Allot Ltd. (ALLT) on Q4 2021 Results - Earnings Call Transcript
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 Gk Investor and Public Relations at 12123788040. Or viewed in the news section of our website, 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: 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 and take out the 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 results of the impact 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 will now like to hand the call over to Erez. Erez, please go ahead.
Erez Antebi: 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 the 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 a 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 additional flexibility in executing our strategy and enable us to support the 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 are continuing to be in 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 that we want before. We are continuously increasing the number of CSPs that we work with, either by replacing competition in DPI or by 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 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 $28.7 million in 2021, compared to $21.1 million in 2020. It is worth noting that we are seeing much of the growth coming from North America and APAC, regions that contributed less to enterprise sales of few years ago. The deal we signed in the beginning of 2020 with Broadcom to position Allot as a replacement for their Packeteer product which is at end of life is contributing a significant portion of this growth. To summarize, I believe the demand for the Allot Smart product line including congestion management, traffic management, analytics, digital enforcement, and enterprise use cases will remain healthy. I want to say a few words on the 5G market and what we believe it holds in store for Allot Smart and our 5G NetProtect product lines. Many operators worldwide are deploying 5G networks. Most of these are using 5G frequencies and radios, but continuing to use a 4G core. However, a growing number of operators are now making concrete plans to deploy a 5G core. We believe the 5G market is a significant long-term growth opportunity for Allot and we continue to invest heavily in it. I would like to expand on two aspects of the 5G opportunity. During 2021, we successfully deployed 5G NetProtect in a couple of 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, in advance of revenue growth and further years. Another aspect is 5G on the cloud. Many CSPs plan to deploy their future core in a cloud environment, for example, DISH and Rakuten. 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 an opportunity for Allot Smart and our 5G NetProtect in this growing market segment. Not all clouds are the same, some work with AWS, some with Azure, and some like Rakuten use their own version. 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 native cloud environment to take advantage of this growing market opportunity. Last week, we announced our partnership with AWS. We are working with AWS as an AWS independent software vendor, building certified applications on the AWS cloud. This enables CSPs, that choose to deploy their core functions on the AWS cloud 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, as it is being revolutionized by cloud-native technologies. In addition, I will note that we are working with other cloud technology providers to reach similar agreements, to further expand our opportunities. I want to turn our attention now to what we see in 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 on securing the consumer, family, 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 have to find a security app, buy it, download it, and install it on every one of their devices. The problem is that regardless how good or bad a security app is, more than 90% of consumers do not 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 surface and not have to do anything technical like downloading an app to each device and configuring it. Network-based security is the solution that makes this possible. We are engaged worldwide with CSP that are looking to provide their customers with such network-based SECaaS security. 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, Allot win rates, 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 deals we signed and in the networks that have commercially launched. As of December 31, we signed a total of 22 deals with CSPs to launch SECaaS to their customers. Of these 22 customers, 12 were signed in 2021. This is more than what we signed in 2019 and 2020 combined, which was 10 deals. Furthermore, by our count, Allot won most of the deals that were closed in 2021 by CSPs worldwide to launch network-based security services to consumers. I believe this shows two very important points. One, network-based security services by CSPs to consumers is an expanding market as more CSPs understand they need to launch such services. And two, Allot achieved the prime leadership role as the technology company enabling the SECaaS CSP services. Last week, we announced two very interesting deals that were recently signed towards the end of 2021. One is with a significant North American CSP with millions of mobile customers. This CSP plans to offer the service based on Allot Network Secure to both 4G and 5G customers. It is important to note that this is our third deal to deploy security services to consumers in the North American market. Previously this year, we announced such an agreement with DISH. We also signed and announced a deal with a European headquarter group that also has operations in North America to deploy our HomeSecure solution. As I discussed in previous calls, we are seeing interest in providing network based cybersecurity to consumers with several North American CSPs. In addition to those that signed with us, we are in discussions with other North American operators as well. It is worth noting that none of the North American CSPs we've signed, were commercially launched yet. While we expect significant SECAAS revenues from North America in the years to come, based on the expected launch time and initial customers