Earnings Call Transcript - ALLT Q3 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Allot's Third Quarter 2021 Results Conference call. All participants are present in a listen-only mode. 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 GK Investor & Public Relations at 1 (212) 378-8040 or view it in the News section of the website at www.allot.com. I would now like to hand over the call to Mr. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin, please?

Kenny Green, Investor Relations

Thank you, operator. Welcome to Allot's third quarter 2021 conference call. I would like to welcome all of you to the conference call and I would like to thank Allot management for hosting this call. With us on the line 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 for the question-and-answer session, and both Erez and Ziv will be available to answer your questions. You can all find 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 of the safe harbor statement. This conference call may contain projections or other forward-looking statements regarding future events and the future performance of the company. These 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 impacts due to the COVID-19 pandemic, changing market trends, delays in the launch of services by Allot customers, 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 Commission. And with that, I would now like to hand the call over to Erez. Erez, please go ahead.

Erez Antebi, President and CEO

Thank you, Kenny. I'd like to welcome all of you to our conference call, and thank you for joining us today. Our third quarter was another quarter of solid growth. Revenues grew 10% year-over-year for the third quarter and reached $38.2 million. In the third quarter, we also achieved non-GAAP operating profit of $0.3 million compared to a loss of $1 million in the third quarter of 2020. This is our 15th straight quarter of revenue growth year-over-year, and I am very pleased with the results we achieved during the third quarter. Also during the third quarter, we succeeded in signing several recurring security revenue deals for several of our Allot Secure product lines. In addition, we recently signed a security as a service deal with DISH in the U.S. to deliver cybersecurity to their 5G customers. I am very pleased with these results, and I believe it shows we are successfully executing on our plan. Our business is expanding across our product lines and markets, and we are increasing our market share, especially in the cybersecurity business as I will describe in more detail. As we see our opportunities grow, we continue to invest in order to capitalize on a significant number of opportunities that we are identifying. I'd like to start by discussing our visibility in control business, addressed by our Allot Smart product line. Revenue from this business is continuing to grow well for us in 2021. The main use cases we see today in CSPs are in traffic management, congestion management, quality of user experience, especially for video, policy and charging control, and digital enforcement. During the third quarter of 2021, we were awarded several deals with operators requiring traffic management in addition to quite a few expansions of existing customers. In a deal we won in APAC, we will be replacing a direct competitor's product that is installed. In addition to replacing the existing DPI solution with our Allot Smart product, that operator also signed a deal with us to launch security as a service, using Allot Secure to its customer base. We are discussing multiple other opportunities with other CSPs currently using our competitors' product and are working on expanding deals that we won before. As governments look to fight crime and terrorism, we see growing interest globally to be able to block illegal activities, such as drug trafficking, child pornography, or terrorism. We are seeing growing interest in our products in this area as well. Our enterprise business is continuing to grow, reaching revenue of $6.6 million in the third quarter. The deal we signed in the beginning of 2020 was Broadcom, positioning Allot as a replacement for their Packeteer product, which is at the end of life, contributing a significant portion of this growth. We expect continued double-digit growth of the enterprise business in the remainder of this year. I wanted to say a few words on the 5G market and what we believe it holds in store for Allot Smart product line. Many operators worldwide are deploying 5G networks. Most of these are using 5G frequencies and radios, but are continuing to use a 4G core. However, a growing number of operators are deploying a 5G core. Many of them plan to deploy this core in a cloud environment. AT&T, Verizon, DISH, and Rakuten are examples of operators who chose in whole or in part to deploy their core in a cloud environment. We believe the growth in traffic volumes that is expected in 5G networks, together with the need for high-quality control of the traffic, creates an opportunity for Allot Smart in this growing market segment. Not all clouds are the same. Some work with AWS, some with Azure, and others like Rakuten use their own version. We are in the process of deploying our products and networks contracted with, such as DISH and Rakuten and are investing what is required to adapt our products to the various containerized cloud-native environments to take advantage of this growing market opportunity. To summarize, I believe the demand for Allot Smart product line, including congestion management, traffic management, analytics, digital enforcement, and enterprise use cases will remain healthy with growth in the main use cases I described. I want to turn our attention to what we see in our cybersecurity business and how the market is continuing to change favorably. As I've said in previous calls, Allot is transforming into a cybersecurity company. And this is where we see most of our future growth coming from. There is a revolution happening in the consumer cybersecurity market. Responsibility for securing the consumer, family, and small business lies today with the individual. Each person is responsible to protect himself or herself