Ladies and gentlemen, thank you for standing by. Welcome to Allot Third Quarter 2022 Results Conference Call. All participants are at present in listen-only mode. Following management’s formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded. You should all -- have all received by now the company’s press release. If you have not received it, please contact Allot Investor Relations team at EK Global Investor Relations at 1212-378-8040 or view it in the News section of the company’s website at allot.com. I would now like to hand over the call to Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin, please?

Thank you, Operator. Welcome to Allot’s third quarter 2022 conference call. I would like to welcome all of you to this 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 this quarter. We will then open the call for the question-and-answer session where both Erez and Ziv will be available to answer those questions. You can all find the financial results and metrics including those we typically discuss on this conference call in today’s earnings press release. Before we start, I’d like to point out the Safe Harbor statement. 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 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, changing market trends, delays in the launch of services by our 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 Antebi. Erez, please go ahead.

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 revenues reached $25 million, 35% lower than comparable revenues last year. In September 2022, our SECaaS ARR was $6.9 million, same as June 2022. This was a challenging quarter for us and while these are the results we anticipated for the quarter, I am not pleased with them. As we look into the fourth quarter and into 2023, I definitely expect to see significant improvement and I remain optimistic on the fundamentals and the future. During today’s call, I will discuss the challenges we are facing, the opportunities we see and why I am confident in the future. Before discussing in detail our different product lines, I would like to address some corporate news, I think, are important. Today, we issued a press release announcing our deal with Verizon business to provide network-based security to provide -- to Verizon SMB, Small and Medium Businesses and IoT, Internet of Thing customers. I believe this is the most significant SECaaS contract Allot has signed to-date, and I am very proud that the Allot has been chosen by Verizon to be the technology solution behind their intended security service. In another press release, which made public today, we announced that Allot Board of Directors has decided to nominate Cynthia Paul to serve as a Director on our Board, subject to shareholder approval. I am very pleased that Ms. Paul accepted our Board’s nomination. Having known her over the last years, I believe our capabilities, vast experience and business expertise will greatly benefit Allot and I look forward to her joining our Board. I would like to also mention a couple of elements affecting us company-wide that I believe we…

Thank you. [Operator Instructions] The first question is from Eric Martinuzzi of Lake Street. Please go ahead.

Hey. Congratulations on the Verizon contract. It’s definitely a high-profile customer. I wanted to get a feel for their potential impact, not necessarily in 2022, but do you have any numbers you can give us for the revenue impact in 2023 or beyond?

Unfortunately not, Eric, as much as I would like to, but it’s a significant operator and we hope for a good and positive impact, but I can’t share any numbers or commit to them.

Okay. And then you did give a little bit of color. I know you are not -- well, let’s just talk about 2023 and the opportunity for a 10% growth there. Obviously, 2022 is going to be a down year for you as we look to a return to potential double-digit growth in 2023. What -- where is that recovery coming from?

It’s coming, I think, from both areas of the business, both some from DPI and some from the SECaaS. But I expect both of them to grow next year. Now to what degree and so on, that it’s premature for me to estimate that.

Okay. And then you -- last quarter, the disappointment around the CapEx deal delays really took the wind out of 2022. It doesn’t sound like any of those delayed transactions have closed. Do I understand that you don’t expect them to close in 2022 or you are not -- the current guidance doesn’t anticipate them to close in 2022?

Right now, I would like to close them this year. They may or may not close this year, but I have been -- as you understand -- as you know and understand, I have been incorrect in forecasting when they will close previously hence the delay. So I am much more cautious at this point. I am not going to commit that they will close this year. But we know -- but I think we see our path to the revenue guidance that we gave.

Okay. So the guidance doesn’t anticipate them closing is what you are saying for 2022?

Like many things in the guidance, there is a -- there are several options that will happen. Some of them will happen, some of them won’t and we take that into account we build -- when we build our forecast.

Okay. And then last question for me on the operating expense side. You are now talking about a range of $109 million to $111 million for 2022. Where do you expect the operating expenses next year?

I think that’s probably better left for the -- for a more detailed guidance on 2023, when we discussed it in February. But Ziv, you may want to have additional comment on that?