targeted, I do not expect significant SECAAS revenues from North America in 2022. The other deal we recently announced is with a tier one operator in Southeast Asia, where the operator will deploy Allot network secure to protect its SMB customers. I will note that in this case, we are replacing an existing service based on our competitors’ product that according to our customer, could not scale well enough to support their future growth. We are continuing to see growing interest from CSPs worldwide, in launching security service to consumers and SMBs. Our pipeline is continuing to grow as we continue to sign additional deals with CSPs. In addition to the deals we signed, we have already been awarded by several other CSPs in Europe, in North America, and in South America, and we're working to sign contracts with them. If all goes well, these contracts shouldn't be signed in the coming months. As I indicated in our previous call, there is still a lot to be done to turn signed contracts into short-term revenues. I think that during last year we learned a lot more how to overcome obstacles and help to help the operators become more effective in marketing the services to their customers. To that end, we have implemented internal changes in our law in both the technical, and marketing teams. Every CSP that we contracted with to launch security services, is assigned an accounting consisting of a salesperson, a customer value manager for marketing, and the program manager. Each such team, which may have multiple accounts, has a SECaaS revenue targets, a target launch date, and the tasked with improving box. While this structure does require some more people, it brings a strong combination of expertise in what is needed to launch quickly, what is needed to achieve high adoption rates, and how to get the CSP to accept and implement the required actions. From what we see in the last few months since we implemented this change, we are seeing more ideas on how to improve, and more effective interaction with the CSP. This was true both at the working level, and the executive level and in both the network teams and the business teams. While I expect we will see more effective launches in 2022, still, most of the revenues will come in the years ahead. In 2021, we signed deals worth a combined total MAR of a $193 million, which of course is in addition to the MAR signed in previous years. As we learn more about the SECaaS market dynamics, and we get more involved in the detailed launch planning before we signed the deals, we also learned to better calculate the MAR. We now have a better understanding, in many cases, of which segment of the market the CSP will initially target in their marketing, and sometimes, we know the extent to which their marketing will be "serious about. " We also learn how to influence things in early days to yield faster and better results. The MAR, as we learned to calculate it better, considers the relevant subscriber base that is expected to be targeted of launch in a "serious manner. " I will remind us that the MAR is calculated based on the number of relevant subscribers that CSP has when we signed the deal. For example, we signed a deal with DISH this year. While DISH has today, millions of customers on a 4G network, this deal is focusing on customers that will be under 5G network which is not yet commercially launched. Therefore, while we believe the revenue opportunity for Allot with DISH is large, the MAR was calculated as zero. As I discussed in the previous call, the MAR indicator, which we have put forward as an indication for future revenues, is not good enough to forecast revenues in the short term. It does not 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. Therefore, while we will continue to provide information on MAR, we will also continue to track the number of signed deals, the number of launched services, the SECaaS revenues, and the SECaaS annual recurring revenue rate, or ARR. We define the ARR as the monthly recurring security revenues we achieved during the last month of the quarter multiplied by 12. During 2021, the ARR for revenues grew from $2.7 million in December 2020 to $5.2 million in December 2021. As of December 31, 2021, of the 22 signed deals, only eight launched commercially, some of them only to a portion of their subscriber base. As I said in the previous call, I expect we will launch an additional 12 SECaaS to 18 SECaaS customers during 2021 -- excuse me, during 2022. This is a significant operational challenge. We have planned and made organizational changes to prepare for it and I am confident in our ability to deliver on time. On the Allot Secure product side, we also have challenges. While Network Secure was launched in multiple networks, HomeSecure launched operationally only recently. As products get launched and are deployed more widely, it takes efforts to mature and support them. We have expanded and aligned the organization in anticipation of the launches, and we are confident that we are well-prepared. Our team is working closely with the customers and we see there is a strong appetite by the CSPs to launch. But as I mentioned in previous calls, there are also challenges and delays. Even once the network is commercially launched, it may still take time for it to generate revenues as CSPs offer security services was free service periods of up to three months. As we prepared and line the company to launch the networks and worked with the CSP to drive revenues, caution and patience are still required. As we look at the SECaaS potential globally, I am very encouraged with our prospects for several reasons. One, our pipeline is bigger than ever. A growing number of CSPs understanding it to launch security services to their customers and as a result we see continued growth in number of RFPs and number of operators we are in direct engagement with. Two, adoption rates of consumers and SMBs. When the service is launched with good go-to-market approach, adoption rates are high, as we discussed in previous costs. Not only is the adoption rate high, but customers stay with the service even when they can opt out. In most cases, the lifetime operators calculate for