and their families and small businesses. To do this, they need to find a security app, buy it, and download and install it on every one of their devices. The problem is that regardless of how good or bad a security app is, more than 90% of consumers don't do what I just described and are left unprotected. This means that the current solution with endpoint security apps is not accessible enough to most people. End users, consumers, and SMBs are looking for a simple zero-touch cybersecurity service. They prefer a simple security interface and do not want to deal with anything technical, like downloading an app to each device and configuring it. Over the last few months, we increasingly engaged with tens of CSPs and are working closely with the customers that signed security as a service deals with us. We have learned a lot more about this market and its dynamics and recognize that there are quite a few challenges in translating signed contracts into short-term revenues. These challenges include technical issues, delays in the CSPs commercial launches, and CSPs initial go-to-market strategies. As we look at the market, we clearly see that the direction and momentum are very positive. We see that the number of engagements, the level of engagements, the total addressable market size of our pipeline, the Allot win rate, and the acceptance and scope of service by consumers and SMBs are all improving and getting stronger. We see evidence of all of these in the rate and size of the deals we signed. Today, I want to share with you our main observations from customer engagements, the dynamics of the market and the lessons we learned, and why our views of the market are very bullish. We have signed to date 18 security as a service deals, seven of which have launched the service. We were expecting three more CSPs to launch their services during the past few months, but these launches were further delayed. Although, two of them are currently expected to be launched towards the end of this calendar year. Our team is working closely with the customers, and we see there is a strong appetite by the CSPs to launch, but there are also challenges and delays. The reasons for launch delays in these CSPs and the expected launch of additional CSPs vary. But I believe they are a combination of four main reasons. One, COVID related. This includes many CSP employees working from home, resulting in delays in implementations and ability to launch new services in general. Two, CSP-related IT delays that are not connected to security as a service. IT teams in CSPs many times have complex large projects that are also highly dependent on third-party companies. We are working with quite a few CSPs to manage ongoing unrelated IT projects, creating a large load on already committed resources and the need to integrate security as a service with their OSS/BSS systems is delaying the completion of their other IT projects. Three, delays due to the difficulties in integrating our HomeSecure and BusinessSecure agent on the router. I want to elaborate on this point a bit. Our HomeSecure product requires installing our security agent on the CSP router. As we are now working on deploying our first HomeSecure networks, we find that CSPs want to launch the service with a larger variety of routers than we originally expected, which we need to integrate with before launch. While we form partnerships with some leading router manufacturers, not all router manufacturers are equally forthcoming in their willingness to share technical information required for the integration. As we progress, we are integrating more routers from more manufacturers, as well as automating and shortening the integration time and effort. For now, it is taking more time than we originally expected, but we fully expect to enable faster HomeSecure launches in the future. Four, CSP integration and training efforts. Prior to launch, the operator needs to design and modify their IT systems to deal with the new service and work with Allot to integrate our system into their OSS/BSS systems. This work involves various departments within the CSP and despite CSP management's intention to do this quickly, this may be delayed due to various other internal priorities. In addition, there are several other factors that are unfortunately contributing to delays in Allot generating security as a service revenues. One, CSPs are launching or planning to launch security services with long free service periods, up to three months, as they are used to launching other value-added services solutions such as Netflix or Spotify. I believe that as CSPs launch and see for themselves the high attach rate and lower churn rate, these free periods will shorten. However, for now, they are causing a delay in revenues to Allot. Two, many operators prefer a gradual limited rollout that allows them to test the message and refine it. For example, one operator launched initially only for existing customers, but is not offering the service to new customers. While another operator plans to focus on new customers and not offer it to the existing base. As the service progresses, we expect most operators to expand the reach and offer security service to all customers and fully exploit the revenue potential and customers' high satisfaction. But for now, this introduces delays in our revenues. Three, different operators launch with different go-to-market service plans. Some start aggressively by bundling the security service into the plan, while others start with try and buy campaigns requiring the customer to take action twice before paying for the service. Some operators sell the service in stores, while others choose to start with only digital means. We are spending significant efforts with marketing departments and executives within the operators to persuade them to adopt more aggressive go-to-market plans that result in higher revenues for both of us. I can share with you that one of the operators who already launched the service started with a digital-only channel, which did not yield good results. After joint work with us, we convinced them to offer this service for sales in stores, and customer adoption grew significantly. So, the