Earnings Call Transcript - ALLT Q4 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Allot's fourth Quarter 2021 results conference call. All participants are present in listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded. 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. Or view it in the news section of our website. 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 Fourth Quarter and Full year 2021 Conference Call. I would like to welcome all of you to the conference call and I'd like to thank Allot's 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'll then open the call for the question-and-answer session where both Erez and Ziv will be available to answer investor 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 that this conference call contains projections or other forward-looking statements regarding future events or the future performance of the company. These statements are only predictions and Allot cannot guarantee that they will occur. Allot does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including due to the impact of 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, CEO

Thank you, Kenny. I'd like to welcome all of you to our conference call and thank you for joining us today. Our fourth quarter was another quarter of solid growth. Revenues grew 5% year-over-year for the fourth quarter and reached $41 million. Our full-year 2021 revenues grew 7% year-over-year, reaching $145.6 million. This is our 16th straight quarter of revenue growth year-over-year, and I am very pleased with the results we achieved during the fourth quarter. Also, during the fourth quarter, we succeeded in signing several recurring security revenue deals for several of our Allot Secure product lines, including a deal with a significant mobile CSP in North America and a Tier-1 operator in Southeast Asia. In December 2021, our SECaaS ARR was $5.2 million and our total ARR, inclusive of maintenance and support, was $47.2 million, up 39% from December 2020. 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 to capitalize on the significant number of opportunities that we are identifying. We announced earlier today that we raised $40 million in a convertible loan from our long-term shareholder, Lynrock Lake. The additional cash will enable flexibility in executing our strategy and enable us to support growth while maintaining a strong balance sheet. I will further discuss the loan and its terms later. I would like to start by discussing our traffic management and analytics business addressed by our Allot Smart product line. Our Allot smart business went well in 2021. The main use cases we see today in CSPs include traffic management, congestion management, quality of user experience especially for video, policy and charging control, and digital enforcement. During the fourth quarter, and throughout 2021, we won several deals where we will be replacing a direct competitor's product that is installed. We are discussing multiple other opportunities with other CSPs currently using our competitor's product and are working on expanding such deals. We are continuously increasing the number of CSPs that we work with, either by replacing competition in DPI or through our security offerings. This growth in our CSP customer base creates new opportunities for both Allot Secure and Allot Smart product lines. As governments look to fight crime and terrorism, we see a growing interest globally to block illegal activities such as drug trafficking, child pornography, or terrorism. Our enterprise business is continuing to grow, reaching revenue of $28.7 million in 2021, compared to $21.1 million in 2020. It is worth noting that we are seeing growth coming from North America and APAC, regions that contributed less to enterprise sales a few years ago. To summarize, I believe the demand for the Allot Smart product line will remain healthy. I want to say a few words on the 5G market and what we believe it holds for Allot Smart and our 5G NetProtect product lines. Many operators worldwide are deploying 5G networks. We believe the 5G market is a significant long-term growth opportunity for Allot and we continue to invest heavily in it. During 2021, we successfully deployed 5G NetProtect in several operators. As more operators solidify their plans to roll out a 5G core, we expect our pipeline for 5G NetProtect deals to grow in 2022. Another aspect is 5G on the cloud. Many CSPs plan to deploy their future core in a cloud environment. We believe the growth in profit volumes that is expected in 5G networks together with the need for high-quality control of the traffic creates opportunities for our 5G NetProtect in this growing market segment. We are deploying our products and networks we contracted with, such as DISH and Rakuten. In addition, we are investing to adapt our products to the various containerized cloud environments. Last week, we announced our partnership with AWS. We are working with them as an independent software vendor, building certified applications on the AWS cloud. This enables CSPs to deploy a full suite of Allot cloud-native applications already pre-integrated and tested. We have already deployed such a solution on the AWS cloud in North America. I believe our partnership with AWS will enable us to grow further in the 5G market. I want to turn our attention now to our cybersecurity business and how the market is continuing to change favorably. As I have 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 lies today with the individual. Each person is responsible for protecting themselves and their families. The problem is that regardless of how good or bad a security app is, more than 90% of consumers do not take action and are left unprotected. Network-based security is the solution that makes this possible. We are engaged worldwide with CSPs looking to provide their customers with such network-based SECaaS security. The direction and momentum are very positive. As of December 31, we signed a total of 22 deals with CSPs to launch SECaaS to their customers. This is more than what we signed in 2019 and 2020 combined. We see growing interest from CSPs worldwide to launch security services to their customers. Our pipeline is continuing to grow as we sign additional deals. If all goes well, we expect to launch an additional 12 to 18 SECaaS customers in 2022. I am confident in our ability to deliver on time. In 2021, we signed deals worth a combined total MAR of $193 million. Our expected negative cash flow in 2022 is expected to be $35 million to $38 million. The main reasons are the operating loss, expected reduction in deferred revenues, and working capital elements and CapEx investments required for SECaaS deals. As SECaaS revenues grow, we expect that our loss and cash burn in 2023 will be significantly less than in 2022. We believe we will achieve profitability and generate cash by 2024. Earlier today, we announced an agreement with Lynrock Lake to provide us financing of $40 million in the form of convertible loans. The loan will mature in three years. We believe this is an excellent deal for Allot as it allows us additional flexibility in executing our SECaaS strategy. It further enables us to pursue growth while maintaining a strong balance sheet. I think this deal is a testament to Lynrock Lake's trust in our company and our strategy. In summary, in the Allot Smart product line, we see a strong pipeline. We are successful in winning deals away from our competition. Overall, we see a solid demand for Allot Smart. The security area is where we see our long-term growth. I believe the network-based cybersecurity market is emerging as a high-growth market. And now, I would like to open the call for questions and answers.

