Allot Ltd. Q1 FY2026 Earnings Call

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. Operator provided instructions on how to ask questions. As a reminder, this conference call is being recorded. If you have not received the company's press release, please check the company's website at www.allot.com. With me today on the line are Mr. Eyal Harari, CEO; and Ms. Liat Nahum, CFO. Following Eyal's prepared remarks, we will open the call for the question-and-answer session; both Eyal and Liat will be available to answer those questions. You can all find the highlights of the quarter, including 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 following safe harbor statement. This conference call may contain projections or other forward-looking statements regarding future events or the future performance of the company. Those statements are early 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 Allot 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. 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 reconciliation tables. And with that, I would now like to hand the call over to Eyal Harari, CEO of Allot. Eyal, please go ahead.

Thank you, Kenny. We are pleased to report a very strong start to 2026. Our first quarter revenues were up 14% year-over-year, representing a meaningful acceleration over last year and marking our third consecutive quarter of double-digit year-over-year growth. Our results reflect the continued successful execution of our cybersecurity-first strategy, with SECaaS ARR growing nearly 60% year-over-year in the quarter. SECaaS revenue rose to approximately one-third of total revenues in the quarter, up from approximately one-fifth a year ago. SECaaS growth is driving the continued scaling up of our recurring revenue base, which now represents 67% of total revenue and provides us with strong visibility into the quarters ahead. We have clearly transformed Allot into a profitable growth company. These solid results, combined with the strong visibility, give us increased confidence that we are well positioned to continue our revenue growth trajectory at a mid-teens rate over the coming year. In terms of profitability, we are benefiting from the significant operating leverage inherent in Allot's business model. Improving gross margin, along with significant operating leverage, led to substantial improvement in profitability. This operating leverage and enhanced profitability contributed to Allot generating its strongest ever quarterly operating cash flow. Other contributors to this strong cash flow generation of over $10 million in the quarter include the large multimillion-dollar Smart projects we have won in recent quarters as we began to execute on the backlog and the increased contribution from our SECaaS business. This strong cash flow enabled us to end the quarter with almost $100 million in cash and no debt, further strengthening our increasingly healthy balance sheet. This gives us significant flexibility to continue investing in our long-term business growth. The Board regularly reviews its capital allocation strategy. Our three main considerations are investment in organic growth, pursuing strategic compelling acquisitions, and returning capital to shareholders. The goal of our capital allocation strategy is to maximize long-term shareholder value. We are very pleased with the continued growth in the SECaaS business. Given the significant long-term potential we continue to see in this market, we have increased our investment in R&D, where we are innovating and bringing new products, services and capabilities to the market. We have also invested in increased sales and marketing efforts where we are expanding our reach further into existing customers and reaching new potential customers. These investments are translating into the strongly growing pipeline we see today. The pipeline expands across all of our regions, and we are gaining more prospects all the time. At the same time, we are supporting our existing customers to successfully market more of the cybersecurity services we power, leading to strong end user adoption while upselling new potential services, which would be attractive to their user base. Our Smart product line remains an important and highly complementary part of the unified cybersecurity-first platform. These products are built on decades of Allot innovation and deliver best-in-class network intelligence. We are executing well on the multimillion-dollar projects we have won in recent quarters, including the deployment and upgrades of our Tera III platform with Tier 1 operators. As a reminder, the Tera III platform is our highly strategic next-generation ultra-high-capacity multiservice gateway, offering deep visibility and control over network traffic and providing a scalable foundation for our advanced cybersecurity and value-added services. During the quarter, we secured a significant Tera III win, a multimillion-dollar upgrade deal with an existing Tier 1 customer. This win further underscores the strong customer interest and growing demand we are seeing for the Tera III. Looking beyond this last win, our Smart pipeline remains very healthy with strong opportunities at multiple stages, both from existing customers planning their upgrades to Tera III and from new customer engagements that are advancing well through our sales process. Our multiyear Smart projects continue to provide good revenue visibility into 2026, 2027 and beyond and add an additional layer of long-term revenue stability. During March, we participated in Mobile World Congress in Barcelona, where we held a large number of meetings with both existing and potential customers and partners and showcased our latest cybersecurity and network intelligence offering. The feedback was very positive, particularly around the converged cybersecurity and network intelligence positioning and our roadmap for AI-enabled security. At the end of March, we also attended the RSA Conference in San Francisco, one of the leading global cybersecurity events. RSA was again a highly productive event for us with strong interest in our offering. Both events help us further build our pipeline of opportunities for the rest of the year. It is clear that our broad suite of products and services driven by our cybersecurity-first strategy is increasingly resonating with operators globally, leading to new revenue streams from new customers and from upselling and cross-selling to existing customers. As I discussed last quarter, but I think it's important to stress again, the cyber threat landscape continues to evolve quickly, particularly with AI, which together are dramatically expanding the cyber-attack surface for consumers, small businesses and enterprises. Allot plays an important role in protecting businesses and consumers from ever-increasing cyber threats, and we strongly believe that today's environment has never been more conducive to our embedded, network-native, always-on cybersecurity offering. Allot's solution offers a highly differentiated and convenient experience for end consumers who cannot easily protect themselves. Our SECaaS platform delivers real-time, zero-effort protection that scales seamlessly with the operator subscriber base with no end-user configuration required, exactly what is needed to defend against fast-moving AI-powered cyber threats. We continue to invest in extending our platform with new capabilities, many of them significantly enhanced by AI, both to address current risk and to anticipate the next generation of threats. These investments reinforce our competitive position and support our long-term differentiation in the consumer and SMB segments, segments which are underserved by traditional security solutions. In summary, we are proud of our first quarter performance. Our success was driven by strong growth in our cybersecurity revenues following strong uptake by end users adopting the telco-provided cybersecurity services that we power. This strength led directly to substantial improvement in revenue, margins, profitability, and cash flow generation for the third consecutive quarter. With 67% of total revenues recurring, we have strong visibility. We believe that we can maintain and build on our positive momentum in the quarters ahead. Looking ahead, we are reiterating our 2026 revenue guidance of between $130 million and $170 million with continued profitability improvements for the year. Following the strong first quarter, we feel increasingly confident towards the upper end of that range. Furthermore, we now have strong visibility ahead to predict 40% or more SECaaS revenue growth in 2026. And now I would like to hand it over to our CFO, Liat Nahum, for the financial summary. Liat, please go ahead.