CSP management is now looking at the security service as a strategic solution to increase ARPU. These factors together result in a delay of approximately six months in Allot recognizing security revenues compared to our previous guidance. The divergence between how operators launch and market their new services, the relatively small sample of operators that actually launched the service and what we saw in the more mature Vodafone launches led us to a more optimistic projection on the timeline between signing the deal and actually recognizing revenue, meaning getting paying customers. During the past few months, we spent considerable efforts with all the operators we signed with or expect to sign with, to get a better and much more detailed understanding of their service launch dates, internal prerequisites, initial target segments, length of free service, and go-to-market plans. While many of these parameters are still undecided and may still change, we feel we have today a better understanding of what is expected to happen. And as a result, we are able to build a more accurate bottom-up security as a service revenue model. On our side, we learned to insist during contracts for much more concrete and aggressive go-to-market commitments from the CSP. It prolongs the negotiations but helps to make a better launch and reach better penetration in the short and medium term. As we meet CSPs worldwide, we are continuing to see growing interest in launching security service to consumers and SMBs. Our pipeline is continuing to grow as we continue to sign additional deals with CSPs. To date, we have signed security as a service deals with 18 different operators, 11 of which have not yet launched the service. Nine of these operators have signed with us deals to launch services with more than one product of Allot Secure to different segments of their customer base. Of the signed customers, one is a group-level agreement with the intent to deploy in several of the group operators and seven others are with operators that belong to a group with opportunities to expand the service to other operators in that group. In addition, we were awarded six additional deals with CSPs for which we are currently in contract negotiations and expect to sign within the next few months. As we look at CSP interest worldwide in security service, I am very encouraged with our prospects, despite the delays in revenues I discussed earlier, and this for several reasons. One, our pipeline is bigger than ever. A growing number of CSPs understand the need to launch security services to their customers, and as a result, we see continued growth in the number of RFPs and in the number of operators we are directly engaged with. To me, this indicates growth of the network-based security market. Two, adoption rates of consumers and SMBs. When the service is launched with a good go-to-market approach, adoption rates are very high as we discussed in previous calls. Not only is the adoption rate high, but customers stay with the service, even when they can opt-out. The lifetime operators calculated for a consumer is around three years. Three, a growing number of CSP CMOs, or Chief Marketing Officers, understand that security needs to be part of the brand promise and are building it into their core offering. Some CSPs still look at security services as a value-added service, but a growing number view it as a core service. One CSP Chief Marketing Officer I spoke with only a few weeks ago explained to me that he sees security as part of his core offering, and he wants all his customers to be protected. Another SVP Products from the North American mobile operator I met with plans on offering it free of charge to all his premium customers, but that operator will pay a lot, of course, to incentivize consumers to move to higher-tier plans. A European-based fixed and mobile operator with operations in several countries, with whom we have signed already, looks at security services as their differentiation from the competition. Viewing security as a core service rather than a value-added service leads to more aggressive go-to-market and higher penetration rates. Four, the North American market is now very interested in network-based security services. As I mentioned in previous calls, several North American operators are actively looking to launch such a service. In April, we announced that we signed an agreement with DISH in the U.S. to protect their new 5G network, and that we expect to sign the agreement where DISH will provide security services to their customers on the 5G network when it launches. As I mentioned before, we recently signed a security as a service deal with DISH to protect their customers, and the agreement includes multiple products of the Allot Secure family. In addition, I can share we are in advanced discussions with two additional North American operators, one for a security service to their entire customer base and another for their SMB customers. Five, we have a high win ratio. During the past year by our account, we won most of the deals that we were awarded for CSP network-based security to consumers. To me, this shows our market leadership and the strengths of our offering. We are winning due to our unique combination of several elements; A, a comprehensive 360 product offering that enables unified security across mobile and fixed access across all devices and against many threats; B, our commercial partnership model, where we share the risk and reward with the operators; C, our value-add sharing best marketing and sales practices helping them position and launch the service; and D, our track record that can be shared proving that when launched correctly, adoption rates and revenues are very high. As I mentioned earlier, seven of the operators we signed with have launched the service already. We expect an additional two to launch before the end of this calendar year, accounting for what we know of the launch timing of the deals we signed and of those we were awarded. Additionally, what we are told by other CSPs, we have not yet won, but we are currently engaged with, we expect an additional 12 to 18 CSPs to launch security services