a consumer is around three years. Three, a growing number of CSP 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 VAS or value-added service, but a growing number view it as a core service. Viewing security as a core service rather than a VAS, leads to more aggressive go-to-market and higher penetration rates, 4. The North American market is very interested now in network-based security services. As I mentioned earlier, several North American operators, in addition to the three we already signed, are actively looking to launch such a service. Although it may be for a subset of their customer base, 5. We have a high win ratio. During the past year, by our account, we won most of the deals that were awarded for CSP network-based security to consumers. We are winning due to our unique combination of several elements. A, a comprehensive 360-degree 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 rewards with the operators. C, our value-added, 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 high. Looking ahead, I want to summarize our expectation for 2022. We expect our SECaaS revenues in 2022 to be between $10 million to $15million dollars. Most of these revenues are expected to come in the second half of the year as additional customers launch and as existing customers grow. We expect the SECaaS ARR for December 2022 to be between $20 million to $30 million. In addition, we expect to sign during 2022 additional SECaaS deals with an aggregate MAR of more than $180 million. We also expect to commercially launch between 12 to 18 new SECaaS customers through 2022. I would now like to say a few words on our expectation for the overall company performance in 2022. Overall, we expect our 2022 revenues, including CapEx and recurring revenues, to be between a $147 million to $153 million. The revenues in the first quarters of the year are expected to be roughly in the same level as in 2021 and towards the end of the year, we expect to see growth. We expect our total ARR in December 2022 to be between $61 million to $73 million comprising of $20 million to $30 million of SECaaS ARR and $41 million to $43 millions of support and maintenance ARR. We expect gross margins to be around 70% in 2022. As we continue to invest to deliver on our SECaaS strategy, we expect our OpEx in 2022 to grow. We expect some increase in headcount mostly in R&D and sales. As you know, the global market for high-tech talent including in Israel has become very challenging and the shekel exchange rate also has an impact. Allot is committed to get the best talent and invest in people as we think this is required to succeed and deliver on the opportunities we have. Altogether, we expect 2022 OpEx to be between $127 million to $130 million. As a result, we expect an operating loss between $23 million to $24 million. I believe 2022 will be a very significant year for Allot. Significant number of new SECAAS networks will be launched. SECaaS revenues and year-end ARR will become substantial for the first time. As I stated earlier, this year also comes with operational challenge to launch many new SECAAS customers and several new products. The right thing for us to do is to invest what we should to succeed in the goals we set for ourselves, and that I outlined to you today. This results in an expected increase of our operating loss and cash burn in 2022. We do not manage our business with a separate P&L for SECaaS and CapEx deals and therefore, we not report it this way. However, to give some color on this we made a synthetic analysis of our 2022 expected business on a fully loaded basis. Our analysis shows that our CapEx business, which is estimated to have around $135 million to $140 million revenues in 2022 should have an operating profit of 10% to 15%. On the other hand, our SECaaS business, on the same synthetic, fully-loaded basis, is expected to lose tens of millions of dollars. This analysis shows that the investments we are making in 2022 are going towards growing our SECaaS business. Our expected negative cash flow in 2022 is expected to be $35 million to $38 million. The main reasons for the negative cash flow are the operating loss, expected reduction in deferred revenues, and other working capital elements and CapEx investments required for the SECaaS deals. As SECaaS revenues grow, we expect that our loss and cash burn in 2023 will be significantly less than in 2022. We further expect that as the SECaaS revenue continue to grow, we should become profitable and generating cash in 2024. Earlier today we announced we reached agreement with Lynrock Lake our largest shareholder, to provide us financing of $40 million in the form of a convertible loans. The loan will mature in three years with an option to extend the maturity up to five years by additional two one-year extensions at Allot sole discretion. The NOK will not grow interest and will not accrete. The conversion price was agreed at $10.30 million. There will be downward adjustment in the conversion price if the maturity is extended beyond these three years. We believe this is an excellent deal for Allot as it allows us additional flexibility in executing our SECaaS strategy. It further enabled us to pursue growth while maintaining a strong balance sheet which is desirable for our potential CSP customers. I think this deal is a testament to the trust Lynrock Lake has in our company and our strategy, and I wish to thank them for this vote of confidence. 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, enterprise business are growing. We are successful in winning deals away from our competitor and unseating them in several CSPs where they are the incumbents. Overall, we see a 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. 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 are working better with CSPs to achieve high penetration rates and I am very optimistic on our recurring revenue outlook. And 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. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be pooled in the order they received. Please stand by while we poll for your questions. The first question is from Alex Henderson of Needham & Company. Please go ahead.
