, on prem solutions.

Speaker 2

Currently, after our review with Broadcom, we remain the major solution provider for this need. Overall, we recognize that we are facing several challenges that continue to make it more difficult for us to forecast our business over short time frames. 1st, as we discussed in previous earnings calls, due to tighter headwinds and tighter expense control by the CSPs, it is taking longer to close DPI deals than in the past, and the total number of DPI bids for CSPs we are seeing is not growing. 2nd, the move of CSPs to 5 gs standalone core is very slow, negatively impacting our ability to grow with our 5 gs NetProtect product. 3rd, in the enterprise market, we believe the growth we saw as a result of the Broadcom deal has peaked.

Speaker 2

As we stated in our last earnings call, while we continue to have a strong pipeline of large deals for the remainder of the year, the dynamics I just mentioned, together with the potential lumpiness of large deals, makes it challenging to forecast our DPI business over short timeframes. I want to turn your attention now to what we see in our cyber security business and how the market is developing. As I have said previously, Aloft is transforming into a cyber security company and this is where we see most of our future growth coming from. Our CCaaS revenues are growing steadily, albeit not at the pace we would like as we continue to see slower deployment than expected. Nevertheless, there are quite a few positive notes worth highlighting.

Speaker 2

I would like to start with the North American market. I'm very happy to announce that a couple of months ago, Verizon Business launched their network native security service, which incorporates Allot network secure. I'm very excited about this offering from Verizon, which provides protection services for segments of Verizon's fixed wireless broadband business customers and help defend them against cyber threats. This cybersecurity service puts a layer of defense at the Internet daily play, intercepting threats before they can even reach devices. Verizon believes simple, zero touch solutions like ours are especially helpful for small businesses, which might not have the in house expertise to manage more complicated security measures.

Speaker 2

The service is being well received and we are discussing with Verizon various ways to expand its reach. I will note that Verizon did not generate any CCaaS revenues for Allot during the Q2, but Verizon will begin contributing to revenues in the Q3. As I stated in earlier calls, I continue to believe that the Verizon opportunity is our single largest signed CCaaS opportunity. Furthermore, as other CSPs see Verizon success, I believe some will follow suit. We are already getting enhanced interest from other operators to better understand what Verizon is doing and how they might do the same.

Speaker 2

On a bittersweet note, one of the operators we signed with a Canadian CSP has decided not to launch the CCaaS service for now as they are refocusing their business following a major network issue they had unrelated to Allot. This CSP is also an Allot smart customer and they have recently expanded significantly the CapEx business they have with us. Cancellation of this CCaaS launch is a significant contributor to the reduction in our ARR forecast for the year. In APAC, we are also progressing well. Recently, we signed 2 additional CCaaS deals in APAC.

Speaker 2

One is a relatively small deal where we deploy network secure in a small Pacific island. The other is a DNS secure deal with a major Tier 1 telecom operator with more than 50,000,000 subscribers, most of whom are prepaid. The services will initially be offered to their postpaid customers and potentially later to other high value customers. I believe these deals are a testament to the importance CSPC in providing business and consumers with network based security services. Also in Asia, Far Easton or FET in Taiwan has experienced a very successful launch.

Speaker 2

Since the launch in December of 2022, the service has been expanding rapidly and we are now in the process of expanding the capacity to handle more subscribers. I will note that our ARR from FET has not been growing even as the number of subscribers has ramped because FET committed to a minimum payment per month from day 1. That minimum has been exceeded, so we should start seeing ARR growth as the number of subscribers grow. FET and their President look at security service as strategic and important to their brand image and in line with their core commitments to their customers. As we discussed in the past, this is an excellent example of how successful CCaaS can be when the CSP aligns security with its strategy.

Speaker 2

It is noteworthy that this SEC experience shows that on average, the security service has blocked 47 attacks per user per month. I believe this is a strong validation of the importance and value of the network native security solution. As we look at the market, we see that the direction and momentum of operators interested in launching network based security services continues to be positive. We see that in many markets, the various operators provide services that are on par with respect speed, coverage and reliability. As they look for differentiation, network based security is emerging as an important element.

Speaker 2

Because it is a service native to the operator's network, network security is directly coupled to the access network itself. There are several Tier 1 operators who have reached the conclusion of providing network based security to their customers is of significant importance to them and they are discussing with us how to do so. In addition, we are in discussions with several other operators globally where we hope to be able to conclude deals over the coming months. I would like to say a few words about convergence. ESPs worldwide have been talking about convergence for quite a few years, mostly combining their fixed and mobile services.