based on Allot products during 2022. Network-based security services are a relatively new type of service for CSPs. As we signed with more operators and moved to the detailed planning phase before launch, and as we follow changes in adoption rates post-launch, we learn more about what affects the results and how to better forecast and predict the process. We also learn how to influence things in their early days to yield faster and better results. The MAR indicator, which we have put forward as an indication for future revenues, is not good enough to forecast revenues, especially in the short term. It doesn't take into account the high variance on launch timing and marketing strategies, especially over a small base of launched operators. There are many variances, some of which we were aware of, like the difference between prepaid and postpaid customers, and some we learned to appreciate more recently. I will mention several of them. Different countries have different regulatory requirements that affect adoption. For example, in some countries, postpaid customers have contract terms of a finite period, such as no more than three years. This means that every year, at least one-third of the customer base need to renew their mobile contracts and are, therefore, in touch with the operator. This is a great time to sell security and leads to high adoption rates. In other countries, service plans are indefinite, and churn is relatively low compared to other geographies. This results in fewer opportunities to engage with the customer. So even while take-up rates are high, adoption rises more slowly. As we take in these and other understandings, we try to see how we can better forecast our revenues. While in the past, we had to make predictions using a top-down approach with MAR as a guideline to revenue potential, we now understand better the differences between operators, and we can base our predictions on a bottom-up approach, analyzing each customer separately. Of course, over time, over a large customer base, over many operators, and with our influence on the go-to-market strategies, averages will work, and I believe our assessment of a 25% penetration rate of the target customer base can be achieved. We, therefore, think the MAR metric we used until now to indicate short-term future revenues is too simplistic, and I think we should provide additional metrics to help investors track our progress. We will continue to provide information on MAR. We will also continue to track the number of signed deals and the number of launched services. In addition, we will report every quarter the ARR achieved based on the last month of the quarter. We define the ARR or annual recurring revenue run rate as the monthly recurring security revenues we achieved during the last month of the quarter multiplied by 12. We will also provide guidance on what we expect the ARR at the end of the year to be. I do want to remind you that while our main growth engine is in recurring security revenue deals, we do have security revenues from some CapEx deals like Vodafone and from security products protecting the network itself, such as DDoS and 5G NetProtect. As I explained before, we are now expecting a delay of approximately two quarters in the amount of security as a service revenue versus the previous projection. In view of this, our expectations for recurring security as a service revenue are revised to the following: $4.1 million to $4.3 million for the full year 2021; $10 million to $15 million for the full year 2022; $20 million to $30 million for the 12 months of July 2022 to June 2023. In addition, I want to provide you past information and expectations on our ARR. In December 2019, our ARR was $0.5 million. In December 2020, our ARR was $2.7 million. In September 2021, our ARR was $4.6 million. We expect our ARR in December 2021 to be between $5 million to $6 million. We expect our ARR in December 2022 to be between $20 million to $30 million. While the MAR metric is not accurate enough to predict short-term revenues, I believe it does provide the ability to indicate longer-term revenue potential, and we will continue to provide it. We expect to meet and exceed the $180 million MAR target for 2021 and an additional $180 million MAR for 2022. I would now like to summarize the overall picture and the key messages. In the Allot Smart product line, we see a strong pipeline, multiple use cases, such as congestion management, digital enforcement, and the enterprise business are growing. Overall, we see solid demand for Allot Smart. The security area is where we see our long-term growth. We are very encouraged by the pipeline growth we see and by the consumer and SMB take-up rates as they sign up for the service. Overall, while we would have preferred not to have the six-month delay in achieving our recurring revenue targets, I believe the network-based cybersecurity market is emerging as a high-growth market. We are winning most deals, and I am confident of our future success and the direction we are pursuing. We know better how to work with CSPs to achieve high penetration rates, and I am very optimistic on our recurring revenue outlook. Looking at our backlog, the market demand as we see it now, the pipeline of deals that we are working on and accounting for the delays in security as a service recurring revenue, we expect 2021 revenues to be between $145 million to $146 million. We are currently working on our budget and annual operating plan for 2022. I thought it important to share with you our guidance for recurring security revenues in advance. While other elements of the guidance we will be able to share in the next earnings call once we finish our budget, it is worth noting at this time that the combination of additional positions we need to take advantage of opportunities such as those I mentioned in 5G, changes in exchange rates, and the general high demand for technical people worldwide are creating pressure on our expenses for 2022. Now I would like to open the call for questions and answers, 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. The first question is from Alex Henderson of Needham & Company. Please go ahead.