Operator, Operator

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. Please stand by while we poll for your questions. The first question is from Alex Henderson of Needham & Company. Please go ahead.

Alex Henderson, Analyst

Great. Very nice description of the current situation the company is in and in a lot of detail. Thanks for that. And congratulations to Lynrock on their investment. I was hoping you could talk a little bit about the change in the MAR calculation. It sounds like you're tightening it somewhat. Has that changed any of the MAR assumptions in previous periods?

Erez Antebi, CEO

Hi Alex. As we disclosed previously, we calculate the MAR on the date that we signed the contract. We don't adjust the MAR for changes that occur after that date.

Alex Henderson, Analyst

I see. If you were to tighten the definition relative to what you thought in the past, it sounds like those might be a little smaller than you had initially calculated. Is that fair?

Erez Antebi, CEO

No. This is a fair assumption that it will be lower.

Alex Henderson, Analyst

Okay. And then going back to the marketing side of these programs, have you improved the timeline from closure to launch based on structuring your support teams?

Erez Antebi, CEO

I think we will do a better job in terms of having a more aggressive go-to-market approach, but I don't think that the time to launch has changed.

Alex Henderson, Analyst

Great. Thank you, guys. I'll take the floor.

Operator, Operator

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

Eric Martinuzzi, Analyst

I just had a question on the debt arrangement, I wanted to understand that. This $40 million, is this roughly equivalent to what you expect your cash burn to be over the next two to three years?

Erez Antebi, CEO

We are expecting a negative cash flow in 2022 of between $75 million to $78 million.

Eric Martinuzzi, Analyst

Okay. And that's the assumption behind the three-year commitment. And if things change, you've got the flexibility for extensions?

Erez Antebi, CEO

Yes.

Eric Martinuzzi, Analyst

Alright. Do you expect that backlog to be down versus 2021? If you don't, why not?

Erez Antebi, CEO

We don't expect a reduction in the backlog at the end of each year.

Eric Martinuzzi, Analyst

How is your supply chain functioning? Are you impacted at all by supply chain issues?

Erez Antebi, CEO

Right now, we are not experiencing supply chain problems limiting our ability to deliver.

Eric Martinuzzi, Analyst

Okay. Thank you.

Operator, Operator

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

Nehal Chokshi, Analyst

Thank you, and good to see the guidance for calendar '22. Do you have the December quarter SECaaS ARR?

Erez Antebi, CEO

Yes, it's $5.2 million.

Nehal Chokshi, Analyst

Got it. And do you expect incremental SECaaS ARR cadence as we go through calendar '22?

Erez Antebi, CEO

We expect a hockey stick effect in 2022, which means most of the increase will come in the second half of the year.

Nehal Chokshi, Analyst

Understood. Thank you for the clarification.

Operator, Operator

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

Marc Silk, Analyst

Thanks for taking my question. What were the considerations behind your deal with Amazon Web Services?

Erez Antebi, CEO

We have solid technology, and AWS wants to offer capabilities that are pre-integrated and work well together. This deal will help both us and AWS expand our offerings.

Marc Silk, Analyst

How many competitors were you going against?

Erez Antebi, CEO

It's not exactly a closed RFP process. We know each other, we talk to each other and reach the deal through discussions.

Marc Silk, Analyst

Do you see this deal being leveraged by your sales team?

Erez Antebi, CEO

Yes, we will leverage this partnership.

Operator, Operator

The next question is from Alex Henderson. Please go ahead.

Alex Henderson, Analyst

Thanks. Can you characterize whether there is a growing realization among service providers about the competitive dynamic of the market?

Erez Antebi, CEO

Yes, there is a change in perception among North American CSPs regarding the necessity to launch network-based security services.

Alex Henderson, Analyst

What about Europe? Are the EMEA service providers looking at this as a critical element?

Erez Antebi, CEO

In EMEA, specific markets see operators looking more seriously at launching security services.

Operator, Operator

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

Shawn Boyd, Analyst

Can you clarify the structure of the convertible loan?

Erez Antebi, CEO

We can transfer the note to someone else which means they can convert the entire amount.

Shawn Boyd, Analyst

Has COVID impacted your ability to interact with customers?

Erez Antebi, CEO

It did impact us towards the end of the year. We're able to interact throughout Europe and North America, but APAC is still challenging.

Shawn Boyd, Analyst

Do you feel that Allot has a majority of the market in network-based security?

Erez Antebi, CEO

We won most of the deals that were awarded for CSP network-based security last year.

Operator, Operator

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

Erez Antebi, CEO

Thank you. I want to thank everybody for joining this call today. Thank you for your support of our company, and I look forward to talking to you on the next conference call. Thank you very much.

Operator, Operator

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