Allot Ltd. (ALLT) Earnings Call Transcript & Summary

Good day, everyone. My name is Erez Antebi. I'm the CEO of Allot. And I'd like to tell you a little bit about the company today. This slide, you know, forward-looking statements. Allot provides innovative network intelligence and security solutions to operators and to enterprises worldwide. We sell to operators globally. We have hundreds of service providers around the world that are customers, thousands of enterprises. We're a publicly-traded company on NASDAQ. Our 2019 revenues were $110 million, and we expect this year to grow 20-some percent to $135 million to $140 million, and we have a strong balance sheet. What is the idea? What's the main theme here? Well, when we look at the world, we see the following main trends. First of all, connectivity is growing. We're all using the Internet more and more. Second, vulnerability is growing. We are subject to more phishing attempts. We're subject to more ransomware attacks. We're subject to more viruses and malware and so on. And it's getting more complicated for people to deal with it. So when we look at this, who is really responsible to protect us as consumers who -- from all these bad things that are happening on the Internet that we're using more and more? And the answer is that, really, today, it's our personal private responsibility. We have to take care of it. But it's complicated for many of us. Will we, as customers, be willing to go to somebody else to provide us that kind of Security as a Service? And the answer -- as we go and do surveys around the world, the answer is invariably yes. We see today that 50%, 60%, even more of consumers care about security when they're on the Internet. They understand that there's a need. And that almost half of them are willing to pay somebody a fee to take care of them. So this, in my mind, is the really next big thing for operators around the world, to provide not just broadband connectivity, but provide a secured broadband connectivity. And by doing this, operators elevate themselves from just, if you like, a dumb pipe to something that provides a lot more value and is worth actually more to their customers. Now what's the size of this opportunity? If you just look at the OECD countries, you see that people today are paying total -- around OECD countries, around $600 billion for plain connectivity. Our estimate is, and we'll show you a few examples a bit later, is that consumers are willing to pay probably about 5% more, a premium, in order to get a secure broadband connection. So that should bring operators to have a potential of an additional roughly $30 billion a year revenue. Of this, we estimate that something between 20%, and we'll show you cases where we can even reach much higher percentage than that, should go to the technology vendors like Allot who are providing the technology that enables this to happen. So overall, we are looking at what will inevitably be an addressable market of several billions of dollars. That's why this is such an exciting opportunity for us. So what did we do to get this? We developed a family of security products that we call Allot Secure. And it's really a complete family of products. It's not just 1 element in 1 location. Much like security at home, where you lock the door, that's one thing, but you also have an alarm system. That's another thing. You also pay maybe a security company to drive by once in a while, that's another thing. Security comes in layers. It's not just one thing fully secures everyone the same way. So we also had to develop a suite of products under a complete, I'll call it, umbrella, a brand what we call a Allot Secure. And what is this made up of? At the heart, we have a product that we call NetworkSecure. This is software that sits inside the operator's network and looks at all the traffic, all the traffic coming to and from the Internet. And by looking at all the traffic, we can identify whether there's malware there, fishing attempts, ransomware, crypto mining, what have you. And in the network itself, we can filter it out and make sure it does not reach the consumer. Now this is very compelling. Why? Because this sits in the network, which means that the consumer does not have to do anything. Like I mentioned a few minutes ago, consumers today are responsible for their own security. And if you ask yourself, okay, so how many consumers actually do something about it? The answer is very, very few. Probably about 5% do something. Why? Because it's complicated. Because they have to find an application, a security app. They have to download it. They have to take responsibility for it. And here, with NetworkSecure, we're enabling the operator to provide them the security service without the individual having to download anything, touch anything, take any sort of technical responsibility for what they're doing. And that's why we'll show you that we can reach 50% penetration. Half the customer base is willing to pay for it, and the activation is really, really massive. So this is the core element, if you like. Another element is what we call HomeSecure. If you're sitting at home, you're connected via broadband connection, your broadband provider, for the most part, has provided you a router to place at home and connect all your Wi-Fi devices at home to that router and from there to the Internet. We are