Allot Communications Q4 2023 Earnings Call Transcript

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February 15, 2024

There are 5 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Allot's 4th 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 3788040 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, would you like to begin, please?

Speaker 1

Thank you, operator. Welcome to Allot's 4th quarter and full year 2023 conference call. I would like to welcome all of you to the Conference Call and thank a lot's management for hosting this call. With us on the call today are Mr. Erez Antebi, President and CEO and Mr.

Speaker 1

Ziv Leitman, CFO. Erez will provide an opening statement and summarize the key highlights of the quarter. We will then open the call for the question and answer session, and both Erez and Ziv will be available to answer those questions. You can all 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.

Speaker 1

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, 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 demand 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'd now like to hand the call over to Erez Antebi, CEO.

Speaker 1

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. I would like to start with a summary of 20 23. Our 4th quarter revenues were $24,300,000 26% lower than the comparable quarter last year.

Speaker 2

Our total revenues for the full year 2023 were $93,100,000 24% lower than our revenues in 2022. In December 2023, our CCAS ARR was $12,700,000 20 percent higher than our CCAS ARR in September 2023 and 38% higher than our CCAS ARR for December 2022. Our cash and equivalents as of December 31, 2023 were $54,900,000 down $86,400,000 at the end of 2022. Our backlog as of December 31, 2023 was $58,800,000 down from $87,700,000 at the end of 2022. This includes a reduction of approximately CAD26 1,000,000 of previous year's recorded booking we removed from the backlog after applying a new and more stringent framework.

Speaker 2

Our total FTE or full time down from 749 at down from 749 at the end of 20 22. We expect Q1 2024 to end with approximately 5.10, 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 $55,200,000 compared to $23,100,000 loss for 2022. The operating loss in 2023 includes approximately $23,000,000 of reserves for credit loss as we already reported in previous press releases. The transition of the business into CCaaS recurring revenue model has proven to be slower than we originally anticipated.

Speaker 2

During 2023, decided to cancel their launches for now due to their own internal issues. These cancellations were the main reason for our 2023 CCAS revenues, 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.

Speaker 2

I will emphasize that we have not given up on these debts and continuously working to secure their payments. As a result of these issues, our negative net cash flow was 31,500,000 dollars 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 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 bleed in 2024 and put Allot on the track for profitable growth.

Speaker 2

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 Rice joined as our new Chairman. Cynthia Paul, Rafi Kesten and Efrat Markov joined the board as well. Several long serving Board members stepped down including Yigal Ekobie, who is a Co Founder of Allot and until recently was our Chairman as well as Itzik Dansiger and Manuel Echanove.

Speaker 2

I want to take this various board members. I would like to especially thank and acknowledge Yigali Aacopi 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 20 24. As I stated earlier, we had several rounds of cost cutting, primarily by reducing headcount.

Speaker 2

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 5.10 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 2 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 and terrorism, our CSP and enterprise businesses remain soft.

Speaker 2

While some of the weakness is 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 CCaaS 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.

Speaker 2

E, CSPs that have no DPI and wish to add 1. 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 and install 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.

Speaker 2

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 24 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 probability.

Speaker 2

Entering into 2024, we have a significantly larger pipeline of large deals in several geographies in the government business and in AllotSmart 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 AllotSmart 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.

Speaker 2

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, Geo Telefonica, Hutchison, Group, Far Easton, our strong customer base is a testimony to the quality of our solution.

Speaker 2

While the relevant network native security 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 conservative approach as we plan for 2024. While we expect to have new expect to see from our current launched customers with their existing go to market. We will be emphasizing working with customers in order to expand the customer base to whom the services are offered and to make for more aggressive go to market strategies.

Speaker 2

As we have discussed previously, for new CCAS 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 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

Speaker 3

signed

Speaker 2

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 breakeven 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.

Speaker 2

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 $50,000,000 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, dollars 55,000,000 We expect our CCAS 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 CCAS is taking longer to scale than we had initially projected.

Speaker 2

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 and 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 The first question is from Nehal Chokshi of Northland Capital Markets. Please go ahead.

Speaker 3

Yes. Good morning. Rose, you talked about how you need to shift focus towards DSPs in emerging markets as opposed to mature markets, because I guess DSPs in mature markets are starting to embrace the cloud and that's a that makes for I guess less fertile ground for you guys to hunt your deals. Can you double click on that commentary there?

