Allot Ltd. (ALLT) Q3 FY2025 Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to Allot's Third Quarter 2025 Results Conference Call. [Operator Instructions] 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 at EK Global Investor Relations at 1(212)378-8040 or view it in the news section of the company's website at www.allot.com. I would like now to hand over the call to Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin, please?

Good day to all of you, and welcome to Allot's conference call to discuss its financial results for the quarter. I would like to thank Allot's management for hosting this conference call. [Operator Instructions] As a reminder, this conference call is being recorded. If you have not received the company's press release, please check the company's website at www.allot.com. With me today on the line are Mr. Eyal Harari, CEO; and Ms. Liat Nahum, CFO. Following Eyal's prepared remarks, we will open the call for the question-and-answer session and both Eyal and Liat will be available to answer those questions. You can all find the highlights of the quarter including the financial highlights and metrics including those we typically discussed on the conference call in today's earnings press release. Before we start, I'd like to point out the following safe harbor statement. This conference call may contain projections or other forward-looking statements regarding future events or the future performance of the company. Those statements are early prediction and Allot cannot guarantee that they will, in fact, occur. Allot does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of changing market trends, delays in the launch of services by Allot customers, reduced demand and the competitive nature of the security services industry as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission. Also the financial results in this call will be presented mainly on a non-GAAP basis. Allot believes that these non-GAAP financial measures provide more consistent and comparable measures to help investors understand Allot's operating performance in the quarter. For all the data, please refer to the financial tables published in the results press release issued earlier today, which also includes the GAAP to non-GAAP reconciliation table. And with that, I would now like to hand the call over to Eyal Harari, CEO of Allot. Eyal please go ahead.

Thank you, Ken. We are pleased with our excellent third quarter 2025 results. We reported double-digit year-over-year revenue growth for the first time in multiple years, continued strong SECaaS momentum and our highest level of operating profitability in over a decade. We saw strength across all parts of our business, both in cyber security as well as network intelligence solutions. Revenue for the quarter was $26.4 million, up 14% year-over-year. Our profitability has likewise expanded strongly, and we reported a solid operating profit in the quarter versus a loss last year. Our Cybersecurity as a Service growth engine continued with its excellent performance. As of September 2025, our SECaaS ARR was up 60% year-over-year, which demonstrates very strong traction for our service among end customers. As each quarter passes, SECaaS is becoming an ever more important part of the revenue pie and it's made up 28% of our revenues in the quarter. We ended the quarter with over $80 million in cash and no debt, and Allot is back to a very strong financial position with a resource to further execute on our growth strategy. Overall, our results demonstrate that we are executing exceptionally well on our cyber-security first strategy and reviewed go-to-market focus. Looking at some of the trends within the business, I first want to discuss our SECaaS growth engine. We are seeing increased traction among major telco for Cybersecurity as a Service solutions. As we progress, we are starting to see the fruits of our long-term investments in this solution. The recent customer launches of our Cybersecurity service are going very well. We are actively supporting our customer launches and offerings are gaining traction with our end customers, driving our strong sales momentum. During the quarter, we gained our first customer for our newly released OffNetSecure solution. OffNetSecure will allow the extending of network-based cybersecurity protection beyond the operator's infrastructure to subscriber using any network or Wi-Fi connection. It allows the operator to better seamless always-on security experience that travels with the user without requiring complex installations or device level configuration. For the operator, OffNet Secure strengthens the customer loyalty, increases subscription-based revenue opportunities and reinforce their role as a trusted provider of digital security, backed by Allot technology. The pipeline of new potential business continues to increase. Our SECaaS offering is gaining traction not only with new CSPs and telcos, but also among the end customer of our existing partners. The positive momentum is allowing us to show accelerated growth and is providing us with a strong forward visibility. As you can see, we are working hard to successfully bring new SECaaS customers to Allot. Our smart product for network intelligence continued to perform well and was also a contributor to our growth in the quarter. We are winning new customers, which are driving higher revenues, stronger backlog, improved visibility and we have a robust pipeline. Today, our smart product is being sold as part of our unified cyber-security first platform. And this integrated solution, best-in-class technology and innovation is enabling us generate increased demand. We are actively executing on the various projects we have recently won, including new Tera III deployments and upgrades where we are working closely with the customers to roll out the platform. We are investing to bring new capabilities and functionality to maintain our technology leadership and our recent enhancement around visibility is creating new opportunities for us. Overall, our efforts to grow the smart business and product line continues to progress well and the backlog that we have built over the past few months provide us with solid visibility heading into next year. In summary, we are very pleased with our third quarter 2025 results, driven by strong performance across all parts of our business, namely accelerating SECaaS traction and increased network intelligence solution sales. Looking ahead, we have good visibility. Our backlog is strong and our pipeline continues to be broad with many opportunities. I'm increasingly optimistic about our long-term future, and I'm excited to continue progressing on our cyber-security first strategy. Given the continued accelerated SECaaS growth, our solid visibility and high level of backlog, we are increasing our guidance. We expect 2025 year-end SECaaS ARR to show an exceptionally strong year-over-year growth, surpassing 60%. We are also raising our full year 2025 revenue guidance to between $100 million and $103 million. As we move into 2026, Allot is exceptionally well positioned for the year ahead, and we see ourselves at the inflection point of a longer-term trend of ongoing profitable growth. And now I would like to over our CFO, Liat Nahum, for the financial summary. Liat, please go ahead.