able to put a small security agent inside that home router. We can do that, again, without coming to anybody's home. We can download that remotely. The customer at home doesn't have to do anything other than agree to have it there. And when we do that, this will protect all your IoT devices in your smart home, your computers, PCs, laptops, smart TVs, thermostats, what have you. And it's fully integrated with the home router, and it fully protects all of the elements in your home, and it protects each one in a different way as it should be. Because, obviously, on your computer, you may very well want to go to a site, I don't know, in Russia. But if the webcam in the kids room is streaming to a site in the Ukraine, something is wrong. So we have to differentiate between the 2, and that's what we do with home secure. In addition to that, we've also developed a parallel product, which we call BusinessSecure. It also sits in the access router, but it does that in the SMB environment. A small business. Small business could be the office of lawyers, it could be a restaurant, it could be a shop of some sort, it could be a whole variety of small businesses that also access the Internet, use the Internet for their business and are susceptible to all the threats on the Internet by implanting this or downloading this software into the home router. Again, we do it from the network. There's no need for the customer to do anything on his own, other than agree to pay the operator. Then this will protect the various devices that are found in small businesses. So by doing all of these, from the NetworkSecure, we can protect you while you're traveling because we protect you while you're on the mobile network. We protect you at home. We protect you in the office. What happens if you enter Starbucks, for example, and you turn -- and you connect to the local Wi-Fi. You're no longer on the operator's network. For that, you do need an external app if you want protection there. And for that, we've integrated our platform with EndpointSecure, which provides continuous off-network security and protects you while you are on public Wi-Fi networks. Now this is fully integrated into the Allot Secure platform. In addition to that, we have developed an IoT security to protect devices that are connected directly to the Internet on the mobile networks. And here, we're talking about devices, think of smart water meters, smart electrical meters, connected cars and so on. And we are able to protect them against malware, botnets, DDoS attacks and so on. How do we do that? We identify what is this device. Is it a smart meter? Is it a connected car? What is it? And then apply the appropriate protection because there are a growing number of such devices that are today probably more IoT connected devices than people on the planet. And that number is just growing. These devices, some of them are very sophisticated, but some of them are very simple, and they're very easily hacked. We prevent them from being hacked. And if they are, we can identify that, isolate them and prevent them from doing harm. And the last element of Allot Secure is DDoS Secure. We're able to mitigate DDoS attacks because an element such as NetworkSecure sits in line, sees 100% of the traffic to and from the Internet, we can identify if there is a DDoS, a distributed denial of service attack instantaneously, within really seconds, and then mitigate it on the spot without having to route the traffic anywhere else. So this also protects the networks from overload and enables them to recover much faster after the attack is over. Now this whole family of products is all under the Allot Secure brand. And I think that what's interesting is not just the brand, but the fact that it's a unified customer experience across all the platforms. If you, as a consumer, at home sign up for the service and your operator provides it, they -- and they do provide several of these elements, you will have a single portal of entry. You will see whatever it is that you decided your profile to be, it will be the same, whether you're on your mobile access, whether on your Wi-Fi at home, whether you're in a store, whether you're in your business, it doesn't matter. And I think that's the real beauty of Allot Secure, and that's the uniqueness that I'm not familiar with anyone else offering today in the market. Now, of course, operators do not necessarily have to buy everything. Some operators provide only NetworkSecure and provide only security on the mobile network. Some provide only HomeSecure and only security while you're in the confines of your home. Some provide both. Some provide NetworkSecure and Endpoint. It really depends on the positioning and what the operator wants to provide you, the consumer, as a service, but it's all there and it's all fully integrated. So now let's see some examples of who took this and what did they actually do with this. Primary example is Vodafone. Vodafone launched this service several years ago in Europe. They've launched by now in 10 markets around Europe. These include Spain, Italy, Germany, The United Kingdom and quite a few others, Turkey, Romania and so on. They launched it on the mobile network only. They have over 20 million paying subscribers today. And in the markets that they launched several years ago, we're seeing up to 50% adoption. I'll show you some adoption