Earnings Call Transcript - ALLT Q2 2025

Operator, Operator

Good day to all of you and welcome to Allot's conference call to discuss its financial results for the second quarter of 2025. I would like to thank Allot's management for hosting this conference call. 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, and 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 that we typically discuss on the conference call in today's earnings press release. Before we start, I would 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 demands, and the competitive nature of the security services industry, as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission. Also, the financial tables and 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 includes the GAAP to non-GAAP reconciliation tables. And with that, I would now like to hand the call over to Eyal Harari, CEO. Eyal, please go ahead.

Eyal Harari, CEO

Thank you, Kenny. We are exceptionally pleased with our second quarter 2025 results from both a financial and strategic perspective. Most notable was the accelerated and very strong performance of our SECaaS growth engine. SECaaS ARR was up 73% year-over-year. We ended the quarter at $25.2 million ARR. SECaaS contributed over one-fourth of our revenues for the first time, and in line with our strategy, it is becoming a sizable and increasing portion of our overall revenue with each passing quarter. We also reported a 9% year-over-year overall revenue growth with improved margins growth and profitability and solid operating cash generation. In the quarter, the highly successful launch of Verizon Business's new mobile offering, My Biz Plan, contributed meaningfully to our results. Toward the end of June, we significantly strengthened our balance sheet. We completed a share offering, and combined with our positive operating cash flow, we ended the quarter with over $72 million in net cash and equivalents and no debt. We have a strong balance sheet and expect to continue generating positive operating cash flow. We are executing well on our strategy and are driving sustainable, profitable growth. Focusing on some of the trends within the business, I first want to discuss our SECaaS growth engine, the Cybersecurity as a Service business. We continue to see strong momentum and growing traction among major telcos for our Security as a Service solution. We are increasingly seeing the fruits of our long-term investment in this solution. As you may remember, in February, we signed our largest SECaaS deal to date with Verizon Business, a division of one of the largest and most prestigious wireless providers in the United States and in the world. In April, Verizon launched its new service called My Biz Plan, a customizable wireless plan geared towards small and midsized businesses. The service includes, as a default option, mobile Internet security, which is built on Allot's cybersecurity protection. Importantly, customers are automatically opted in to service at the start, and Allot gets paid by Verizon for each account that is connected to the My Biz Plan service. This new service is being actively marketed to Verizon Business mobile customers, which is over 30 million subscribers. It is also an attractive, flexible package for new potential business subscribers. This exciting land-and-expand win represents a significant targeted addressable market and long-term growth opportunity for Allot. Verizon Business reported that the new offering is resonating well with customers and driving strong sales momentum. We believe the long-term potential for Allot from this deal is substantial. A few weeks ago, we announced that Play, a leading converged operator in Poland, selected our DNS Secure solution to provide cybersecurity protection services to its fixed broadband customers. This win brings additional services to our existing network-based solution that Play deployed back in 2021 for their mobile customers. Play's fixed broadband customers and mobile customers now have a unified, converged user experience using Allot cybersecurity protection. We also announced earlier this week that Más Móvil, a telecom operator in Panama, selected Allot NetworkSecure to provide its mobile and fixed customers with network-native cybersecurity protection. Our SECaaS strategy is built on the following four growth drivers: first, increasing the number of CSPs that we work with to launch cybersecurity services. Strong existing relationships include Verizon Business, Vodafone, MEO, O2, and Telefonica, just to name a few. We continue to see the potential to add new SECaaS telco and CSP customers such as Más Móvil, which we just announced, and we have a solid pipeline of opportunities. After launch, we aim to expand our services to new end-user segments at the CSP, for example, expanding from mobile to broadband customers, with Play being the most recent example. We also aim to increase the penetration of our cybersecurity protection services among our customers' end-users. We have a strong group of telecom customers, and we are working closely with them to ensure that their customers, the end-users, know about the solution and understand the significant added benefit they will get at only a marginal increase to their monthly bill. And finally, we look to upsell and