Thanks, Eyal. We reported revenue of $26.4 million in the quarter, up 14% year-over-year. Revenue from our growth engine, Security-as-a-Service, was $8.7 million in the quarter, up 71% year-over-year, comprising 33% of our total revenue. Our Security-as-a-Service annual recurring revenue as of March 31, 2026, was $33.7 million, up 59% year-over-year. 67% of our overall revenue this quarter was recurring revenue. I will now discuss the non-GAAP financial measures. For all our financial results, including the GAAP financial measures and the other various breakdowns of our revenue, please refer to the table in our results press release. Our non-GAAP gross margin in the quarter was 71.3% compared with 70.4% in the first quarter of last year. The improvement reflects the high contribution of SECaaS to our overall revenue mix. As mentioned in previous quarters, our non-GAAP gross margin depends on the specific product mix sold in the quarter. Our expectation for gross margin in 2026 remains in the range of 70%, as it has been in previous years. As SECaaS revenue continues growing as a percentage of overall revenue, we expect our gross margin to continue trending higher over time. Non-GAAP operating expenses for the quarter were $16.2 million compared with $15.9 million in the first quarter of last year. The slight increase in OpEx reflects our increased investment in sales and marketing to support our pipeline build, as well as investment in R&D to support our product development roadmap and innovation, in particular our cybersecurity offering, which we discussed last quarter. While we are making select investments in sales and marketing and R&D, we remain disciplined and are working at a high operational efficiency. We reported a non-GAAP operating income of $2.6 million with an operating margin of 9.9% compared with a non-GAAP operating income of $0.4 million or an operating margin of 1.8% in the first quarter of last year. Allot had 499 full-time employees as of March 2026. In terms of non-GAAP net profit, we reported $3.1 million in the quarter, or a profit of $0.06 per diluted share, compared with a non-GAAP net income of $0.8 million, or a profit of $0.02 per diluted share in the first quarter of last year. We generated record operating cash flow in the first quarter of $10.6 million, reflecting robust profitability and strong cash collection. The strong operating cash flow was partially attributable to one-time advance payments after reaching milestones from a few of our major Smart deals that we reported in recent quarters. This is also reflected in our increase in deferred revenue. This is a positive sign that we are progressing in executing those projects and related revenue will materialize this year. Allot has a robust balance sheet with no debt. Cash, short-term bank deposits, restricted deposits, and investments as of March 31, 2026, totaled $98 million versus $88 million as of December 31, 2025. Looking ahead to the rest of 2026, we are reaffirming our full-year 2026 revenue guidance of between $113 million to $117 million. Following the strong first quarter, we feel increasingly confident towards the upper end of that range. And furthermore, we now have the strong visibility ahead to predict 40% or more SECaaS revenue growth in 2026. Our gross margin expectation for the year remains in the range of 70%, with a specific gross margin in any given quarter depending on our product mix. On the operating expense side, we expect to increase our sales and marketing as we continue to build our pipeline for the next several years. We also expect a modest increase in R&D expenses as we continue to invest in developing our products. Overall, we continue to expect profitability improvement for 2026 as the operating leverage inherent in Allot's financial model shines through. That ends my summary. Eyal and I are now happy to take your questions.