Thanks Eyal. Revenue in the third quarter were $26.4 million, up 14% year-over-year. Revenue from our gross engine, SECaaS was $7.3 million in the quarter, up 60% year-over-year and comprising 28% of our revenue in the quarter. Our SECaaS annual recurring revenue, ARR, as of September 2025 were $27.6 million. Our revenue increase was driven by growth in both our SECaaS and our smart businesses. From a geographic perspective, I want to point out that in the third quarter, we had an increased level of America sales in line with our strategy to increase business in this region. Specifically, we recognized revenue on a relatively large smart order and on the SECaaS front, we experienced a growing contribution from the U.S. Finally, I want to point out that recurring revenue continued to grow as a percentage of our overall revenue, spending at 63% in Q3 2025 versus 58% in Q3 2024. I will now discuss the non-GAAP financial measures. For all our financial results, including the GAAP financial measures and the various other breakdowns of our revenues, please refer to the table in our results press release. Non-GAAP gross margin in the quarter was 72.2% compared with the 71.7% in the third quarter of last year. Non-GAAP operating expenses were $15.4 million compared with $15.6 million in the third quarter of last year. During the quarter, we received the grant of approximately $1 million for research and development funding. This grant was also received in the third quarter of last year. We reported non-GAAP operating income of $3.7 million compared with $1.1 million in Q3 2024. The growth in revenue and improved gross margin on a similar operating expense base led to significant growth in our operating income. Allot had 497 full-time employees as of September 30, 2025. In terms of non-GAAP net income, we reported $4.6 million in the quarter or a profit of $0.10 per diluted share as compared with $1.3 million or $0.03 per diluted share in the third quarter of last year. During the quarter, we completed $46 million follow-on share offering, of which $40 million in gross proceeds were received during the second quarter and the remaining $6 million in gross proceeds received this quarter. Our share issued and outstanding as of the end of September were 48.4 million shares. We reported $4 million positive operating cash flow in the third quarter. We're presenting the third quarter in a row that we are generating positive operating cash flow. We added over $10 million to our cash balance, and we are well positioned to drive profitable growth. Cash, bank deposits and investments as of September 30, 2025, totaled $81 million versus $59 million as of December 31, 2024. Allot has no debt. That ends my summary. Eyal and I are now happy to take your questions.

[Operator Instructions] The first question is from Nehal Chokshi from Northland Capital Markets.

Congratulations on a good quarter. Eyal, you mentioned that you're seeing increased traction with the major telecom customer. Can you outline whether or not that's coming from higher attach rates? Or is that coming from more at-bats because potentially, you've now bundled at the default at the base premium bundle here?

Thank you, Nehal. So overall, we are seeing good progress with all of our new customer launches. I think we'll see positive trend both on the tax rates as well as we have good progress with new services we launched with our customers. This quarter, we updated on a Más Móvil in Panama that launched our SECaaS service and expanded our customer base. And overall, we are seeing good results with all of our customers that drove this very significant goals on both the SECaaS revenue and ARR and supported our highest revenue growth for the company in a while.

Okay. Great. You also mentioned that you secured your first customer OffNet secure. Can you give a little bit more detail of what is the customer profile of this first customer here?

So we have -- the OffNetSecure is a product we launched a few quarters ago with an aim to enhance our security protection for our end customers, not only when they are connected to the operator network, but also when they are leaving the network and using other ways to connect to their services. With the new product is starting to build pipeline, and we are in a multiple sales opportunities with both new and existing customers that are looking to enhance their service with this option. I don't want to go too much into the specific of this first launch, but I would say that the main value for these specific customers that they really want their customers to be protected 24/7, and they wanted to combine our unique network security with the OffNet. So no matter where the customer is connected, they are always using our cybersecurity services and they don't have any -- and they mitigate the risk or minimize the risk to be under security threat.

Is it fair to say that this is customer materiality to Allot?

We appreciate the customer, and it's very important. I don't want to go into specifics. As I said, with the first customer that we already added this service, but we have additional multiple opportunities with both new and existing customers that are looking to further enhance our cybersecurity service with OffNet.

Okay. Great. My final question is that in the past quarters, you've commented on a strong smart pipeline. Do you continue to see that?

Yes. We announced in earlier -- earlier in the year that we won several multimillion dollar deal as well as very large deal we announced, I believe, in July or August. And we still see strong pipeline with opportunities both with existing customers looking to further expand their platforms. We see good demand for the Tera III new product, which is very high capacity service gateway solution. And we have a good mix of new and existing customers in the pipeline. So overall, as commented earlier by Liat, we see in this quarter strong results, not only from the SECaaS, but also from the smart product line, and we are hoping for this trend to continue.

The next question is from Jonathan Ho from William Blair. Please go ahead.

Congratulations on the strong results. Starting with SECaaS. Can you maybe unpack for us a little bit more what the drivers of the growth were? How much of this growth is maybe coming from newer contracts that are now coming online adoption and growth in existing contracts?