Unfortunately, we cannot relate to a specific number since we didn’t provide guidance for next year. We just said that the loss will be significant lower than this year and that the revenues will grow roughly 10%. So if we take, let’s assume that this year, the revenues will be $125 million. So it means that the revenues next year would be 137.5%, if I am not mistaken by the calculation. And -- but I cannot relate to specific number of the OpEx.

Well, given that you have guided the FX down and you are comfortable talking about a double-digit growth rate, we can assume that there’s leverage on that growth that we won’t be returning to -- wouldn’t be growing OpEx by the amount that we are growing revenue.

No. We said...

By definition if we say that the loss will be lower. So it means that the expenses should -- cannot grow at the same percentage of the revenues.

Eric…

Okay.

…I’d like to -- I agree with what Ziv said, of course. But I would like to reemphasize, again, we are fully committed to becoming profitable full year in 2024, okay. Now I am not saying that each and every quarter, but for the full year of 2024, we will be profitable. And the only practical way to reach that is to have a significantly lower loss in 2023. So that’s what we are going to do.

Understand. Thanks for taking my questions.

The next question is from Nehal Chokshi of Northland Capital. Go ahead.

Yeah. Thank you and congratulations on the Verizon deal as well.

Thank you.

What are your expectations on Verizon’s aggressiveness with the go-to-market with their limited to SMB customers that this is initially committed for?

Unfortunately, I think, everything has to do with Verizon intentions on go-to-market or their timing or anything like that is confidential, competitive information for Verizon and I cannot relate to any of it.

Okay. Does this Verizon deal change how you would assess the network security, network revenue ratio of 5% to 8%?

I am not sure I followed the question. Could you repeat that, please?

Yeah. Okay. So I think from your Investor Day from like two years ago, you had presented a top down view of your opportunity. One of the steps was the amount of revenue of 5% to 8% intensity of network security and network revenue. And so my question is that, given this contract with a large provider, does it change your view on that network security, network revenue ratio that top down view that you presented a couple of years ago?

Yeah. I think at the top down view, it shouldn’t change it, not necessarily, because it’s doing better or worse or exactly on that number, but because, again, it’s one deal with a single operator for a specific sub-segment or subset of their customers. So I don’t see this -- overall, does it change my view of the overall market, I think not.

Okay. Very good.

And if you…

Yes.

If I understood your question, you relate to the percentage as we said, how much customers are willing to pay for the service between 5% to 8%, right?

Correct.

So it shouldn’t be changed because of Verizon. This is on average how much according to our experience with many customers, how much they are willing to pay percentage wise out of the connectivity charge or out of the current ARPU.

Okay. So now as Ziv -- thank you, Ziv. I didn’t fully appreciate the question. Let me provide the response maybe from a slightly different angle. I talked during this call, I think, I said it quite a few times, that we are trying to work with operators where they bundle security-as-a-service as part of their pricing plans and so on. When something like that happened and I am not talking about Verizon, I am talking in general, okay? Something like that happens, then an operator will be offering a plan that is, I don’t know, X dollars per month, whatever. And including that plan there will be so many as, such speed, so many gigabytes of data and security and maybe other things. Now there is -- if we do such bundling, I think, it will be it’s great, I think, both for the operator and for us, but there is no distinct line item that says this is how much the customer is paying for security. But I think that the -- if you like the perceived value of the security is around those numbers.

Got it. Understood. Thanks Ziv for clarifying my question and the rest for further detail there. So yesterday, you did a press release based on some survey of 1,000 SMB customers of 50 employees or less. And it’s great that 70% are looking to our network security provider or your communications. Do you have any visibility as to what the other 30% are looking to do as far as security then?

Hey. Excellent question. I do not. It wasn’t the part we were focusing on, honestly, in the survey. Yeah, certainly, we run surveys like this, our marketing department run surveys like this for -- in different countries globally for different segments of the market and we published the results from time-to-time. Yeah, what we see consistently in all these services is that, a majority percentage-wise changing, but basically a majority of customers, whether they are consumers or SMBs or so on, understand that they need to be secured and they understand that there are threats that they understand somebody needs to help them secure and that a very, very large portion is looking at the operator is the one who will secure them. If you ask me to guess, I am here, I am just guessing and the others either don’t think they need security or they think that they can take care of themselves or a variety of other things like that.

