Ladies and gentlemen, thank you for standing by. Welcome to Allot Second Quarter 2022 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 Investor Relations team at EK Global Investor Relations at 1212-378-8040 or view it in the new section of the company's website at www.allot.com. I would now like to hand over the call to Mr. Kenny Green, of EK Global Investor Relations.

Mr.

Green, would you like to begin, please?.

Thank you, operator. Welcome to Allot's second quarter 2022 results conference call. I would like to welcome all of you to the conference call and I'd like to thank Allot to 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 those 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 the Safe Harbor statement.

This conference call contains projections or other forward-looking statements regarding future events or the future performance of the company. These statements are only predictions and Allot cannot guarantee that they will in fact occur. Allot does not assume any obligation to update that information.

Actual events or results may differ materially from those projected, including as a result, changing market trends, delays in the launch of services by our customers, reduced demand and the competitive nature of the security systems industry, as well as risks identified in the documents filed by the company with the Securities and Exchange Commission.

And with that, I'd like to hand the call over to Erez. Erez, please go ahead..

Thank you, Kenny. I'd like to welcome all of you to our conference call and thank you for joining us today. Our second quarter revenues reached $32.8 million, 7% lower than comparable revenues last year. After 17 straight quarters of revenue growth year-over-year, this is the first quarter that our revenues have not grown.

And while this is what we expected, I am not pleased with this. In June 22, 2022, our SECaas ARR was $6.9 million, up 17% from March 2022. As you would have seen from our earnings release, despite overall progress and confidence in our long term vision, we are facing headwinds that have led us to further lower our forecast for this year.

I will address these headwinds and their impact in more detail as I discuss our forecast later in the call. I would like to start by discussing our traffic management and analytics business addressed by our Allot Smart product line.

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 last few months, we were awarded several deals where we will either replace a direct competitor's product that is installed or provide a VPI solution where there was no such capability before.

For example, the deal we announced with Ethio Telecom, the Ethiopian CSP will be a new Allot Smart installation where such capability did not exist before. We are discussing multiple other opportunities with other CSPs currently using our competitors' product and are working on expanding such deals that we won before.

We are continuously increasing the number of CSPs that we work with, either by replacing competition in DPI or by providing new capabilities. 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're seeing growing interest in our products in this area as well. In addition, we are investing in new ways to help wireless operators manage congestion on their networks and save on their cost of expansion.

Several sizable deals that we expected to book and be able to partially deliver in the second and third quarters were delayed and are now not expected to close before the fourth quarter. We did not lose any of them and we believe they will close by the fourth quarter, but we cannot be assured of that.

Given the delay in closing the deal and uncertainty regarding the exact time when we will close the deal, and the exact terms required to recognize revenue, we cannot be assured that all the revenues we expected from them in 2022 will be recognized this year.

As a result of the above, we are reducing our revenue forecast for the third quarter and for the remainder of the year. Looking at the DPI market in general, we see many opportunities and an overall solid DPI market. Many of the more significant opportunities we see are either new customers or competitor replacement opportunities.

However, this makes the opportunities more concentrated and the revenues lumpier. We continue to see a good win rate for Allot. In addition, we see that it is taking us longer to close DPI deals than it took in the past. We don't know why this is.

In part, this may be due to larger sizes of the deals, it may also be related to the general economic environment and we do not know this will be a continuing trend. I am fully aware of the challenges we are facing and as it is becoming more challenging to estimate the timing of deals and to provide accurate forecasts.

I would like to stress again that as I see it, the DPI market is solid, we have many large opportunities in our pipeline and we are continuing to win against competition. I want to turn our attention out to what we see in our cybersecurity business and how that market is developing.

As I've said in previous calls, Allot is transforming into a cybersecurity company and this is where we see most of our future revenue growth coming from. We are engaged worldwide with CSPs that are looking to provide their customers with network based SECaas.

As we look at the market, we see the direction and momentum of operators interested to launch network based security services continues to be very positive.

We see that the number of engagements, the level of engagements, along win rate -- Allot win rate, the acceptance and scope of service by consumers and SMB, the request we are getting from customers and vendors to integrate more products to our management platform are all improving and getting stronger.

We see evidence of all of these in the rate and size of deals we are awarded and in the networks that have commercially launched. This results in continuing to close additional SECaas deals with more operators. During the second quarter, we signed several additional SECaas deals.

With Vodafone, we signed a SECaas deal to launch security services to fix broadband customers using Allot HomeSecure products with the intention to deploy in seven different European countries.

In addition, we also signed agreements with the mobile CSP in APAC who plans to launch our Network Secure and with the Central and Eastern European mobile CSP group that plans on launching our DNS security offerings in a few countries.

In addition, we are in contract negotiations with several other operators in North America, Latin America, EMEA and APAC where we were awarded deals that have not signed the contracts yet. I would like to say a few words on the North American market.

As we previously announced, Allot has already signed SECaas deals with three operators in North America, one of which is DISH. None of these operators have launched yet. As I previously mentioned, we were awarded by a fourth North American operator and are engaged in contract discussions with them.

In addition, I would like you to know that we are in the process of closing a SECaas contract with fifth North American operator initially targeting a specific segment of their customer base. While we cannot assure you the contracts will be signed, we are very optimistic. These potential contracts represent an MAR of dozens of millions of dollars.

In addition, we are in serious discussions with other -- with additional operators. North America is the largest telecom market globally.