cross-sell new applications and products to the CSPs. Our OffNet solution is an example of a new product, which is a significant value added to the CSPs because it ensures that the end-user can remain connected and protected by the CSP even when the end-user is not under a network. Because we already have a strong working relationship with CSPs and telcos, the sales cycle for this type of new add-on services is significantly reduced. The strong launch at Verizon, together with the growing traction among our customers that have recently launched our SECaaS offering, gives us improved visibility and makes us increasingly comfortable that we will exceed our regional SECaaS growth estimates. As such, this quarter, we increased our SECaaS growth outlook. We expect 2025 year-end SECaaS ARR to show an exceptionally strong year-over-year growth in a range of 55% to 60%. Our Smart product for network intelligence remains an important part of the overall Allot business. Built on decades of Allot experience, offering best-in-class technology and innovation, this solution continues to be a market-leading offering. Today, our Smart product is being sold as part of our unified, security-first platform. In the past few months, we have signed several multimillion-dollar agreements with new customers, as well as a very significant agreement with a Tier 1 telco, all of which will contribute significantly to our overall future growth. Our new integrated solution is enabling us to generate increased demand in 2025, and we are seeing a higher backlog and improved visibility. I wanted to discuss the landmark deal that we announced a few weeks ago. This new business win was with a Tier 1 telco operator in EMEA. It is a pivotal win for Allot, the largest in five years, and it validates our ability to expand our security and network intelligence footprint. The agreement is valued in the range of tens of millions of dollars. The project will be executed over 2026 and 2027. It includes a long-term recurring revenue tail of maintenance and support revenues. We see additional growth potential for further projects at this customer over the coming years. The integrated solution will offer both our network intelligence and cybersecurity solution for this customer converged 4G and 5G mobile network and fixed fiber network. This solution will be delivered via a unified service gateway based on our recently launched SG-Tera III platform. We launched this new service gateway at the end of last year. It is geared toward top-tier telco operators because it offers unparalleled visibility into network traffic under one unified platform. This partnership is highly valuable for Allot, not only from a financial perspective, but also because it brings us a major new telco customer with a large subscriber base. It also allows us to demonstrate the value of our unique technological advantages and core expertise for major telco players in both cybersecurity and network intelligence. We continue to see further interest in the SG-Tera III platform, and it is another contributing factor to our current strong pipeline. We see interest from both existing customers that we want to upgrade to our new platform, as well as new customers that appreciate the value added that this new product can bring them. Towards the end of June, we successfully completed a follow-on equity offering, receiving strong support from the capital markets and our largest shareholder, Lynrock Lake. The proceeds were used to pay down our convertible debt as well as for general corporate purposes and to strengthen our balance sheet. We are very happy with the strong vote of confidence we have received from the capital markets. The offering added multiple new supportive and long-term focused institutional investors to our shareholder base. We also gained support from a number of leading Wall Street investment banks that we continue to work with to bring additional interest to our company. In particular, I want to thank the Lynrock team for their ongoing and meaningful long-term support of our company. Given our strong performance in the first half of 2025, as well as our improved visibility and solid backlog into the second half, we are introducing revenue guidance for the full year, and we are also increasing our SECaaS growth expectations. For 2025, we expect overall revenues of between $98 million to $102 million, positioning us for a year of profitable growth. And as I mentioned earlier, we increased our 2025 SECaaS ARR growth expectations to between 55% and 60%. In summary, we are exceptionally happy with our second quarter 2025 performance and continued strong momentum into the second half of the year. We showed significant success with a new contract with a major telco player worth tens of millions of dollars, which will be executed over 2026 and 2027. We are especially excited about the increasing traction and the very strong growth of our SECaaS solution. Looking ahead, our visibility has improved. Our backlog is strong, and our pipeline continues to be broad with many opportunities. I'm increasingly optimistic about our long-term future and looking to continue progressing on our security-first strategy. And now I would like to hand over to our CFO, Liat Nahum, for the financial summary. Liat, please go ahead.