Alex Henderson, Analyst

Thank you very much. That was a ton of information. I'm not sure I observed all of it. There are a couple of pieces I just wanted to clarify. The first one was, I thought you said 18 signed deals and 17 launched. But then later, I thought you said 11 not launched. So, I'm a little confused. So, can you clarify how many of the 18 have actually launched?

Erez Antebi, President and CEO

18 signed deals, seven launched, 11 not launched.

Alex Henderson, Analyst

I see. I somehow put an extra digit on that. In terms of the shekel, obviously, a major hit to all Israeli companies, not just you guys. It's at an all-time high, I believe, looking at the chart of it and has spiked quite sharply over the last couple of months. Can you give us some sense of what the impact of that is, A, in the December quarter, but kind of annualized for 2022, just based on the current exchange rate and talk a little bit about whether you're doing any hedging or not that might change the timing of that realization to your costs?

Ziv Leitman, CFO

I would say that every 10% change in the exchange rate means that when the shekel strengthens, it impacts us by a few million dollars, typically between $5 million and $10 million. We do engage in some hedging. However, keep in mind that if we hedge the dollar against the shekel now, the full exchange rate we would receive is lower than the spot rates. This means we are already accounting for part of the effects. Most of the technical challenges are expected next year. In the fourth quarter, as mentioned, we did some hedging, and the exchange rate changed during that time. Next year, we will feel the full impact, so we can anticipate that operating expenses will be higher next year, partly due to the exchange rate.

Operator, Operator

The questioner has disconnected. The next question is from Eric Martinuzzi of Lake Street. Please go ahead.

Eric Martinuzzi, Analyst

I wanted to look ahead to 2022. I know you're in the planning phase now, and we'll receive more details later. But broadly speaking, if I remove about $12.5 million of SECaaS revenue from our previous 2022 estimates, that suggests a growth trajectory in the mid to high single digits based on my own projections. Does that align with your overall thinking?

Ziv Leitman, CFO

And as we said, we think that the smart product market for DPI for a multiyear period will grow single digits. And as we said, it might be that in a specific year, it will go more. In another area, it can go less. It can be even flat. Or this would be even slightly decrease. So, again, generally speaking, for instance, your assumption for next year was, if I recall correctly, 167 or 165. I don't recall the number. And now of the SECaaS revenues will be lower by $12.5 million. So not unreasonable to assume that the previous forecast should be reduced by that amount, i.e. $12.5 million.

Eric Martinuzzi, Analyst

It seems like there's been a significant change, and I understand that pushing things out by six months means you're losing out on those additional revenues with each carrier. However, what can you tell us about the conservatism in the new forecast? Clearly, you had certain expectations, and now you have an additional year of experience with SECaaS. Is this forecast more cautious?

Erez Antebi, President and CEO

I think the main difference is that our previous forecast was based on significantly fewer contracts and less detailed data about each customer. We approached that forecast from a top-down perspective; we utilized the MAR model, calculated averages, and estimated our likely outcomes. In contrast, the current forecast is constructed from the ground up. We have invested considerable effort working closely with each operator to understand their launch dates, go-to-market strategies, and the segments of their customer base they intend to target initially. We aimed to provide a more reasonable bottom-up forecast based on this understanding, and that’s the key distinction.

Eric Martinuzzi, Analyst

Okay. No, I appreciate that. It's a reality-based versus theory-based. So, in my experience, reality wins versus theory. And then, I also appreciate the ARR color. I want to make sure you gave five data points. And if you don't mind, I'd like to go through those and make sure I have these correct. December 2019 ARR on the SECaaS $0.5 million; December 2020, $2.7 million; September 2021, $4.6 million; December 2021, $5 million to $6 million; December 2022 expectation of $20 million to $30 million. Is that correct?

Ziv Leitman, CFO

This is correct. And you also have those numbers in the PR.

Eric Martinuzzi, Analyst

Okay. All right. And then lastly, you talked about the DPI side of the house. I know you guys are primarily software, but I have had experiences this earnings season with companies that are primarily software being impacted by hardware issues because their software gets deployed on hardware with limited availability. Have you seen any supply chain issues, hardware availability issues impacting your ability to meet your DPI expectations? Or do you anticipate that?

Erez Antebi, President and CEO

Like you mentioned, we are a software company, but we do many times have to provide as part of the deal that we do with operators. We also have to provide servers, routers, et cetera, that we procure from off-the-shelf from companies like Dell, HP, Lenovo, a variety of others. So, in that sense, we are seeing the same issues that everybody else is seeing, where the shortage of chips causes supply chain issues with getting routers and servers that we need to buy. What we did do is we quite early on in the process, we did buy into inventory and make longer-term commitments in order to guarantee timely delivery of what we need to provide our customers, and we did that based on the forecast. So, as of now, I think we're doing okay on this. These things may present more challenges next year, but right now, I think we're handling it okay.

Eric Martinuzzi, Analyst

Understand. Thanks for taking my questions.