Operator provided instructions on how to ask questions. The first question is from Jonathan Ho of William Blair.

I wanted to better understand what opportunities you see ahead, particularly with your pipeline commentary. And also, just a broader question in terms of how you think about the adoption of AI within your customer bases, and particularly the autonomous agents. And what could that also bring in terms of opportunities for Allot ahead?

Good morning, Jonathan. As for the pipeline, we see a solid improvement in both the Smart and SECaaS opportunities. I would start with SECaaS. As we pointed out in previous quarters, we expanded our sales efforts into reaching more CSPs and trying to build new partnerships, as well as working closely with our existing CSP base in order to continue and evolve the current partnerships. We see an increased number of opportunities in different stages, both with new and existing customers, and we believe this will continue and evolve and mature along the year. On the Smart side, as I pointed out earlier, we see good demand for our newly released platform, the Tera III, which we launched last year. Demand is coming both from existing customers looking to upgrade their current solution as they need more capacity as their networks grow, as well as interest from new customers looking to adopt this platform with its advanced capabilities that combine networking and cybersecurity protection as a platform of choice. So overall, we see good demand, and we expect this to materialize over the next quarters. As for AI, as we focus on consumer and SMBs, we mainly see a lot of initial adoption of tools like ChatGPT and cloud-based agents. We are not focusing on large enterprise customers when we talk about our end customers, but more on the lower end. There, the current usage is really unprotected; many people are experiencing those tools without awareness in many cases of the risks encountered. We are looking in our product roadmap and our innovation to see how we can add protections using our uniquely positioned network-based protection, and we can also protect them from the new threats that are arising due to those new tools. When we talk to our DSP partners and when we do some surveys with customers, the awareness of the risk that is coming due to AI agents is increasing and people are worried about fraud and impersonation that might come from those very powerful tools.

And then just in terms of a follow-up, where do you see the most opportunities to continue investing in sales and R&D? Can you provide a little bit more specific color around where those dollars are going? And how do you think about balancing that with showing operating leverage?

As described last quarter when we laid out the plan for 2026, our main R&D focus is to continue adding more cybersecurity engines to our portfolio. This allows us to have better protection for consumers and SMBs, but it also provides us upsell and cross-sell opportunities to our existing base. So, we discussed last quarter solutions like network firewall and DDoS protection. Also part of the coming innovation is how we protect from AI threats and how we add identity protection as people are worried about their credentials being stolen and shared on the dark web. Geographically, we see that advanced, mature markets are already aware of the need for cybersecurity, but we are starting to see demand for cyber protection mature in developing markets as well. As we have global partners and Allot with its decades of presence in the CSP space, we have a very global presence, and we try to leverage our strong relationships with carriers around the globe. The biggest worry today is in the developed markets, and we believe over time this will continue globally. In terms of operational leverage, the fact that we have an installed base of Smart customers—hundreds of customers around the globe—means the same sales team can upsell them security solutions and cross-sell other tools, which improves our operational efficiency over time. We see that as we continue to grow revenue, our gross margin strengthens and our profitability expands.

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

Congrats on the good results. I got two sets of questions. First one is on the cash from operations, very strong. Is that a result of some outsized bookings that you experienced within the March quarter?