Speaker 2

Unfortunately, many CSPs have been struggling to bring tangible value to their customers and basically provide unified billing and discounts.

Speaker 3

Secure platform combined

Speaker 2

security enforcement in the core under DNS line and in the routers under a unified management system and portal. This is perhaps one of the few tangible convergence values CFPs can bring to their customers offering a unified experience on both mobile and fixed access. We don't see CSPs starting with a convergent offering, but we are in discussions with several CSPs in Europe that have launched our CCaaS service to mobile customers and are looking to expand it to a converged mobile plus fixed offering. As we discussed in previous calls, I want to remind you that we changed our strategy for the Allot secure business. We are putting more emphasis on large strategic accounts that can have a high revenue impact, while in small to medium deals, we are looking for minimum revenue thresholds.

Speaker 2

These changes reduce the number of new CSPs we can sign up. However, it allows us to focus our resources on the smaller number of CSPs that see more strategic value in the CCaaS service, which should drive profitable revenue growth for our look. We remain excited about our CCaaS opportunity as we have a differentiated scalable solution for CSPs. Our CCaaS revenues for the Q2 were $2,400,000 and the CCAS ARR at the end of the second quarter was $9,700,000 a significant growth year over year. As of June 30, 2023, we have 28 signed customers, but 7 of them have been canceled and discontinued mainly due to our strategy to focus on large customers.

Speaker 2

Unfortunately, only 14 have started to generate revenues. Most of them are relatively small operators and the majority of them launched the service only to a portion of their subscriber base. There are a few more launches planned for this year. Looking ahead, I want to summarize our expectations for 2023. We expect CCaaS revenue for 2023 to be around $11,000,000 We expect the CPaaS ARR for December 23 to be between $12,000,000 $14,000,000 and our total ARR, including support and maintenance, to be between $51,000,000

Speaker 1

$55,000,000

Speaker 2

Regarding our total revenue, operating loss and cash flow guidance, we are providing a wide range because of a specific large expansion deal we expect to close this year. We expect our total revenues for the full year 2023 to be between $95,000,000 $110,000,000 non GAAP operating loss to be between $38,000,000 $44,000,000 including the $14,000,000 doubtful debt reserve and cash burn for the whole year to be between $24,000,000 $44,000,000 As I stated, we remain committed to reach profitability for the full year 2024. This will be achieved with some revenue growth, mainly in CCaaS combined with tight expense control. We expect the 3rd quarter revenues to be approximately $25,000,000 but with a lower than average gross margin of 50% due to the specific expected deal mix. Our strategy remains the same.

Speaker 2

While we believe that our DPI business has limited growth potential and the lumpiness of the business makes it difficult to forecast over short time frames, we think we can maintain a stable level of revenues through new use cases and market share gains, and we are using DPI's profitability and cash flow generation to invest in our CCaaS business because our CCaaS business is where we see significant future growth opportunities. While our CCaaS revenues are being recognized later than we would have liked and later than we expected, I remain convinced of the large potential of this business and I'm confident that it will grow significantly in the coming year. I have full faith in our company, our team and our products, and I believe the actions we are taking to make our growth and I believe in the actions we are taking to make our goals achievable. And now I would like to open the call for questions and answers, and Ziva and myself will be available to take your questions. Operator?

Operator

Thank The first question is from Eric Martinuzzi of Lake Street. Please go ahead.

Speaker 4

I have a question regarding the bad debt write off, the $14,000,000 credit allowance. Are we still doing business with the reseller or resellers in Africa that were responsible for that write off?

Speaker 3

Hi, Eric. We are not doing the new business with this reseller, but we are making an effort to collect the money. But we don't have any new business.

Speaker 5

All right.

Speaker 4

The strategy examination that you announced on July 17, are we complete with that? Or is that still an ongoing process? Obviously, we're focused on growth on CCaaS and a return to profitability. But does that say that the strategic examination is complete? I would say

Speaker 2

that it's that we've done a lot of work over the past few weeks on this. We've reached some high level conclusions, both on the general strategic direction that we are continuing to focus on the CCaaS opportunity because we believe in it. We've reached the conclusion that we need to significantly reduce our cost structure, which we are implementing already. And I think that we will continue to work to see how we both implement this and continue to bring the company back to growth in the future. So I wouldn't say it's complete.