Okay. Very good. And then as these large deals that have gotten delayed, how much bigger are they relative to average sites you typically see?

How much are they, sorry?

On the DPI side, the large deals that have been got delayed…

Yeah.

… that haven’t been lost…

Yeah.

…how much…

Yeah.

… are they the near typical average deal size that you are seeing?

They are quite large. I mean they are definitely in the millions of dollars, okay? That’s -- I will put it that way. It’s not -- we have many deals of various sizes. These are large.

And typically, what’s the size of the deal then outside of these large deals?

I know, Ziv, do you know what the average deal size we have is?

No. But I think it’s -- the average is not really significant since there is larger -- the standard deviation is relatively wide. So we can have a deal of $300,000 and we can have a deal of $3 million and more. So the average will mean really nothing.

Got you. Understood. Okay. So it’s just simply do you have a larger proportion of large deals in the pipeline than usual?

Yes. We are seeing that we are -- we are seeing today more large deals, I think, than we saw a couple of years ago.

Got it. Understood. Okay. And then, Erez, did I hear you correctly, did you give an incremental market target for calendar 2023 or that was calendar 2022?

No. Calendar 2022. We are not to give anything on 2023.

Okay. Great. Thank you.

The next question is from Marc Silk from Silk Investments. Please go ahead.

Thank you for taking my questions. I will add on to the group, congratulations on the Verizon deal. It just gives your technology a lot of credibility, and hopefully, that will open up more doors to future deals. So on your -- on previous calls, you have talked about on your traffic management and analytics. You have been awarded several deals where you will be replacing a direct competitor’s product. In the slowing economy going forward, why would they switch from a competitive product as opposed to basically doing nothing?

It’s because that so they need to do something and there are several rationales for why do they need rephrase the question of your permission. Why don’t I have to make any such move at all, okay? Why not stay with what they have got, right? That’s basically your question. And the reason is that they are making other changes that necessitate them to make a decision. Some of them could be because, for example, it’s a think of a mobile operator that wants to launch a 5G network and they want to go to a real 5G network, a standalone 5G core. So they need to launch a new core. So they need new capable -- they need to add capabilities to that core. They have to do something. They can’t use the 4G cores that they have got. Another example, it could be that they have made a strategic decision as an operator to move from their own data centers to some sort of shared environment maybe on cloud and so on. And again, they will need to deploy new tech -- different technology than what they have got, because what they have got doesn’t cut it. It doesn’t do that work for them anymore. I could give you another example where -- and this is realistic. They have currently a certain product, whether it’s from our competitor or in other fields and that product has reached end of life and there’s no more support for it. So they can’t get security upgrades, et cetera, for its, et cetera. So they have to do something. They can’t live with the product that has no more support, security updates, et cetera. So I have to do something. All these reasons open up the issue of, okay, if they are going to do that, now they can make a choice from scratch. And therefore, they can’t be -- and these and there are other probably examples of why they would have to do something and they can’t stay with what they have got.

So basically we are saying the companies that are going forward, a global recession is not going to basically be an option for them to have an activity?

It’s -- I can’t say that. That’s a hard sentence for me to say. You -- one could make the argument. I don’t say if there’s going to be a global recession, it’s going to be really bad, then the company that decided to launch a 5G network is going to say, okay, we are going to delay for a couple of years. Things like that could happen, right? I am not going to say there’s going to be zero effect. But the strategic reason to move to make these changes is not tied to, okay, they just got tired of this platform and they really have excess money and they want to spend it. They are trying to do something strategically different, each and every operator with its own -- with their own rationale and direction and that necessitates new equipment for them. And I think that, in general, I think that the telecom industry, while recession will hit -- if there is a recession, we will hit everyone. I think the telecom industry is a little bit less -- the hit will be a little bit less dramatic, just because, we -- maybe we will change our iPhone less frequently, but we are not going to give up our connectivity. So at the end of the day, I doubt we will see a huge impact on telecom -- the telecom operators.