Liat Nahum, CFO

Thanks, Eyal. We reported revenue of $24.1 million in the quarter, up 9% year-over-year. Revenue from our growth engine, SECaaS, was $6.4 million in the quarter, in line with our expectations and up 73% year-over-year, comprising 27% of our revenue in the quarter. Our SECaaS annual recurring revenue, ARR, as of June 2025, was $25.2 million. I will now discuss the non-GAAP financial measures. For all financial results, including the GAAP financial measures and other various breakdown of our revenue, please refer to the table in our results press release. Our non-GAAP gross margin in the quarter was 73.4% compared with 70.6% in the second quarter of last year. Non-GAAP operating expenses for the quarter were $16.4 million, 2% below $16.7 million in the second quarter of last year. Allot had 487 full-time employees as of June 2025. We expect this to gradually increase towards 500 full-time employees by year-end. We reported a non-GAAP operating income of $1.2 million compared with a non-GAAP operating loss of $1 million in the second quarter of last year. In terms of non-GAAP net profit, we reported $1.5 million in the quarter, or a profit of $0.03 per diluted share, as compared with a non-GAAP net loss of $0.8 million, or a loss of $0.02 per share in the second quarter of last year. During the quarter, we completed a $46 million follow-on share offering, of which $40 million in gross proceeds was received before the end of the quarter and the remaining $6 million in gross proceeds were received after the close of the quarter. We used $31.4 million to repay back the convertible notes that our large investor, Lynrock Lake, held, and they converted the remaining $8.6 million of debt to 1.25 million Allot shares. Our shares outstanding following the offering and the conversion of the convertible notes were 47.2 million shares outstanding. We reported positive operating cash flow in the second quarter of $4.4 million. Cash, bank deposits, and investments as of June 30, 2025, totaled $72 million versus $59 million as of December 31, 2024. As part of the follow-on share offering, we repaid the $40 million convertible notes. As of June 30, 2025, the company has no debt. That ends my summary. Eyal and I are now happy to take your questions.

Operator, Operator

Our first question is going to be from Shaul Eyal of TD Cowen.

Shaul Eyal, Analyst

Congrats on the results and outlook. Eyal, wondering what has been driving the strong ARR growth metrics? And maybe for Liat, healthy performance on the gross margin's front. What has been driving that improved performance across the board?

Eyal Harari, CEO

Thank you, Shaul. We are happy with the results of the quarter. And definitely, the SECaaS ARR growth is exceptionally high this quarter. As mentioned in the prepared remarks, the growth in the ARR is driven both by new customers, new services we launched with existing customers, increased adoption within the services already launched, and upsell of new applications. In the recent couple of quarters, we announced the Vodafone expansion and specifically Verizon...

Liat Nahum, CFO

Gross margin in the last few quarters, as SECaaS is becoming a higher percentage of our revenue, it is driving the higher gross margin. But also, in addition, the revenue mix which we had in product this quarter in Q2 was in favor of more software expansion deals, which contributed to a higher gross margin. As we stated before, our gross margin is dependent on the revenue mix. And going forward, we do expect to remain in the range of 71% to 73% gross margin.

Operator, Operator

Our next question will be from Jonathan Ho of William Blair.

Jonathan Ho, Analyst

Congratulations on the strong results. Can you give us a little bit more color on the My Biz opportunity and how you expect that to potentially ramp over time?

Eyal Harari, CEO

Thank you, Jonathan. So as shared last quarter, Verizon decided to launch a new flagship My Biz business plan. This is their main service offering for their business customers, focused on the SMB customers, mobile business phones. As part of the launch of this program, they decided to offer Allot cybersecurity protection as a default add-on to the package, as they see cybersecurity as very important for business customers. And as part of a value-added to customers to move to this new plan, they decided to bundle our solution with it by default. Verizon is now promoting their My Biz Plan in a lot of their focus and capacity. They were mentioning this successful launch in their earnings call. And we are actually getting a subscriber fee for any new subscriber that is joining the plan. From past experience with other carriers, we know that it takes between two to three years to get into peak. We are just now in one quarter to the penetration of this service. So obviously, now it has moved from zero to start to share ARR. So growth is affecting a lot. But we expect the growth to continue in the next two to three years as more carriers, more customers are moving to this My Biz plan. This is what we expect, again, and it depends on the Verizon go-to-market approach. It's not something they are committing to us. It's not something we have full visibility, but based on what we see from other carriers in similar cases. So now we are one quarter to go, but we expect two to three years of growth from this service launch.