Speaker 2

I would say it's a work in process, but we've done a lot on until now.

Speaker 4

Okay. And I appreciate the color on the full year outlook as well as the Q3 revenue of $25,000,000

Speaker 2

and I think you said it was 50% on the gross profit.

Speaker 4

What should we be thinking about for a normalized operating expense post restructuring?

Speaker 3

So as we said, the total cost reduction is supposed to be around $15,000,000 on yearly basis. And let's assume the baseline could

Speaker 6

be

Speaker 3

Q2

Speaker 1

core.

Speaker 3

But altogether, as we said, we are targeting to be profitable in 2024.

Operator

The next question is from Nehal Chokshi of Northland Capital Markets. Please go

Speaker 7

ahead. Yes, thanks. Ziv, I'm sorry, I couldn't hear you that well. What was the comment what was the detail on the OpEx run rate that you had just given out? Could you say that again, I'm sorry?

Speaker 7

So

Speaker 3

the baseline is the Q2 expenses. And the $50,000,000 reduction in cost, most of it will be in expenses and smaller part will be in coke. But altogether, this should bring us to be profitable in 2024. But as was mentioned, we will see the full effect of this cost cutting on the course of the end of the year.

Speaker 7

Okay, understood. And when you say profitable in calendar 2024, does that mean profitable in each quarter of calendar 2024, profitable for the full year calendar 2024 or just profitable by the end of calendar 2024?

Speaker 3

It means full year of 2024, doesn't mean each one of the quarter, as we mentioned already in previous quarter.

Speaker 7

Okay. And so looking into the September quarter, what's the worst case scenario you see transpiring with respect to the DPI business?

Speaker 2

Not quite sure how to answer that. And honestly, I'm not quite sure of the question. We gave the forecast for the revenue or the guidance, I would say, for the revenues in the 3rd quarter. So maybe if you can elaborate what you're looking for, I can try and help.

Speaker 7

Yes. Okay. Let me be a little bit more explicit. So your full year guidance of $95,000,000 to $110,000,000 That's a big range given that you have 2 quarters left. What I'm trying to figure out is if you basically see this $25,000,000 that you did in the June quarter as a sustainable level given your order book and the uncertainty is both whether or not you have an inflection in DTI within the December quarter?

Speaker 7

Or is there uncertainty with respect to even the September quarter revenue level?

Speaker 3

So Niel, as we talked about the finishing also in previous quarter, even at this point, 1 month before the end of the quarter, we don't have all the revenues in hand. So when we say our forecast for the 3rd quarter is the $25,000,000 this is our forecast. We don't have it in NAND. So for 2, we don't have all the revenues of T4 in NAND. So when we set the range in $95,000,000 to $110,000,000 this is our focus.

Speaker 3

It doesn't mean that we have an end 95,000,000 and we are just waiting for the after. This is the normal cost of business. With 12% situation also a year ago and a year 3 years ago.

Speaker 7

Okay, understood. And how do you know that the DPI softness is definitively macro related as opposed to say, hey, encryption is reducing irrelevant to the DPI market or some other market phenomenon that might be going on?

Speaker 2

I think it's very hard it's hard for me to really differentiate what the macro level consists of. I do see the operators tightening very much their budgets and expenses. You've seen operators in the U. S. Announce layoffs and reduction in costs.

Speaker 2

You've seen that in operators in Europe. So this affects, I think, not only a lot, I think it probably affects other technology providers who are selling to the operators. Now I don't think that there is I don't see technically a material change in the ability of VPI to provide value because of encryption or something like that. We're dealing with increased encryption, and we have certain algorithms and I would say certain algorithms, some of the heuristic sounds based on AI and machine learning to help us cope with that. I don't think that that's a major contributor, but the macro environment is definitely harder for operators and as a result for companies providing them with their technology.

Speaker 7

Okay, great. Thank you for answering my questions.

Operator

The next question is from Mark Silk of Silk Investment Advisors. Please go ahead.

Speaker 5

Excuse me. Thanks for taking my questions. My question is on the July 20 announcement with Tier 1 with $150,000,000 mostly prepaid customers. So you're initially offering it to the postpaid customers and then potentially to other high value customers. Does that include the prepaid customers or that's basically something that's not a product for the prepaid?