So, the cash increase is overall due to expanding profitability, and we saw this trend in the last few quarters. As pointed out in the prepared remarks, some of it is coming from new orders that we received during the first quarter, but some of it is also from milestones we reached on orders we received during 2025 as we start to progress with project milestones of some of our large customers. We started to get prepayments as we progress well with those projects.

Could you describe backlog levels relative to a quarter ago and a year ago?

Can you repeat the question, sorry?

Could you give some characterization as to the backlog levels relative to a quarter ago and a year ago?

We don't share our backlog on a quarterly level, and this is why we focus on revenues. Overall, we are seeing good demand for our products, and this is reflected by our increased visibility and our comment on increased confidence that we can meet the higher range of the guidance and also our higher SECaaS projection for the year.

Great. And then the other question is around SECaaS. Glad to see the formal raise from double-digit to at least 40% year-over-year growth, which then you could say roughly equates to about $12 million of incremental ARR for calendar '26. You did almost $3 million in the first quarter. How should we think about the linearity of that incremental ARR as we go through calendar '26? And is this being driven by incremental carriers being layered in, incremental SKUs from carriers or just the ongoing expansion within existing carriers?

Overall, we see that SECaaS revenue is growing sequentially and has quite stable growth, so it's reasonable to assume roughly linear growth over the year. We have strong growth coming from our base customers—this is the organic growth of customers that already launched services. As we proceed along the year, and mainly towards the end of the year, growth will be supported by new wins within our existing customers and mostly new customers that we will win during the year. Those new customer wins support our growth into 2027 because there is some time between winning, implementing the solution and ramping the services. The majority is coming from services where we see higher attach rates and traction. That is the majority of the revenue and the growth, supplemented by upselling and new customers that support our longer-term growth.

The next question is from Matt Calitri of Needham and Company.

This is Matt Calitri from Needham here. The follow-up on the strong SECaaS strength seen here. Is there any color you can provide on any progress you made with new business wins or rollouts that occurred during the quarter?

The quarter's results are based in part on customer launches and ramping from wins we closed last year, like Más Móvil in Panama, and our continued success with other Tier 1 customers around the globe that continue to promote their services to their customer base. CSPs find cybersecurity a very important service, and it supports retention when they promote the service to their customers. We see some customers running promotions and offering our cybersecurity service as a higher-priority item in their promotions, which supports growth from our existing base. We do see good progress in our pipeline, as I mentioned earlier, with more opportunities in different stages. This includes our new models like DDoS, network firewall, and identity monitoring, which are added capabilities that provide more value to potential and existing customers. We are also expanding our sales effort with more salespeople in the field working with more CSPs to build new partnerships.

And so then as it relates specifically to the updated guidance for the 40% plus SECaaS revenue growth compared to the commentary for robust double-digit growth given last quarter, how did that change relative to your internal expectations? And what did you see over the quarter that informed this update to the outlook?

We are overall aligned with our plan, but after Q1 passed, our visibility improved and we are somewhat more optimistic. Much of the growth depends on our CSP customers' marketing activities and their success in launching promotions and go-to-market campaigns. The very strong ARR growth in Q1 gives us visibility to sustain 40% or more SECaaS revenue growth for the year. We are one quarter further into the year, and we feel more confident that the robust double-digit growth we targeted can be specified more precisely, so we are comfortable committing to the 40% expectation.

Just one last one for me. Can you help walk us through the mechanics of the Smart deal that you called out? I think you said you saw some prepayments this quarter that led to the free cash flow strength. Will there be any more of those prepayments coming through? And how exactly is that expected to flush through the revenue line?

As we pointed out, the high cash flow was generated from a few one-time advance payments related to Smart deals that we started executing. The model of Smart deals can fluctuate quarter-to-quarter, so payments are not necessarily related to revenue recognition timing. This is why you also see an increase in deferred revenue, and that deferred revenue will be recognized over the year. Basically, the way those deals are structured is that we often receive prepayments that are tied to executing milestones, and that is what happened this quarter.

The next question is from Jonathan Ruykhaver of Cantor Fitzgerald. Please go ahead.

So Eyal, your prepared remarks I thought were quite constructive around everything you're doing—the investments in R&D and sales and marketing, the strong pipeline for new customers, and the expansion opportunity for SECaaS. I appreciate the heightened confidence given the increased guidance for SECaaS revenue growth. But I'm just curious, philosophically, what keeps you from providing a formal SECaaS ARR guidance? It does seem like that is the leading indicator in terms of where you're focused strategically.