Speaker 2

Yes. I think that CSPs in developed countries are starting to embrace the cloud. And we see very few greenfield opportunities in for DPI in developed countries. On the other hand, in developing countries sorry, and another important point is that in most developed countries, the use cases or I'm sorry, the way that the operators are selling, for month capacity to do whatever you like, things like that. In developing countries where bandwidth is still a lot more expensive and ARPUs are much lower, there are still use cases like policy based charging, social networks free on the weekend, things like that.

Speaker 2

So we see they're both much more significant growth in terms of operator customer base. We see a broader set of use cases that require DPI and we see there's simply more opportunities. So it's not that we're abandoning developed countries, but we're shifting some of our resources to developing countries and lower ARPU countries because that's where we see more opportunity for DPI.

Speaker 3

And what about the refresh opportunity within the short markets? How is that looking?

Speaker 2

Refresh opportunities within, sorry, could you repeat that?

Speaker 3

Within the mature market, within existing customers, is there a refresh with mature market customers?

Speaker 2

There are there is some. There is some, but it's less than what it was, say, 5 years ago. So we're just seeing more opportunities elsewhere. What we are seeing in opportunities elsewhere. What we are seeing in developed countries is we're seeing new use cases, mostly really around fixed wireless access, both by the large carriers and by smaller carriers.

Speaker 2

And that's why I said that we're looking around at different use cases that fixed wireless access carriers and Tier 3 and 4 carriers in these mature markets are going to use. But that's not a segment that we were focusing on in the past. So we'll be focusing on it more now. And like I mentioned in the in what I read earlier, I don't expect that to bring significant revenues already in 2024 because of the longer sales long sales cycle that it takes. So I expect that we'll see the fruits of that more in 2025 beyond.

Speaker 2

But we do see a need there.

Speaker 3

The fruits of investing in emerging markets will be both born in calendar 'twenty five, is that correct?

Speaker 2

No, no, no. I'm sorry, I missed the no, I didn't explain myself. I said that in mature markets, high ARPU markets, okay, Europe, North America, etcetera, we do see new use cases coming up for fixed wireless access carriers and for smaller operators, Tier 3 and Tier 4 operators. These are areas that we did not focus on in the mature markets until now. So we're putting resources to focus on those selling into those markets, in mature markets, into those segments today.

Speaker 2

But I expect since the sales cycle are long that we won't be able to conclude significant revenues from that in 2024 and we'll see the fruits of that in 2025. In developing countries, low ARPU countries, I fully expect to see a business continuing to grow in 2024.

Speaker 3

Got it. Understood. Sorry, I misunderstood, not you. And on a calendar 23 basis, what percent of your DPI revenue came from emerging markets?

Speaker 2

And Ziv, maybe you have the numbers?

Speaker 4

I don't have the exact numbers, but what we do disclose that in 2023, about 60% of the business of the revenues derived from EMEA, which is developed in developing countries, 18% from America and 22% from

Speaker 3

Asia. What I'm trying to establish is that the sales motion in the emerging market is that already an established sales motion where you already have established that you can sell your DPI market into these little markets?

Speaker 2

It is established. It's not new for us. We've been selling there in 2023 and even before and we will and I expect that we will sell more in 'twenty sorry, in 'twenty three and before that. And I expect that we will sell more in 2024.

Speaker 3

And so how does the overall DPI pipeline look like today relative to 12 months ago?

Speaker 2

I think it looks significantly stronger. And like I said, I think we have we see that a stronger pipeline of large deals actually, both in the both for governments and for emerging market opportunities.

Speaker 3

Okay, great. Thanks. I'll take the floor.

Speaker 2

Thank you.

Operator

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

Speaker 3

Hi, Resin. I was just wondering if you could comment a bit further on that increased pipeline that you're seeing in the DPI business or the smart business? And specifically, are you seeing any improvement in close rates or actual large deal closures? I know the pipeline progress is encouraging, but there were definitely issues over the past couple of years with deal slippage. So just curious if you have a sense if the market is returning to healthier behavior, specifically with the customers you're targeting?

Speaker 2

I don't think that we can I think it's premature for me to say that the market is getting much healthier and we're seeing better close rates? I think it's still taking a long time to close. I do see a larger pipeline of large deals that I definitely see, But I would be cautious and wait on commenting whether these deals will start closing faster than they have during this year or something like that. I'm not sure yet. I'm hopeful, but I'm not sure.

Speaker 3

Okay. And then with the Verizon deal and the opportunity to target additional customer segments outside of fixed wireless. I was wondering if you could comment on how the launch is performing in any more detail if they've made any changes to how they're marketing the service within the FWA segment? And just at in any sort of pulse taking you can give us on how that's performing?