Operator, Operator

We will continue and go back to Alex Henderson for more questions. Alex, please go ahead.

Alex Henderson, Analyst

Thank you. I'm not sure what happened there, as I seemed to have dropped off the call. Anyway, I wanted to discuss a few of the points you made. You mentioned that you have the largest pipeline ever. Could you explain to what extent that's true? If we were to compare the pipeline from the end of 2020 to what you anticipate it will look like by the end of 2021, how would you quantify that increase? Would you say it's up 30%, up 5%? What level of expansion in the pipeline can you identify?

Erez Antebi, President and CEO

I can't provide a specific number without conducting an expensive analysis. However, I can say that we are witnessing a significant increase in deals. It's not limited to just a few minor deals. Based on the information I shared earlier, we have signed a total of 18 deals over the past two to three years, although only seven have launched so far. I also anticipate that we will see between 12 and 18 new launches next year. This clearly indicates a substantial growth in the number of deals available.

Alex Henderson, Analyst

Yeah, that was actually going to be one of my next questions. If you have seven that have already launched out of 18 signed, that means 11 are in the process of launching. You're indicating there will be 12 to 18 additional launches, which suggests it will take less than a full year to launch them, or roughly a full year, which seems shorter than in the past. Am I calculating that correctly? It seems like you're expecting some improvement in launch time going forward to reach those numbers, especially at the high end.

Erez Antebi, President and CEO

I wouldn't read the averages that accurately. I would say that some of these deals are still going to take more than a year to launch and some may be shorter. And I think that on average, I would stick to the one year to launch from signature. But it's an average with relatively wide variability.

Ziv Leitman, CFO

And also, Alex, please take into account that when we say launch, it doesn't mean the operator is launching the service for his entire installed base. They might launch a service only to a small segment of the installed base. And then after a few months, few quarters, had another segment and so on. Not in one shot, launching to the entire installed base.

Alex Henderson, Analyst

So, the initial TAM may be smaller than the total MAR?

Erez Antebi, President and CEO

Yes.

Alex Henderson, Analyst

Going back to the Allot Smart line, you've clearly been gaining market share against your competitors. You've also acquired some business in the enterprise segment due to the Broadcom deal. However, those contributions are starting to feel a bit stale. Do you anticipate these benefits will begin to slow down as we progress through 2022 and return to a more normalized market environment? Additionally, it appears that the security business is really taking off with the comment about reaching $180 million next year. Is that also beginning to positively impact the Smart business?

Ziv Leitman, CFO

So regarding the first question, as I said before, it's not unreasonable to assume that the next year the DPI market will be flat for us. As we said before, in the previous year, we took a lot of market share from our main competitor. It doesn't mean that we will be able to do it next year as well. So, still, on a multiyear period, we will see single-digit growth of the Smart business, but perhaps next year, it will be flat.

Erez Antebi, President and CEO

Regarding security, we offer security as a service to operators that use our competitors' DPI systems. We do not require them to purchase our DPI system to engage in a security as a service agreement with us. I mentioned earlier that we have a customer in APAC who signed two separate contracts with us, one for DPI and one for security as a service, where we are replacing a competitor's product with our own in the DPI deal. Our engagement with the customer on either side fosters trust and familiarity, which can benefit both areas of the business. However, these deals are independent of one another, and having one does not automatically provide a significant advantage for the other.

Ziv Leitman, CFO

And please remember the different CSPs. While we send DPI to the network teams, we provide security as a service to the marketing teams. In smaller CSPs, there may be a greater advantage in selling both services. However, in larger CSPs, these functions are typically managed by entirely different departments or divisions.

Alex Henderson, Analyst

Okay. One last question. The home router security feature appears to be increasingly integrated into many routers. For example, NETGEAR has included it as part of their offerings. They provide it for free for the first six months or a year, depending on the model you purchase, and it's offered at a low price after that. It is pre-installed on the router upon purchase and works seamlessly with their launch and maintenance software. They are the leading company in the router market. In that respect, does that create a barrier for you regarding that product?

Erez Antebi, President and CEO

We haven't observed that as a limitation so far. There are many operators that collaborate with a wide range of routers. Operators recognize the importance of incorporating this into their security offerings. When the operator owns the router, it serves as the network's edge at the premises of end users, whether they are consumers or small businesses. It is the operator who determines which services customers receive and what is installed or not installed on the router. Overall, the situation appears quite promising.

Alex Henderson, Analyst

Great. Thank you.

Erez Antebi, President and CEO

Thank you.

Operator, Operator

The next question is from Marc Silk of Silk Investment Advisers. Please go ahead.