Jonathan Ho, Analyst

Excellent. And maybe just as a follow-up, can you talk a little bit about the large European telecom deal that you signed or a CSP deal that you signed? And is this mostly SECaaS, or is there sort of a networking component as well? Any color would be helpful.

Eyal Harari, CEO

We issued a press release a few weeks ago announcing a significant deal worth tens of millions of dollars related to our network intelligence product line, Smart. This deal is not part of our SECaaS offerings and involves a leading CSP in EMEA that has chosen to purchase our Tera III platform to support both mobile and fixed networks. The Smart product line encompasses our traffic management capabilities that enhance network performance, along with some of our cybersecurity engines to ensure network protection. This is a CapEx deal, which is expected to be implemented over the next few years, with the majority of the revenue anticipated in '26 and '27. As a CapEx deal, it will likely include additional services, mainly supported maintenance, in the subsequent years.

Operator, Operator

Our next question will be from Nehal Chokshi of Northland Capital Markets.

Nehal Chokshi, Analyst

Congrats on an excellent quarter, really, really strong SECaaS ARR. That's fantastic to see. And just to point out that this is the second quarter in a row of record incremental ARR, this quarter being $4 million versus $3 million in the March quarter. So that's fantastic. Just to be clear, that increase in the record incremental ARR for the June quarter sounds like that is being driven by a full quarter of Verizon Business mobile being available? Or is that due to increased attach rates as Verizon pushes the My Biz Plan harder?

Eyal Harari, CEO

Thank you, Nehal. The growth is primarily due to a full quarter of promoting My Biz, which was launched around mid-April. This is the first time we are seeing its contribution to our ARR growth. Additionally, the growth is linked to the launch with Vodafone, which we announced a few quarters ago as reaching full capacity and contributing to the ARR. As you may remember, Vodafone was a security customer but wasn’t using the SECaaS service. Over the last few quarters, we transitioned them to the new solution, and now they are contributing more significantly to the ARR. The combination of these two factors is what has driven this exceptional growth this quarter.

Nehal Chokshi, Analyst

Got it. And it kind of sounds like both of them are equal contributors to the increase in the incremental ARR. Is that correct?

Eyal Harari, CEO

Both of them are significantly contributing to the ARR. Yes.

Nehal Chokshi, Analyst

Okay. Fantastic. And then can you comment on what has been the profile of attach rates as users within the Verizon Business mobile and users within Vodafone come up for potentially device renewal, which is often the opportunity to attach the SECaaS service. Are you seeing any sort of change in those attach rates?

Eyal Harari, CEO

With Vodafone, we have a mature customer base. They have been using our previous platform for network security for years, making them a stable customer. As for My Biz, it is automatically included for everyone moving to the My Biz Plan, which results in exceptionally high attach rates. Customers can opt-out if they wish, but since it's part of the bundle, very few do. The attach rates are nearly 100% and generally in the 90s. It mainly depends on how many Verizon customers are transitioning to My Biz. Verizon runs its own marketing campaigns to move its more than 30 million business customers to My Biz, creating additional touchpoints for engaging end customers and offering this service. As mentioned earlier, we anticipate that achieving maximum penetration of this service will take two to three years since these processes require time. For instance, device upgrades occur every two to three years, marking the end of a migration cycle. However, those who join My Biz show very high attachment rates because the service is included by default.

Nehal Chokshi, Analyst

Okay. Fantastic. Moving to the landmark deal that you announced this quarter. You described the pipeline as very strong. Can you confirm that this landmark deal was part of the pipeline a quarter ago, and it must have made up a significant portion of it? Are you indicating that your pipeline has actually grown compared to the previous quarter, even with this landmark deal successfully exiting the pipeline?

Eyal Harari, CEO

Yes. We still see a strong pipeline despite the orders that were very high this quarter, obviously, with these tens of millions of dollar deals. As mentioned also before, we have additional multimillion-dollar opportunities, some of them even 8-digit opportunities with a good mix of existing and new customers. And we still feel that we have good visibility to continue to execute well on the Smart product line.