Makes sense. In your second quarter conference call, you announced that you signed a SECaaS deal with Vodafone to launch security services to fixed broadband customers using Allot HomeSecure products with the intention to deploy in seven different European countries. So my question is, is this just limited to customers using the Allot HomeSecure or is there an even bigger opportunity?

This is -- it’s -- we are providing the Allot HomeSecure -- under this contract, we are providing Allot HomeSecure to Vodafone and they will install it in for -- in these seven countries, like, I said last time. Is there a potential to expand that in Vodafone for other things? Vodafone has been a long-time customer of Allot for many things, for DPI, for network security, for other things. And I hope that we will be able to provide the technology for other things as well. But at this point, the contract that we signed is limited to this.

And just to be clear, so your new -- original deal with Vodafone was obviously that they just paid upfront and that was basically it. So this is going to be a recurring revenue deal with you and Vodafone?

That’s correct. The original deal, the -- for many years ago was for network secure that was used to -- that is being used today to protect their mobile customers. They paid us upfront, and of course, they pay us for expansion, support and maintenance and so on, on an ongoing basis. This deal is recurring revenue where they pay us monthly per the number of subscribers that will be using it.

Okay. That’s great. So since you always bring up Vodafone’s 50% penetration rate, are they going to use the same playbook in these seven European countries or every country is going to be different, just because again, you emphasize how successful they have been implementing your technology?

Even on the network secure deal, they were -- they did different go-to-market approaches in different countries. And I would expect that here as well the different OpCos in different countries will be using different go-to-market approaches on the HomeSecure as well.

Can you give us a ballpark of the potential MAR if all countries are in play or it’s...

I honestly would rather not.

Okay. My last question is, so I just saw that DISH is seeking $2 billion in financing for network build-out in Q1 of 2023. Is this kind of the time line that they have given you as far as when they are going to start or it’s unrelated or anything you can, call it, you can bring on the DISH deal would be helpful?

Look, I mean, they have announced that they have started already providing commercial services several months ago, right? They had some -- they had, I think, some milestone that they had to -- regulatory milestone they had to reach and I believe they announced they reached it. Now they still have a very, very small number of subscribers. I am not talking about the, I forget the brand name…

Called LOOSE [ph].

Yeah. LOOSE, I am not talking about those, obviously. But on the new network, it’s -- they still have a very small number of subscribers and I am not sure when that number will start growing dramatically. I hope it will be soon, but I don’t know.

All right. Thank you for taking my question, and hopefully, the Verizon deal will start with something exciting. Thank you.

Thank you very much.

[Operator Instructions] The next question is from Tal Liani of Bank of America Merrill Lynch. Please go ahead.

Hi. This is Madeline on for Tal this morning. Just one quick question for me. So if I am looking at fourth quarter revenues, about a $10 million to $12 million gap from where we are in the third quarter. I just had another confidence in terms of guiding to that number versus maybe guiding a little bit below if we are thinking that two other deals or so may not materialize in this quarter, so around the confidence and why still holding that guide? Thank you.

Ziv, do you want to address that, please?

So our guidance for the yearly revenue is between $125 million to $130 million going the lower range. So let’s assume it will be $125 million. It means that in Q4 we will have revenues of $35 million. So if you ask me whether today we have all the $35 million at end. So the answer is, no. Usually, in our business, most of the revenues are coming towards the end of the quarter. But currently, this is our best estimation of the revenue that we will achieve this quarter.

And just a follow-up there, with macro deteriorating, that still gives you guys the confidence to say that we think $35 million is going to be the right number to guide to. I guess I am just worried about the extra two carriers. If we don’t see those materialize in the quarter, what would that risk be to the revenue of $35 million?

Again, according to our forecast, our weighted average right now is around $35 million. This is what we are expecting. Since we don’t have it in end, it can vary. So this is -- right now this is the weighted average of our forecast and we will work very hard in order to achieve it.

Thank you.

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

Yes. I want to thank you all for joining us on the call today. Thank you for your question. Thank you for your interest and support of Allot. And I look forward to seeing you on our next call or sometimes earlier. Thank you very much.

Thank you. This concludes the Allot third quarter 2022 results conference call. A recording will be available on Allot’s website on -- at www.allot.com. Thank you for your participation. You may go ahead and disconnect.