Marc Silk, Analyst

Thank you for addressing my questions. Regarding the seven initiatives that have launched on the recurring revenue model, have there been any adjustments to the strategy? I'm aware of your collaboration with Vodafone, which has given you insight into increasing market penetration. I would like to know if there have been any changes in strategy or if you are utilizing your expertise more than before with these seven initiatives.

Erez Antebi, President and CEO

Yes, some operators have changed their approach. I provided an example earlier where one operator initially launched their service using only digital channels. Customers had to visit their website or receive an SMS, and it wasn't available in stores or bundled with any packages, resulting in low penetration levels. After collaborating with us, we demonstrated a different strategy. They agreed to launch it in physical stores, tried it at a few locations, and received excellent feedback, with their sales team finding it easy to sell and wanting to promote it more. They are now expanding this approach to all their stores and call centers. This is a great example of how we influenced their launch strategy, and we're both benefiting from the results.

Marc Silk, Analyst

For the 11 upcoming launches, do they all have individual strategies? Can you provide a percentage of the partners who are receptive to your guidance on what works and what doesn't, to help avoid obstacles with the 11 that have yet to launch?

Erez Antebi, President and CEO

I can't provide a specific percentage. However, I can say that all of them are engaged and listening to us. Ultimately, not all of them will be convinced to follow our recommendations, and the responses will vary. The decisions will depend on individual personalities and their existing offerings. While I can't quantify it, I believe the marketing guidance and support we are providing is significant and is already making an impact for many of them. I expect this will influence our future results, but I cannot specify how many will change their decisions based on our input.

Marc Silk, Analyst

Okay, that's fair. My last question is about the $25 million you're postponing by six months, which I understand due to factors beyond your control. A few quarters ago, you registered for a shelf offering of up to $250 million, and you have sufficient cash on hand. I believe most shareholders hope you reach a point where the $25 million isn't a concern. If you plan to raise more funds later, achieving those prior goals would likely lead to a higher share price, providing better value for any future financing. I don’t mind this approach as it could attract more investors. However, it seems reasonable to expect that you need to deliver on those numbers since there was a bit of disappointment. If you choose to raise funds, it might be wise to wait to maximize potential returns. Good luck moving forward.

Erez Antebi, President and CEO

Thank you, Marc.

Operator, Operator

The next question is from Roy Wallace of Outerbridge Capital. Roy, are you on the line?

Rory Wallace, Analyst

I just wanted to ask, can you hear me?

Erez Antebi, President and CEO

Yes. Yes.

Operator, Operator

Yes. We hear you loud and clear.

Rory Wallace, Analyst

Fantastic. So, I wanted to ask specifically on the North American side of the business. And I think, Erez, you commented that during advanced discussions with two operators, one on the consumer side and one on the SMB side. So, I just want to make sure I had that correct. And then ask if one of those deals, specifically the consumer one, could be for one of the big three mobile carriers?

Erez Antebi, President and CEO

I can't comment on who those operators are. But you got the first part of the statement correct. But I'm not going to comment on who that is or who that could be.

Rory Wallace, Analyst

Understood. And then, on the 5G NetProtect side of the business, I think that was not sort of highlighted as deeply on the call. Could you just talk a little bit more about how that opportunity is shaping up for you going into 2022?

Erez Antebi, President and CEO

I mentioned 5G in relation to DPI, but I didn't focus much on 5G NetProtect. The value we see in 5G NetProtect is significant. We announced sales to DISH as they expand their network in the U.S. and to another operator in APAC. We believe there are more opportunities in this area. However, I want to reiterate my earlier comment about the rollout of 5G networks. A year ago, we expected more 5G networks to be launched with a 5G core. 5G NetProtect is designed to work with a 5G core. Currently, most operators investing in 5G are concentrating on 5G frequencies and radio technology while still relying on a 4G core. Consequently, the full deployment of standalone 5G networks is progressing slower than anticipated, but 5G NetProtect represents a substantial opportunity for us.

Rory Wallace, Analyst

Okay. And then on the new launches that are yet to come versus the operators that have already launched for Allot Secure, what's the relative scale of opportunity from those that have launched so far versus those that have not yet launched? And if I think about it from a subscriber base standpoint or a MAR base.

Erez Antebi, President and CEO

Yeah. It's a mix. There are some that are small. There are some that are larger. I don't think I could give any indication on a change one way or another.

Ziv Leitman, CFO

It's not more than one-third of the total.

Rory Wallace, Analyst

Got it. And then as far as the metrics that you're giving now, which are very helpful, especially the ARR metric. Is that something that you're going to continue to provide on a quarterly basis?