rates in a few minutes. Consumers are paying EUR 1 a month extra to get the security. They don't have to touch anything. They don't have to configure anything. They just agree to pay Vodafone. Now look at these numbers. They're extremely interesting. Half of the consumers in some countries are willing to pay an extra euro, which is about 5% premium over what they pay for their broadband package in Europe, just to get the security. And this is generating today, to Vodafone, roughly $300 million of new revenue a year, which is a tremendous amount even for a company like Vodafone. What drives this high percentage? Well, there's a few things. One, I mentioned, it's the fact that the consumer does not have to do anything. You don't have to choose, you don't have to download, you don't have to do anything, just have to agree to buy the service. But if you look at the slide that I'm showing now, we also have elements to touch the subscriber, elements that inform the subscriber that he is being protected. For example, on the left most picture, you see, we can insert an icon on the screen. So while you're browsing, an icon will show up, and that icon will indicate to the customer, hey, you're being protected now by the operator. If you look at the second screen to the left, when you touch that icon, a service portal opens up. It allows you to see what you can configure on security. For example, you may want your phone will be able to access all sites, but your kids' phone will not be able to access sites such as violence -- that include violence or adult material or stuff like that. And you will also be able to see what exactly has been happening. What have we protected you from? Where have you -- what have you avoided by signing up to this service? It's also possible to send -- for the operator to send individual messages to consumers who are on the service. Say for example, John or Sarah, last month, you paid this EUR 1 or whatever the fee is, and we protected you from 1 phishing attack and 1 ransomware attempt. That's a tremendous amount of value. When you get a message like this, chances are you're not going to sign off from the service next month. And also, similarly, you have an ability to manage and secure the devices around your home. And you can look at -- you can open a portal to see the home network, what devices you have, what you don't have and configure them differently. So how fast does -- do these penetration rates happen? This is an example of several markets. Each line represents -- each line of color represents a different market, a different country. And you see, on the horizontal axis, the number of months since implementation. So overall, this is a 3-year scale. And you see on the vertical axis, what is the percentage of customers that are actually buying the service. And you can see it goes anywhere from the very successful ones, 55% or thereabouts, to the really unsuccessful ones like around 10%. Now with value-added services for consumers, 5% is typically considered dramatic success. If you ask most operators, what is their -- a success rate on any type of value-added service? They will tell you that those that succeed are 5%, 6%, 7%. So numbers like this, where on average you reach around 30% plus, are really almost unheard of in the value-added services for communication operators. But these are the real numbers that people actually sign up for and pay for this kind of value added service. Why? Because security is different. It's important and people are willing to pay for it. Where have we been successful so far? I mentioned Vodafone. We've also implemented this network with Telefónica in Spain and elsewhere. We're working with several operators around the world, including one in the U.S. We're working with Rakuten in Japan, Hutchison Drei in Austria, Altice in Portugal and so on. And we're adding operators all the time. And they're launching the service, and the service is growing continuously. In order to help investors understand what is the value when we add an operator, we've introduced a new metric that we call MAR, or maximum annual revenue potential of that customer. So when we sign up a customer, we calculate what happens if 100% of their customer base -- when we sign up an operator, we calculate what happens if 100% of their customer base actually signs up for this security service. How much will that represent to Allot in our annual revenue? And that is the MAR of that customer. So in 2019, we signed up customers with a total MAR value of $85 million. What does that mean? It means that if 100% of their customers actually sign up for the service, we, Allot, will get additional $85 million in annual recurring revenues. Now of course, 100% of the customers will never sign up. That's not even the goal. But as I showed you before, a 30% average after 3 years is a very reasonable number. This year, in 2020, our guidance, which we believe we will meet, is that we will sign up an additional set of customers that have an aggregate MAR of $140 million. So every year, we will -- we will sign up additional customers. Our total MAR will grow. And in addition to that, the penetration on each of these customers will grow because, as I showed you, the first year penetration is low; second year, it's higher; third year, it's much higher. And this is what's going to happen year after year, building