Alex Henderson: Great. Very nice description of the current situation the company is in and in a lot of detail. Thanks for that. And congratulations to the and Lynrock on their investment, it's a brilliant move on their part. 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? You talked about the '18, '19 vicinity of 85, and then '20 at a 192, and now you've given your '21, but has any of the historical changed as a result of tightening the definition and better understanding?
Erez Antebi: Hi Alex. As we disclosed previously, we calculate the MAR on the date that we signed the contract. It's up to that date. Let's assume the number of subscribers increased or decreased, we don't adjust the MAR. So what was calculated in previous periods of the number and we don't change them.
Alex Henderson: I see. If you were to tighten the definition relative to what you thought in the past, it totally sounds like those might be a little bit smaller than you had initially calculated. Is that fair or is there some that are larger and some that are smaller?
Erez Antebi: No. This is a fair assumption that it will be lower.
Alex Henderson: Okay. And then going back to the marketing side of these programs, it does sounds like you've changed your marketing stature, and that is -- the go-to-market improvement there is resulting in increased confidence in the timing of getting programs out. Have you improved the timeline from closure to launch based on the way you're structuring your support teams?
Erez Antebi: I can't say that we have already improved it yet. I think that it's still going to take probably a year from when we signed and so -- until they actually launched. But I think that when we launched, we will be a -- both us and the CSP working together, I think we will do a better job of it in terms of having a more aggressive go-to-market, addressing a larger portion of the customer base from day one and things like that, that will help improve the penetration after the launch. But I don't think that the time to launch has changed.
Alex Henderson: Going back to the more traditional business, could you give us your sense of what you think the growth rate in the traditional business will be for the full-year? I think you've managed to sign some deals that will continue to allow it to grow in that 0% to 5% range as opposed to decline. Is that an accurate read?
Erez Antebi: As we said, in the past, this market, single digit -- low single digit growth rate on a multiyear basis, which mean, one year it can grow more, the other it can go less, or it can be flat. And then the guidance of revenues for next year, taking the assumption that it will be, roughly speaking, it will be flat.
Alex Henderson: So when you say next year, you mean '22. I assume that you're saying this year is roughly flat?
Erez Antebi: Yeah. We'll feel mentally with 2021.
Alex Henderson: Understand. And going back to the OpEx side of it, have you increased your assumptions for T&E associated with increased traveling, and the like in that calculation of OpEx or are you still assuming fairly tight travel conditions?
Erez Antebi: We increased the travel expense even though it's not in the same level as it was in 2019 or before, pre -COVID.
Alex Henderson: . So we should assume further loosening of the travels expense or increase in travel expense, those being travel restrictions as we go into '23 as well then?
Erez Antebi: Not necessarily, because now -- and often all the other businesses around the world it turns out there's many things can be done remotely and you don't need to send five people to each meeting. can be remotely via Zoom.
Alex Henderson: Thank you. Okay. I'll take the floor, thanks.