Erez Antebi, President and CEO

Yes, we will provide every quarter on the ARR at the end of that quarter.

Rory Wallace, Analyst

Okay. Great. Well, thank you very much and good luck.

Erez Antebi, President and CEO

Thank you.

Operator, Operator

The next question is from Jeff Bernstein of Cowen. Please go ahead.

Jeffrey Bernstein, Analyst

Hi, everyone. I wanted to inquire about the competitive landscape, specifically regarding SECaaS and 5G NetProtect. From what I understand, Cyan AG has been the primary competitor in SECaaS with their lightweight DNS-based product. I believe your company now has a similar capability targeted at smaller carriers. They have been working with Orange, which I understand took about three years to implement, and I'm unsure if it is fully rolled out yet. I've also heard that some smaller carriers are involved. Are the U.S. cable companies using someone like Cerberus or trying to build out similar services? Are there more competitors now compared to the past? Is your previous enterprise competitor now entering this space? What is the current status of the competitive environment in SECaaS?

Erez Antebi, President and CEO

In SECaaS, we are in a unique position as we are the only technology company offering a comprehensive range of products for various network-based security solutions. Consequently, we face different competitors across different segments of our portfolio. For our in-line network security, which we have introduced in various applications, we do not encounter any direct competitive products. However, we do see companies focused on DNS security entering the market. Our primary competitors in this space are Infoblox and Akamai, as they are the leading DNS providers for carriers around the world. While Cyan may be more vocal, they are not a significant competitor and we encounter them in very few deals. In terms of router security, the competitive landscape is different, with companies that originated from endpoint solutions expanding their services to include router security, such as McAfee, F-Secure, and Avast, although Avast has withdrawn from the router security market. Additionally, we observe companies like CUJO, which has performed particularly well in the U.S., focusing solely on router security. This gives you a broad overview of our competitive landscape.

Jeffrey Bernstein, Analyst

Terrific. That's great.

Operator, Operator

The next question is from Shawn Boyd of Next Mark Capital. Please go ahead.

Shawn Boyd, Analyst

Good morning. Can you hear me okay?

Erez Antebi, President and CEO

Yes.

Shawn Boyd, Analyst

Yeah. Great. Just one for me. I'd like to go to the new commentary regarding ARR. And I'm trying to tie that back to deals. It's very important, I think, to understand this company and to understand the layering that happens as these deals come on. So, can you give us any color as to the ARR guidance at the end of the year? Maybe starting with the September number and then the guidance that you've got for December 2021 and then the guidance further December 2022, what number of launches you are kind of including there and you're assuming occurs and maybe what level of adoption or penetration? Thank you very much.

Ziv Leitman, CFO

We currently have seven operators launched in service, which serves as the basis for the September ARR and we expect it to also be the foundation for the December ARR. However, I want to clarify that when we mention a launch, it does not imply that it is available to the entire customer base of the service provider. They can only start with customers who physically visit the stores, new customers, and premium customers. The total customer count used for calculating the ARR is seven, and the penetration rate for most of these operators is relatively low since they have only recently begun the process. Most of them have just initiated services for a portion of the total installed base, so there is still significant potential for growth, which we believe is very substantial.

Shawn Boyd, Analyst

Okay. And just stepping out to your ARR guidance of $20 million to $30 million for December 2022, we should assume that's based on the seven that we have now, plus the 12 to 18 to come. So 19 to 25 separate operators? Or should we factor in some attrition? Just trying to think about that $25 million or midpoint there, how many different contracts are supporting that.

Erez Antebi, President and CEO

We anticipate launching an additional 12 or more operators next year, with some potentially commencing towards the end of this year and offering initial free periods. Even with these launches, we won’t see immediate revenue. By the end of 2022, we expect the annual recurring revenue to reflect a greater number of operators, but not all of them launching in 2022 will contribute to that revenue by year-end.

Shawn Boyd, Analyst

Got it. Okay. Thank you and best of luck, gentlemen.

Erez Antebi, President and CEO

Thank you.

Operator, Operator

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

Erez Antebi, President and CEO

Thank you all for joining the call and for your support. I look forward to meeting with those who would like to connect over the next few days or later on Zoom. Hopefully, as COVID calms down, we can begin face-to-face meetings in the not-too-distant future. Thank you again for joining us, and we look forward to speaking with you at the next quarterly call.

Operator, Operator

Thank you. This concludes the Allot third quarter 2021 results conference call. Thank you for your participation. You may go ahead and disconnect.