Speaker 2

High value customers include the postpaid customers, which typically pay a lot more than prepaid, and some of the prepaid customers as well. Prepaid means different things in different geographies. I mean, it always means prepaid, obviously, but it's not necessarily just very, very poor people who have very, very little money and are trying to save every cent. It's also a way of how people spend their money and how they choose to contract with the telecom operator. So high value customers are a mix of both.

Speaker 2

Now having said that, the majority of the and you can imagine, this is an APAC customer, tens of millions of customers. We said more than 50. You can assume that a majority of them are really revenue producing or very low ARPU type customers to the operator and they will probably not be relevant or not relevant to a large extent to the service.

Speaker 5

Okay. So there's reports that China continues to basically try to infiltrate Taiwan as far as with fishing, etcetera, etcetera. Are you seeing that from other Asian countries that that might be an impetus to use your product or you don't really hear that from some of these customers?

Speaker 2

No. I haven't heard that as a reason or motivation from any of our customers or any of the operators, neither in Taiwan or elsewhere.

Speaker 5

Okay. And then I'm just concerned about this 2024 profitability, which I know you're trying to do the right things here, but I'm worried that we could have a recession next year and then you have another excuse. So I think it's important that the executive committee as you're looking at this, as they go throughout the rest of the year, they got to really make an assessment if you get to you can get the profitability because the story is getting a little old and it's frustrating because you have fantastic technology. So I think they've got to kind of maybe think outside the box because your stock price is not reflecting your revenues or the success of your product. So has that been discussed as well as saying that maybe a bigger company could do better?

Speaker 2

I've shared what I can from the discussions that we've the conclusions that we've had with the Executive Committee. And I think, as I said with the response to a previous question by someone else on this call, the work is not done. We've reached the conclusion until now, and we will continue to work to make sure that we find a way both to reach profitability next year and to create shareholder value.

Speaker 5

Okay. And on a positive note, I did see an advertisement for Verizon and I did call them and it's being well received. And I said there's been any issues with the customers. And they say usually if people call us back, then there's problems and they haven't really had any callbacks. So let's hope that that's going to accelerate growth and maybe bring some other big customers on board.

Speaker 5

So good luck, I guess. And I'd like to see the Board and management buy shares in the open market. It's the only way to show confidence because talk is cheap, money talks. Thank you.

Speaker 2

Thank you.

Operator

The next question is from Rory Wallace of Outbridge. Please go ahead.

Speaker 6

Hey, Erez and Tziv. Following on Mark's point there, it does seem like Verizon is showing a pretty good commitment to the service with the way they've launched it, the way they've priced it, they're certainly pricing it as a pretty incrementally valuable service of $10 or $20 per line. And there's obviously 30,000,000 Verizon business lines across their group, but currently probably $1,000,000 of that or less

Speaker 1

is on FWA. So you mentioned

Speaker 6

potential expansion opportunity within Verizon based on how the service seems to be going for them. So far, it would seem logical that they might expand at some point. But I wanted to understand your thought process around that. And also just when you talk about it being the largest contract that you've won and the biggest opportunity you see, what are you sort of basing that analysis around? Is it the FWA opportunity over a few years' time and that alone is enough to make it the biggest?

Speaker 6

Or is it really predicated on kind of growing outside of FWA and into the full business group or even the consumer group?

Speaker 2

Okay. So I'm obviously very excited about what's happening in Verizon. And so far, it looks to be successful for everyone. And that's great. Now, right now, as you mentioned, it is being sold only to fixed wireless access customers.

Speaker 2

It's we're talking and I mentioned this in my notes before, we're talking to Verizon about because it's going well, about possibility to expand that, to expand the service and the reach of the service beyond what it is today. I cannot elaborate where this will be expanded to and if it will be expanded to anyone. When things if and when things are concluded and Verizon allows us to share, I'll be happy to share it. Regarding my comment on the size of potential size of Verizon. I think that the contract we have is with Verizon, the company.

Speaker 2

It's no, we don't have a contract on fixed wireless access in Verizon. We have a contract with Verizon. We have launched it to a certain segment. When I look at overall, I look at the size of Verizon and the potential where this can go. I look at the not just the size number of subscribers, but I also the fact that Verizon is in the United States with high revenue per customer and high ARPU.