Thank you, Jonathan. So our main growth is coming from the large Tier 1 contract we announced in the last 2 quarters that onboarded, launched their service and continue to onboard new and additional customers. Overall, we are very pleased from the result of most of our strategic accounts that are continue to add new subscriptions and supporting the service. We announced this quarter about one new launch, Más Móvil in Panama. And some of the new projects and activities are going to support our longer-term growth. But when we look on our short-term quarterly changes, this is mainly by new customers joining on the services we already launched.

Got it. And then in terms of your network intelligence offerings, can you talk a little bit about the competitive landscape and pricing environment? It looks like this is inflected back to growth, but I just wanted to understand sort of the sustainability of that growth opportunity?

So our networking technologies, part of our call asset. We have a very large and a significant installed base of customers. Overall, the competitive landscape is less, I would say, easier these days due to some of the changes in the dynamics. We see that the overall telco CapEx spend is still tight and the telecom industry is still challenging, but we believe we have unique technology and with the Tera III product that is very unique, we are able to get best price performance in the market and by that, get really competitive edge. I believe that in the next few quarters, there is definitely a potential to continue to grow well with this product, and this still continue to be a significant part of our plans. While in parallel, as you could also see that the SECaaS starts to be very meaningful. We passed more than 25% of our business from the cybersecurity. And if we continue with this pace, we are going to allow 30% of our business with the cybersecurity SECaaS service. So this positions us very well to continue the growth next year.

Got it. And maybe one last one for me. Can you talk a little bit about the drivers of growth in some of your larger SECaaS contracts and whether some of the ad campaigns that were launched that were pretty public and had an impact in terms of adoption. Is there any way to measure that or anything that you've taken away from a learning perspective?

So we are seeing 4 drivers for our SECaaS growth. One is, obviously, when we add new customers that are expanding our TAM into new subscriber base. This is what we are busy with our expanded go-to-market team that is going after new accounts. On accounts that we already work with, usually, we start with certain services, but we will continue with our customer success teams to further offer additional services, example, start with the mobile network. We are offering the fixed security. In some area, we are doing the business customers. We are looking into the consumer and vice versa. So every accounts definitely those Tier 1s has a lot of potential to do more. For the services already launched, we are working closely, our marketing team and our consultants that bring best practices on what is the best way to go to market for our partners to reach to their customers. We are trying to help them with marketing materials, marketing campaigns and really more on a consultancy supporting mode. And we are really relied on their go-to-market efforts. Typically, new services once launched, they are speaking after 2 to 3 years, and we see strong double-digit attach rates in many of our customers. And this is why this growth is usually sustainable along this time. And last is we are looking to further upsell and cross-sell of new innovation, new products. We are very pleased that our latest release of the OffNet is now part of the portfolio. And this is helping us to get more revenue for the same customers that already attached to the cybersecurity service. We are continuing to work on additional innovations and bring more value to our customers to further help them to protect their customers. So all of those are working together. Some are more longer-term growth. Some of them are more shorter-term growth. And because we are investing in all those in parallel, we are seeing a very good result in the 60% range -- 60% range of the -- range year-over-year, which we are very pleased of.

The next question is from Matt Calitri of Needham & Company.

This is Matt Calitri of Needham. On the SECaaS side, how is Verizon Live's penetration trending versus expectations? Are you seeing fairly linear scaling here? Or is it more of an exponential path?

So we cannot refer to specific customers, but as commented before, we are overall very pleased with our progress with all of our customer base. We see the results in the quarterly numbers. And as you saw, we raised our expectations to express 60% on a yearly level. So overall, we are very happy with the progress.

Okay. That makes sense. And then a cleanup here. When you said SECaaS revenue is going to about 30% of the business, was that expectation like by the end of the year?

Yes. So if we will continue the current trend and as we gave already guideline for the remaining of the year to reached 60% and above year-over-year, then this is indeed the expectation, yes.

Okay. Great. And then last one for me. On the product revenue strength you're seeing, how is Tera III playing a role in customer conversations? And what kind of color you can give there as far as new opportunities that's opening up and how conversations are changing there?

So we do see a good mix in our pipeline of new opportunities as well as discussion with our existing customers. Overall, we are putting a lot of focus on our customers success and making sure we are helping to support our customer business goals. And a lot of the growth and a lot of the potential we see is already with a very impressive installed base. We have some of the best carriers in the world that are working with us, both on the smart and secure product line. We are trying to continue and improve and delight our customers to maximize the business value they get from our solution. And overall, in the telco industry, this is the best way to provide longer-term sustainable growth. We also see every quarters additional new customers that are adding to the potential. As we mentioned in the previous comments, we see -- we saw part of the quarters, new logos joining in -- on both product lines, and we are trying to keep the investment on hunting and going after new accounts and maintaining a healthy mix in our pipeline between the 2.

There are no further questions at this time. So that ends our question-and-answer session. In the next few hours, this call will be made available on Allot's IR website. I would like to thank everyone for joining this call today and especially to Allot's management for hosting this call. And with that, we end our call. Have a good day.