Nehal Chokshi, Analyst

Okay. And does this landmark deal show up in deferred revenue immediately? Or how is that going to show up on the balance sheet, if at all?

Liat Nahum, CFO

In general, as Eyal stated, this is a deal that will be recognized in the CapEx part during '26, '27. And therefore, there will be some deferred revenue, but of course, not all. It's a 5-year deal. So overall, of course, not everything is invoiced and will go to deferred. But over time, as all deals that are project-based, we'll see some increase around the deferred revenue and then shifting it into the revenue. So overall, during '26, '27, this is the trend that you will see.

Nehal Chokshi, Analyst

What about remaining performance obligations? Is that a metric that you've been reporting in your 10-Qs, and will it show up in that then?

Liat Nahum, CFO

Yes. As Eyal stated, there is also recurring revenue from this deal. As with any network intelligence deal, there is a maintenance and support part, which is also committed. Going forward, you will see that after we will, of course, execute the full project.

Operator, Operator

Our next question is going to be from Matt Calitri of Needham.

Matt Calitri, Analyst

Great. This is Matt Calitri over at Needham. I'll echo how it's great to see the continued momentum at this quarter and the raise to your ARR growth expectations. From a go-to-market perspective, can you provide some color on how you're working with providers to ensure effective marketing? And what are you doing internally to convert the pipeline?

Eyal Harari, CEO

Thank you, Matt. So working with our existing customers for SECaaS is mainly about sharing with them best practices from other carriers we work with. We are trying to work closely with our customers, see what works for them and what doesn't work for them. And when we see in other countries, for example, if we see something that works well in the U.K., we share this success story with Verizon for the U.S. And if we see something works well for Verizon in the U.S., we might share it with Play in Poland. And they really appreciate it as they always like to see more ideas and innovation to drive their services. Mostly, they are relying on their own teams. We are working with large carriers, Tier 1 carriers that usually have a lot of resources and knowledge and know-how. So they know how to promote their services. We are mainly there to support them and provide our expertise and any materials that can leverage the campaigns. As mentioned before, success stories from other carriers. As for new customers, this is working on business development in order to create new partnerships. We have dedicated sales executives working around targeted accounts. We identify countries and carriers that we feel appreciate cybersecurity, and they have a need for a solution like ours. They have a large enough installed base and the ability to charge for this service. And we have a targeted go-to-market approach. This is the reason we are expanding our sales team to further engage with additional carriers and build more partnerships. Once we create new partnerships with the carrier, we are actually expanding our addressable market to their end customers. So we have a mix of teams that are doing more of the customer success, which are making sure that the current customers are happy, working on expansions and working on best practices for their go-to-market. And with new customers, it's more of a hunting going after accounts with a dedicated sales team.

Matt Calitri, Analyst

That's great to hear and makes a ton of sense. And then, are you seeing any macro impact on sales cycles? And more specifically, how are the multimillion-dollar deals like the European telco progressing through the pipe compared to expectations?

Eyal Harari, CEO

Telco deals, particularly large ones in the tens of millions, are taking time. Sales cycles in telco typically range from 12 to 24 months or longer, which is anticipated. Overall, we do not observe any macroeconomic influences. The telco market has been quite stable in recent years. We are making good progress with 5G, which is prompting more efforts from carriers. The demand we are experiencing is driven by our newly launched Tera III platform, known for its unmatched capacity and capabilities. The combination of traffic management and cybersecurity features, as part of our security-first strategy, is appealing to customers. This is what is fueling the demand. However, the long sales cycles mean we are focused on building our pipeline and tracking progress. With large deals, the outcome can be binary; you either win or lose, which can impact performance over time. Since the year's start, we have seen solid execution with both existing and new customers. We have highlighted multiple multimillion-dollar deals and are pleased with a landmark deal we recently won. There are many more opportunities in the pipeline, and we aim to continue making progress and share additional positive updates.

Operator, Operator

Thanks, Matt. So it looks like there are no more questions in the queue. So that will end our question-and-answer session. In the next few hours, this call will be made available on Allot's Investor Relations website. I would like to thank everyone for joining this call today and especially to Allot's management for hosting this call. And with that, we end our call. Thank you very much.