Operator: The next question is from Eric Martinuzzi of Lake Street. Please go ahead.
Eric Martinuzzi: I just had a question on the debt arrangement, I wanted to make sure I understand that. So this dollar amount, this $40 million, as you were sizing up the debt arrangement, is this roughly equivalent to what you expect your cash burn to be over the next two to three years?
Erez Antebi: As we said before, we are expecting a negative cash flow in 2022 from between $75 million to $78 million and is for $40 million. And as we said in 2023, probably we will be cash flow negative but the number will be significantly lower than the 2022, and in 2024, we expect to be profitable and cash flow positive.
Eric Martinuzzi: Okay, and that's the assumption behind the three-year. And if things are changed a little bit, you've got the flexibility for the extensions.
Erez Antebi: Yes.
Eric Martinuzzi: Okay. You know you do have a -- go ahead.
Erez Antebi: As well as I've stated before the other motivation that we have for opening is to keep a strong balance sheet. It's very important with when we'll compete against it's very important that we can present -- we can show that we have a very strong balance sheet. So when we --
Eric Martinuzzi: That is next. Basically the cash that we have is the -- responding to the RFP cash that the idea is to not touch the balance sheet as of the end of December. And then this is sized for the continued investment in the SECaaS, the debt arrangement is to go after the SECaaS. The backlog at the end of 2021, we're $89 million, that was down versus a $110 million the year prior. So, the expectation for 2022, I have a question. Do you expect that to be down versus 2021? And if you don't, why not?
Erez Antebi: We don't -- usually there's timing differences between one year to another. Sometimes a backlog going up, sometimes it's going down. The same time although that were expected -- so we're expected to be received let's say at the end of the year sometimes, there is to the next year. So -- but we don't expect reduction in the backlog at the end of each year.
Eric Martinuzzi: I was asking it from a supply chain -- disruptive supply chain perspective. Are you impacted at all by -- is the backlog impacted at all by supply chain issues?
Erez Antebi: Not in -- it was not in 2021. We'll see what happens in 2022. Right now, we are not suffering -- at this point, we're not seeing problems in our supply chain that are limiting our ability to deliver and we bought more equipment to hold an inventory in anticipation of all the supply chain issues, we're doing other arrangements to make sure that we can deliver what we need to on-time, and so far that has been successful. Now, we do see that the supply chain issues are continuing and there are some specific servers or switches that are harder to get and we have to do some juggling to get them. But right now, I think we're in okay shape, I hope that that will not change during 2022.
Eric Martinuzzi: Okay. And then last question for me. I appreciate the detail on the percentage of top 10 and customers of the total revenue for the year. I saw that declined from 2020 to 2021. What's your expectation for the coming year based on the pipeline you have? Does that roughly half the revenue from the top 10 customers continue to play out?
Erez Antebi: Yeah. This is sale assumption, it's about 60% of the revenue who will come from the top 10 customers, the sale assumption.
Eric Martinuzzi: Okay. Thanks for taking my questions.
Erez Antebi: Thank you.
Operator: The next question is from Nehal Chokshi of Northland Capital Markets. Please go ahead.
Nehal Chokshi: Yeah, thank you. And good to see makers of calendar '22 guidance in the December quarter results drove down on some of these things. First of all, did you give actually the December quarter SECaaS ARR?
Erez Antebi: Yeah, December --
Ziv Leitman: Yeah.
Erez Antebi: Yeah. It's at $5.2 million.
Nehal Chokshi: $5.2 million. Okay. Great
Ziv Leitman: in the end you can see there is a table, the last table of the PR. It's over --
Nehal Chokshi: Yeah.
Erez Antebi: -- it's over the last two pages.
Nehal Chokshi: Okay. Great. And what about March quarter? What are your thoughts on overall, as well as SECaaS ARR exiting the March quarter?
Erez Antebi: We expect it to be higher but not by much because things will accelerate towards the end of the year as more and more upper -- as more and more launches happen and revenues start coming in from them.
Nehal Chokshi: Got it. Okay. So you expect incremental SECaaS ARR cadence as we go through calendar '22 to build each quarter, basically. Like, maybe sort of a cadence?