a very, very strong recurring revenue base that has -- eventually can reach very, very high numbers, like we talked about in one of the first slides where I showed that overall, I believe, this is a multibillion-dollar market for vendors like Allot that participate in it and provide this kind of technology to operators. Now in addition to Allot Secure, which is really, by far, our fastest and most important growth engine, most of our revenues today come from Allot Smart, which is our DPI platform. This is a platform that Allot has had for several years and where we provide software to service providers around the world that enables them to do 2 things. One is to see everything that's happening on their network. And second, to be able to control the traffic. And by controlling the traffic, they can do things like policy control and charging. For example, they could provide packages of broadband access, where I don't know, Facebook is free on the weekends or something like that. They can manage congestion. If -- now it's -- the network is very heavy -- is very heavily congested and there's a lot of traffic, maybe we throttle down the speed of YouTube. It's a decision of the operator, but we enable them to throttle down the speed of YouTube. So people will, for a while, watch cats playing on YouTube at a slightly lower resolution, but it will enable other people to access and get -- access the Internet and get whatever they need done in a reasonable experience. We're seeing today, we're seeing quite a few applications that are growing for us. One is we see a lot of need for visibility, especially to try and understand what's the quality of experience that customers get and Allot Smart provides that. Second thing, and I mentioned it briefly before, is congestion management. Operators today are spending many billions of dollars increasing the capacity of their networks just to handle the traffic load. We can help them manage the congestion in such a way that they can save on their CapEx spending and not have to increase the capacity as much by handling the current capacity more intelligently. And last but not least, what we're seeing growing a lot is regulatory compliance. More and more governments around the world are enacting laws to gain some sort of control over, I'll call it, the Wild West that's happening on the Internet. For example, there's a new censorship law in New Zealand, following a very unfortunate incident a couple of years ago, where somebody was broadcasting live on YouTube shooting people while he was in a place of congregation. And the government in New Zealand decided that they want to be able to block those kinds of things. Government of Australia is enacting such law, so is the government of Germany and U.K. and so on. So we're seeing a growing need to regulate what's happening on the Internet to prevent really abuse of that medium. And what we're -- and we are able to provide the technology that enables governments and operators to enforce those regulations where they're needed. As you can see, we're selling to many operators around the world. This slide just shows some of those that we work with. The largest, by the way -- the largest operator that we've deployed a DPI system with as Reliance Jio. The slide is a bit outdated, but the Reliance really is moving very fast. They have today more than 400 million customers on their 4G network, and we're providing the DPI to provide them visibility on that. So where is Allot coming from, and where are we going? There are a lot of things changing in Allot, and we're moving forward very quickly. We used to be a DPI company. Now we're moving a lot more into security and visibility and control. We used to have a CapEx model. We used to sell perpetual licenses. Today in the security area, we are selling -- our business model is that of revenue share. I told you that in -- that customers are willing to pay a portion to the operator who will charge them a monthly fee to get security. We are taking a portion of that monthly fee, and that's how we build our recurring security revenues. While we used to have only simple preset rules, today we're deploying more and more machine learning and artificial intelligence. We're going a lot more into virtualized solutions. And of course, we're moving from the 4G world to 5G, which is where the telecom industry is moving. A few words on our financials. We've been growing, I think, very nicely in the last few years. You can see our steady growth between the years, '17, '18, '19. We're showing 16% compounded annual growth rate. In '20, we are guiding to have a growth rate that exceeds 20% over '19. And you can see our growth quarter-by-quarter within the years as well. In terms of our balance sheet, we have a very strong balance sheet. As of the end of September 2020, with $107 million of cash with no debt. You can see here the quarterly breakdown. I won't read it out. But basically, we're seeing healthy gross margins in 70%, 71% range. We are guiding to continued growth both in revenues and in the MAR, which is the main metric that -- from which derives the recurring security revenues that we expect to grow with exponentially in the future. And I think that's about it. So thank you very much. I appreciate your time and hope to see you someday when COVID goes away. I hope to see you also in person. Thanks very much.