Speaker 2

Unfortunately, I can't share any numbers on this, but I would say that it's performing according to plan and perhaps even Verizon, it's considered a very successful launch and a very successful service. And that's why we're looking together with them on changing or not changing, sorry, on adding additional market segments to the service and broadening the scope of whom this service is being offered to. Overall, it's I think it's going very well in my mind.

Speaker 3

Okay. And then how about the CCaaS business outside of Verizon and any trends that you're observing there? I know you've talked a lot about changing the structure of that business emphasize profitability and efficiency and also to sort of cross pollinate the learnings of some of those successful customers you've had?

Speaker 2

Well, I think that with I'd say that almost all I'm saying almost all just because I don't want to maybe there's 1 or 2 that I missed in my mind when I go through the list. Everybody who's launched this is very happy with the service. And they're seeing good returns. They're seeing good penetration. The operators that are providing the service are happy with it, and I think that's great.

Speaker 2

Now we're working closely with those that are providing the service today to try and expand that to get higher penetration, get into more segments and so on. And I think that's very positive and that's what we're building our 2024 forecast on. I would say that in terms of new customers, we made the decision to do a few things. 1 is to focus on a significantly smaller number of new customers than we had been focusing on or we had been looking at, I don't know, just a year or 1.5 years ago. We have significantly reduced our cost base in order to make to enable ourselves, I'd say, the stamina and the ability to continue to grow the CCaaS business while waiting for the whole market at large to embrace concept of network native security and start launching it in much, much larger numbers that we see today.

Speaker 2

I am convinced that at some point in the future, it will happen. But right now, it has not yet. So we're focusing we're spending much less resources and focusing on those opportunities that we believe we have a specific operators will put the right go to market emphasis priority and so on on this type of service.

Speaker 3

Okay. And then as far as the operating expenses, were there any restructuring expenses in the Q4 non GAAP operating expense number? And what's a good number to use when the restructuring activities are complete as far as a baseline of non GAAP operating expenses? So

Speaker 4

the total OpEx for Q4, it was around $29,600,000

Speaker 2

out of it

Speaker 4

approximately 9,000,000 it was one time provision for credit loss.

Speaker 3

So

Speaker 2

it's about it's less than

Speaker 4

EUR 21,000,000 excluding the doubtful debt or the credit loss. We had a few millions of other one time items. And we did say that at the end of the year, we had the 5 59

Speaker 3

FT feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet

Speaker 4

feet feet feet feet Es, while at the end of the Q1, we are expecting around 510. So it's about another 9% reduction in headcount. So it's also a few millions a year.

Speaker 3

That's helpful. So is it fair to think about that non GAAP OpEx number adjusting for one time items would be somewhere in the vicinity of $17,000,000 or so a quarter in Q2 when you go through the restructuring and you have that new lower headcount?

Speaker 4

Again, as Erud said, we decided not to provide the guidance. I think that 70,000,000 euros is too low. But I would guess it will not be 2019. Sorry, you said it will be lower than 19. Okay.

Speaker 4

That's helpful. That narrows

Speaker 3

it down. So thank you for taking my questions.

Operator

There are no further questions at this time. Mr. Antebi, would you like to make your concluding statement?

Speaker 2

Yes, I want to thank everyone for joining our call. And I want to thank you all for your support of Allot. And I look forward to meeting with you and talking to you either in person and sometimes in near future and if not in the next earnings call. Thank you very much.

Operator

Thank you. This concludes the Allot Q4 2023 results call. Thank you for your participation. You may go ahead and disconnect.

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Key Takeaways

  • FY 2023 revenues fell 24% to $93.1 million (Q4 revenues of $24.3 million down 26% YoY), while CCaaS ARR reached $12.7 million in December (up 20% QoQ and 38% YoY).
  • The company ended 2023 with $54.9 million in cash (down from $86.4 million), a backlog of $58.8 million (vs. $87.7 million), and recorded $23 million of credit loss reserves.
  • Non-GAAP operating loss widened to $55.2 million in 2023 (vs. $23.1 million in 2022), driving negative net cash flow of $31.5 million despite multiple cost-cutting rounds.
  • Headcount was reduced by roughly 35% from its September 2022 peak (from 770 to about 510 FTEs by end-Q1 2024) to align costs with slower CCaaS scaling.
  • For 2024, Allot targets breakeven non-GAAP profitability and no net cash burn, with sequential CCaaS revenue growth and a strategic shift of Allot Smart DPI focus toward emerging markets and new use cases.
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Earnings Conference Call
Allot Communications Q4 2023
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