Erez Antebi: Yeah but we expect real hockey stick in 2022, towards the end of the year.
Nehal Chokshi: I'm sorry, could you say that one more time?
Erez Antebi: We are expecting that hockey stick phenomena in 2022, which means, most of the increase will come in the second half of the year.
Nehal Chokshi: Yes. Understood. Okay. And you know on the 3Q '22 -- 3Q '21 earnings call, when you introduced your SECaaS ARR guidance and the reduction of SECaaS revenue guidance, that implied a push-out in incremental SECaaS ARR from calendar '21 to calendar '22. And I believe that the rationale there was extended promotional periods of three to six months. And so, I guess I would think that that would result in that pushing out, hitting your incremental seek as ARR in the first half rather than the second half, can you explain to me where that logic might be wrong?
Ziv Leitman: First of all, I don't recall that we said that it's an increase from three to six months. We said that according to our assumption -- initial assumption, we didn't think that the CSPs should give any free periods. And now they're insisting of having most of them providing three months of free periods. But there were other reasons as well. So this is why we said that -- and it was like three months ago we said we see postponement in the timetable of about six months.
Nehal Chokshi: Okay. What were the other reasons for postponement of about six months?
Erez Antebi: Some of it has to do with delays in the launch dates themselves. Some of it had to do with the fact that when the operators are launching and they're launching not to their entire customer base, but to only a portion of the customer base. Some of it had to do with how effective the go-to-market techniques work, where was that when they launched, how aggressive, are they actually going after whatever portion of the launch based -- of the base that they are going after. We have -- we talked about issues of there's a number router. We do HomeSecure number of routers that we have to integrate, which was the larger number. So was a range of things that when we put them together, they led to what was then a six-month postponement of our forecasts.
Nehal Chokshi: Okay. Alright. You guys also mentioned that none of the North American CSPs signed has been commercially launched yet, that's not surprising. An initial launch time will not produce SECaaS revenue in calendar '22 but what about contributing to SECaaS ARR within calendar '22? So, they could launch at the, say end of fourth quarter of calendar '22, and you can get some initial penetration within calendar '22 to produce some nominal SECaaS revenue, but much more material ARR. Is that what is embedded in the back half loaded incremental ARR here?
Erez Antebi: Not, not really. I think we're looking more at the non - North American operators for the revenues and ARR for this year. And even if someone does launch in November or December, they'll only have a small number of customers. So the monthly revenue will be very small so, the -- also the ARR won't be material.
Nehal Chokshi: Okay. Thank you. That would be -- I'll see the floor now. Thank you.
Erez Antebi: Thank you.
Operator: The next question is from Marc Silk of Silk Investment Advisers. Please go ahead.
Marc Silk: Thanks for taking my question. So about a year ago when you started getting into the 5G, I kind of asked you a question and I thought it was just only one-time revenue but that announcement last week shows that actually 5G is going to also be recurring revenue for you guys?
Erez Antebi: Look, 5G is, right, it's a mobile technology, so, as we're providing -- as well as the operators providing SECaaS services, most of their customers today are on 4G worldwide because that's the networks and in the future many customers are going to be on 5G networks, so I would expect that when they launch a SECaaS over there to their 5G customers then we'd have SECaaS recurring revenue on 5G, but I'm not sure if I fully understood your question.
Marc Silk: No, that was it. I just know you signed a deal a little while ago, like a year ago and I thought it was a one-off. So that's actually good news. Last question is, you signed a deal with Amazon Web Services, which is -- it shouldn't be overshadowed considering it's one of the biggest companies in the world, and little Allot signed a deal with them. What were they interested in? What overwhelm them? How many competitors were you going against? And if you could comment more on that because, I would think that this is something also that you can leverage with other customers, the fact that Amazon picked you guys and I would assume that that probably opens a lot of doors for you guys?