As I mentioned earlier, SECaaS growth depends heavily on our CSP customers—their launch timing, service adoption and marketing campaigns. We rely on their efforts and success, and their success becomes our success. Our ARR at quarter end gives us visibility to grow revenue for the year. As we progress and see more clarity on new wins and launches, we'll continue to evolve our SECaaS guidance. We continue to view the cybersecurity strategy as our main focus, balancing short-term and long-term growth to sustain high double-digit SECaaS expansion. We believe this approach is working, as reflected in the numbers, and we hope to continue to perform well through further adoption of cybersecurity services by our existing customers and new launches.

I'm curious: product revenue seems to drive more upside than services. That's the dynamic we saw last quarter as well. Can you talk about that outperformance and how you see that playing out for the rest of the year? SECaaS adoption seems like it could reverse that trend. Maybe some clarity on how we should think about that going forward?

Most of our growth is coming from SECaaS. Smart provides good stability and modest growth so far, but because Smart is less recurring, its revenue can fluctuate quarter-to-quarter depending on project maturity and execution milestones. Some Smart deals are multimillion-dollar projects, so recognition timing can move between quarters. Smart also provides upside potential if we execute faster and market demand remains strong. Overall, the plan for the year is that very high SECaaS growth will be the primary driver, with Smart providing scale and upside while also being a channel to upsell our security solutions to existing customers. That's the model, and we see it working well.

Can you talk about adoption trends you're seeing around the new security capabilities you've been making available, and the strategy between monetizing higher-tier price packages versus improving subscriber expansion and retention? How do you balance those two when you look at new products?

We got very good market feedback on our new capabilities. With strategic partners we work closely to align our roadmap to their strategies. Customers like being able to offer additional capabilities relatively easily, seeing monetization opportunities both as direct revenue increases and as tools to attract and retain subscribers. For example, a provider offering a $1 package might uplift to $1.50 by adding more capabilities. Others use additional capabilities to increase attach rates or defend against competition to retain customers. The market understands that consumer and SMB segments are underserved and under-protected, and they appreciate that we can turn Allot into a wider platform with more cyber engines. The reception has been very positive.

On the CSPs looking at monetization, what is the lag before you begin to see an uptick in ARPU?

It depends on the go-to-market approach. If they update pricing for an existing package, it could be faster. If they launch a new package for new customers, it takes more time. It varies by customer, so it's hard to give a single timeline. What we can say is that the visibility we have supports our expectation to grow SECaaS revenue by 40% or more this year, and that is the most important part of the picture.

The next question is from Shaul Eyal of TD Cowen.

Congrats on a strong start to the year. Eyal, I wanted to ask about how you are using AI internally within Allot on sales and marketing and on R&D. Can you share some thoughts with us? Also, how do you think about hiring into 2026? I have a follow-up for Liat.

AI is an important topic for us. We are looking at three dimensions. First, our product teams are focused on identifying new threats that require enhancements to our product roadmap—for example, AI-generated malicious sites or phishing content, and new attack surfaces introduced by AI. Second, we are exploring how AI can help in the development cycle to increase R&D efficiency and accelerate time to market so we can introduce more capabilities faster. Third, we are implementing AI to create more operational efficiency across the organization through automated processes that strengthen our teams. In general, while our top line continues to grow, we are managing to keep OpEx at similar levels, which increases profitability. If we use AI smartly, we can create more product differentiation and organizational efficiency, further expanding profitability. This is happening across the organization.

And how should we be thinking about hedging the U.S. dollar versus the shekel or vice versa? Liat, can you help us on that?

Yes. As we mentioned last quarter, we continue to see the shekel strengthening, and we have expenses in Israel since our headquarters are in Israel. However, we are hedged for 2026. When we modeled our expectations for 2026, this was already taken into consideration, and we expect to deliver continuous profitability improvement. We feel very comfortable with our hedging approach for 2026.

There are no further questions at this time. I will now hand back the call to Eyal Harari, Allot's CEO, for a concluding statement. Mr. Harari, please go ahead.

So, thank you, everyone, for joining us on the call and hope to see you all in our next quarter results. Thank you.