Speaker 2

You mentioned that the price that they're putting out in the market for the security services between $10 to $20 a month. Then I think that translates to a very large opportunity for us. How much of that opportunity materialize, I do not know. But anyway, I look at it, I believe today, the single largest signed opportunity that we have.

Speaker 7

Yes, that makes a lot of sense and

Speaker 6

I appreciate those comments. So yes, good work and congratulations on that launching and good seeing well so far. To your comments on the rest of the U. S. Market or sort of halo opportunities coming out of Verizon watching the service, Can you be any more specific about the nature of those conversations?

Speaker 6

I know you it takes a long time to win these Tier 1s and you've been knocking on their doors and having meetings with senior executives for some time in some of

Speaker 1

these companies. But is it

Speaker 6

really potentially accelerating actual signings of large near term opportunities for you?

Speaker 2

I think it's as you said correctly, it's a long process. It takes time. It's hard for me to predict any short term revenue short term, sorry, results. So I would rather than not create any expectations that I may not be able to stand behind. So I think we're talking to the other operators.

Speaker 2

I think it's interesting. I think there's potential there, but beyond that I wouldn't comment.

Speaker 6

Got it. And then as far as that Tier 1 Canadian operator, they've had a few things come up and it's not totally shocking to hear that, I guess, they're pushing out the launch. I just wanted to be clear, are they backing away from offering CCaaS at any point in time? Or is it just that they've sort of deferred the launch date to an unknown future date, So you've kind of conservatively taken that out of any future projections. And then I think you mentioned they're still taking DPI equipment from a lot.

Speaker 6

And I was wondering if that might be part of the reason for the Q3 gross margin being lower might be that maybe there was a bundled thought process around how you structured that contract. Just trying to understand because the gross margin, did you say 5.0 or 6.0 for Q3, but it's a lot lower than the gross margin you've had in any other quarter?

Speaker 2

So it's at 5.0 for Q3, 50% for 5.0 for Q3.

Speaker 1

Q3.

Speaker 2

Between postponing indefinitely to not doing it because it's subject to change anyway regardless. So right now, we're not doing it. That's how we look at it. In the future, it should convey many things. It's obviously no longer in any of our forecast.

Speaker 2

And regarding the Q3 projected margin, it's very low and it's related to a mix of a few deals. But beyond that, I kind of want to specify where exactly it's coming from.

Speaker 6

Okay. That's fair. And then with sort of other large opportunity on Vodafone for HomeSecure, I think you mentioned the convergence of mobile and then fixed services. But can you comment any more on the opportunity with Vodafone or any of these other fixed line deals that you've won for the home secured product?

Speaker 2

Like we announced, I don't remember when, but a while ago, we've signed an agreement with Vodafone to launch the HomeSecure product. And that's we're very hopeful that this will launch and it will be successful. I don't have other comments on that. We're talking to various other operators, both in Europe and in other places, about launching HomeSecure. It's one of our product lines.

Speaker 2

We are actively selling it. And I'm not sure I have much more to add beyond that. Okay. And then the operating expense

Speaker 6

run rate, you mentioned to use Q2. You previously said Q3 would come down from Q2 levels out before this most recent cost reduction action. So is there some cushion in that? Or is there a reason why that prior sort of expected step down in the Q3 OpEx level wouldn't have been happening anyway?

Speaker 3

First of all, in Q3, as we said, we are going to book the $2,000,000 of onetime

Speaker 2

REIT expenses. The other expenses

Speaker 3

would be roughly in the same level as the second quarter.

Speaker 6

Okay. Got it. And then in terms of working capital, you've had the inventory come up quite a bit.

Speaker 7

I guess some of that's going

Speaker 6

to be related to this the lower margin business. But what should we expect from working capital going forward? I mean is your goal going to be to kind of bring back these days of inventory and receivables and payables kind of back to where they were? And that should be a tailwind to cash flow at some point, letting alone that $14,000,000 bad debt receivable that's still sitting out there. I mean, is it fair to think that working capital should normalize at some point?

Speaker 3

Currently, I wouldn't take it into account, it will sharply go down, but definitely, it will not be increased further.

Operator

This concludes the question and answer session. Mr. Antebi, would you like to make your concluding statement?

Speaker 2

Yes. I want to thank you all again for joining this call and for asking the questions and participating. And I look forward to talking to you in the next conference call next quarter. Thank you very much.

Operator

Thank you. This concludes the Allot Second Quarter 2023 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.

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Allot Communications Q2 2023
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