Erez Antebi: Yes, I think it's a very important deal and it's -- the reason they're working with us is because we have a good and solid technology that the -- and what Amazon wants to be able to do is come, as they provide the cloud environment and they offer their cloud environment to operators who wish to deploy their core services, not on their own premises, but on the cloud environment that Amazon will provide. They want to be able to offer these operators as many capabilities that are pre -integrated and work together and are tested and so on and work in their environment quickly and efficiently as possible. So when we do with this deal with Amazon, it enables them to expand their offering or the value of their offering as they go to other CSPs. And what it does for us, of course, it allows us to have a better position when an operator decides to deploy on AWS, it allows us to have a much, much better position to convince them to use our technology and not someone else's. I think it's a very important deal and I think it's a good deal for both sides.
Marc Silk: How many people were competing for this deal?
Erez Antebi: It's not exactly a closed RFP with -- where there are x numbers submitting bids and so on. It's a process of discussions. We know each other, we talk to each other, each side sees the value and then we reach the deal. I'm sure that they are talking to others as well.
Marc Silk: And do you see this deal being able -- your sales team being able to leverage this because I would think that that's probably one of your more impressive customers?
Erez Antebi: Yes, they would. I would definitely see. We definitely look to leverage it.
Marc Silk: Thanks for taking my questions.
Operator: The next question is from Alex Henderson. Please go ahead.
Alex Henderson: Great. Thanks. I wanted to go back to the question of adoption rates and mindset of the service providers. I think it's pretty clear at this point that you're getting a very significant response from a pretty broad range of service providers in North America. If I were to guess my -- you're talking about all of the majors at this point and to that extent, I'm wondering if there is a growing realization among those service providers that there's going to be a competitive dynamic in the marketplace where this is a function -- functionality that obviously has value to consumers that they want to get out in front of, as opposed to being at all behind the curve on, i.e. is there a change in the landscape where the competitive dynamics between service providers to be seen as ahead of the curve and more value-added and the like, where security as a service for them, becomes the strategically important element where the competition, therefore, accelerates the adoption rates.
Erez Antebi: I think there's definitely a change in the perception and understanding within North American CSPs, the necessity to launch network-based security services. I think I talked about it two years ago. They basically were uninterested, the vast majority of them. Today that dynamic has changed. The understanding that this is something that consumers are looking for, that it's something that the operators should provide, that the operators should be viewed as providing a secure access is growing. And we are seeing cases where one operator is seeing that another one is or hears that another one is going to launch such a service and that does accelerate their own process in doing this. Now, when I say accelerate with operators, especially in North America, that doesn't mean it becomes very fast. It still takes time. Whether it's faster.
Alex Henderson: Alright. Exactly. So it sounds like the North American markets gotten towards that critical characteristic of competitors in the category needing it. Can you characterize Europe as this in a similar way? Have the EMEA service providers started to look at this as a critical element or is the overlap in EMEA somewhat less and therefore, less of a factor of competing between the service providers?
Erez Antebi: EMEA is not a homogeneous market like the U.S., they're -- each country has different sets of operator s that work there and there is some operator s like Vodafone, for example, that work in multiple countries and it's -- the market situation is a bit more complex. But if we look at specific markets then yes, and EMEA we definitely see it that when one operator launches a security service, then other operators competing in that market start to look at the launching of a few of these services more seriously and start to engage with us more seriously at that point. It's definitely
Alex Henderson: One last question. The U.S. and EMEA tend to be leaders in terms of thought process for service providers on a global basis. While there may not be the same level of competition in LATAM or APAC we're tending to be fewer service providers and less overlap hence the, not going to have that competitive dynamic we talked about. Do they see the increased competition in the U.S. and EMEA and the adoption rates in those countries as indications that this is more of an accepted technology? Are we crossing the rubicon of whether this is something that's optional, i.e. avast, to something that's core in more of those less competitive markets where there's maybe one or two service providers as opposed to as many as there are in the U.S. and Europe?
Erez Antebi: I think there's a general note. I think that the APAC and Latin America are behind on providing security services to their customers, much like in other areas. And you're right, EMEA Europe basically and North America are much more thought leaders in this process so I think the APAC and Latin America are behind Europe and North America from what I see. But I think -- we've won deals both in APAC, we've won deals in Latin America and I think that it's going to start catching up, but it's slagging behind.
Alex Henderson: So the question was, as the U.S. and EMEA accelerated adoption, does that change the attitude in EMEA -- I mean Latin America and APAC?
Erez Antebi: I can't say that I've seen that yet. I would expect that it would happen in the future, but that's an expectation. I can't say that I've seen that happen right now.
Alex Henderson: Alright. I get it. Thanks.
Erez Antebi: Thank you.
Operator: The next question is from Shawn Boyd of Next Mark Capital. Please go ahead.
Shawn Boyd: Thanks for taking the question. Can you hear me okay?
Erez Antebi: Yup.
Shawn Boyd: Great. First thing on the convert, just quickly. Just a cursory look at your ownership list, it looks like the Lynrock is already at 20%. There are two maximums mentioned in that press release, 20%, and then also the 25% if they give you 60 days’ notice. Is it correct to assume if the stock price for such that above this current exercise where they would want to convert, they can really only convert up to half of that $40 million right now?
Erez Antebi: First of all, we can transfer the note to someone else which means they sell part of the current holdings. So they will be able to convert the entire amount.
Shawn Boyd: Okay. Thank you for that clarification. The other question is on just COVID impact in general. Previous calls we've talked about the issue with flying and seeing customers and working on deployments, etc. We didn't really speak to that too much. You guys have been great on giving us some fairly granular guidance and now kind of quarter-by-quarter and talking about ARR, we have had just a heck of a wave though in Q4 and Q1. Is that slightly impacting sort of your -- where your SECaaS revenue came in December quarter and then possibly also that ARR as we now start into 2022?
Erez Antebi: It did have some impact towards the end of the year. In Israel at least had been in December a very severe travel restriction. So we couldn't basically go anywhere and was right to the end of the year, which made a lot of things difficult, including launches and some other deals and so on. Right now, if I look at the world map, we can -- we see that we're able to travel and interact it's throughout Europe and North America. APAC is still really shut down in terms of travel. It's very, very hard to travel there and it's been going on now for almost two years. It's a very long time to not see customers face-to-face. And Latin America is also not very -- they don't accept too many people in face-to-face meetings. So that's also a harder environment right now. We hope it will all get better.
Shawn Boyd: Yeah, I think we all do and I think it is going that way, just taking some time. Last question from me regarding market share. I think you've mentioned a couple of Do you feel that Allot has a majority of the market in network based security? You've now signed -- if I'm hearing this all correctly, you've signed 22 deals today for the combined MAR of nearly $500 million. How does that compare to your competitors? I'm trying to understand this edge that you're getting in selling the next new customer with -- partly based on track record and you being able to point to that. So what does that look like versus the competitors?
Erez Antebi: In last year, in 2021, by our account based on all the deals that we are aware of that were closed for network-based security, we won most of them, so if we signed 12 deals last year, our competitors in network based security combined, signed less than that. It's hard for me to calculate the MAR, but -- of these very deals because I definitely don't know the exact terms and so on. But, it's not that they signed large deals and we won small ones or anything like that. I think that they signed less if -- I would expect that they had signed less MAR in total if they used that metric then we did for total for all our competitors in this space. Now in And you asked if it is helpful in the next yields, yes, absolutely it's helpful because you get -- we get references, customers, any customer likes to buy from people, from companies and the partners that are working well with others in their respective fields. So yes, it's definitely helpful in getting the next deal.
Shawn Boyd: Okay. Good luck, gentlemen and thank you for the additional disclosure on some of these KPIs, and they'll help eventually attract the business.
Erez Antebi: Thank you.
Operator: There are no further questions at this time. Mr. Antebi, would you like to make your concluding statement?
Erez Antebi: Yes. 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 definitely talking to you on the next conference call. And hopefully, as travel starts, to meet some of you in person during the next few months. Thank you very much.
Operator: Thank you. This concludes the Allot fourth quarter 2021 results conference call. Thank you for your participation. You may go ahead and disconnect.