Allot was traditionally much stronger in other regions and the advancements we are making with North American operators represent a significant change for Allot, and will be key to generating SECaas revenues in 2023 and beyond. Our main challenge is to translate the contracts into revenues. The first challenge is to launch the service.

This process involves many stakeholders, technical operational marketing, purchasing and more. They all have multiple other tasks and priorities. Often integration of our products with different internal IT systems is required. We have increased our efforts to assist in these processes and in some cases, we can't help.

During the last seven months, we spent significant and concentrated efforts to try and speed up the launches of every operator we signed with. Unfortunately, we concluded that while in some cases we managed to speed up things, overall our ability to positively impact the launch date is very limited.

As a result, we will change our approach and focus future efforts of speeding up launches mainly on larger opportunities that we believe can contribute significantly to revenue. I will talk more about this and other changes we are making in our focus and how we run the business a bit differently.

During the second quarter, two additional CSPs launched SECaas services. One of them is Tango in Luxembourg and another is a predominantly prepaid DSP in our APAC region. As of June 30, 2022, of the 24 signed customers only 11 launched commercially.

Most of them are relatively small operators and most of them launched the service only to a portion of their subscriber base. The second challenge we have is the marketing aggressiveness of the CSP when launching the SECaas service.

Aggressive go to market approaches can include, among others, proactively offering the service in every customer interaction, bundling the security offering in the price plan for some or all of the customers, etcetera.

The degree to which a CSP will be aggressive in their go to market approach is primarily determined by the perceived value of the service. Unfortunately, we have learned that merely adding revenues to the CSP is not a strong enough motivation.

CSPs have multiple value added services and these typically have low penetration rates, which CSPs seem to be content with. If security is perceived as another value added service, the expectations of it will be low, the targets given to the working level and the CSP will be low and the results will be low.

This can also result in the CSP not prioritizing the launch of the service. On the other hand, when an operator sees secured as presenting a strategic value, the motivation and results change.

What is strategic will change from one operator to another, and this can include elements such as differentiation in the market compared to competitors, motivation to transition a customer from a 4G legacy service to a 5G service, overall brand perception of the operator as a secure broadband provider with motivation to transition a customer from a low tariff plan to a more expensive one and others.

The willingness of the CSP to commit to an aggressive go to market approach in the contract is to a degree an indication of how strategic this service is to them. Bringing all of you above into account, we decided to change certain elements of our approach to the market.

One, going forward, we will focus on CSPs that have significant revenue potential, even at the expense of market share. Two, we will push very hard to have CSPs we engage with contractually commit to an aggressive go to market.

Of course, we will not always be able to get such a commitment, especially if the CSP is a major Tier 1 operator and with such major operators, we may have to agree to a practical approach.

Three, CSPs of medium size that will not commit to an aggressive go to market approach and small CSPs regardless of their plan to go to market approach and small CSPs, regardless of their plan to go to market approach, will be offered commercial terms where our revenues are not dependent on their marketing success.

We expect some of these CSPs may agree to this and some will not. I expect these changes will have an impact on the number of CSPs we eventually sign up. However, it will allow us to focus our resources on the smaller number of CSPs that we see more strategic value in, the SECaas service that will ultimately drive our revenues.

As I look at the deals we have done and those that are in the pipeline, I am convinced that the size of the market remains huge. While I'm disappointed with the current pace at which our revenues are materializing, I remain confident in our ability to achieve our long term goals. Looking ahead, I want to summarize our expectations for 2022.

The SECaas revenues and ARR in 2022 are composed of the projected performance of the 11 networks we launched, plus the projected revenue of new networks yet to be launched. As I noted, unfortunately launch dates are hard for us to predict reliably.

Launches continues to give delay and so far during the first six months of this year we launched a disappointing number of only three operators. We continue to see launch dates delayed by the CSPs for a variety of reasons.

Some of the reasons for those delayed, as I mentioned in the previous calls, are budget allocation, team resource allocation and prioritization within the CSP, especially in the IT department, internal issues between group headquarters and national operating entities and also product maturity and integration issues with our DNS Secure and HomeSecure.

I would like to note that we expect to launch additional SECaas networks during 2022 despite the above delays, but the total number of launches in 2022 will be lower than what was expected in the beginning of the year.

As we are getting closer to year end and given that usually there are also a few months of free service and ramp up time, we don't expect them to have significant contribution to 2022. Most of our SECaas revenues are tied to the euro. From January till today, the euro fell about 10% compared to the U.S. dollars.

This has a negative effect on our revenues. We continue to forecast SECaas revenues for the whole of 2022 to be $7 million, but due primarily to additional delayed launches we now expect our December 2022 ARR to be around $9 million.

Despite the change in our approach to future SECaas deals, as I explained before, we still expect to achieve $180 million of new MAR in 2022. It is important to note that while MAR is a good indicator for long term market opportunity, it is not a good predictor for short term revenue.

I would now like to say a few words on our expectations for the overall company performance in 2022. Bringing into account our reduced CapEx revenues as described earlier, we are now forecasting total revenues for 2022 to be between $125 million to $130 million.

We expect third quarter revenues to be around $25 million, substantially lower than previously expected and with a much stronger fourth quarter. Our forecast for support and maintenance revenues remains at $41 million to $43 million. We expect our gross margin for the year to remain around 70% despite our near term headwinds.

We have already implemented some cost cutting measures as can be seen from the lower OpEx for 2022 than the previous guidance and we will continue to closely control our expenses. The changes I discussed earlier in our approach to SECaas contract will also help us reduce upfront costs.

As we continue to adjust our expenses, we expect our OpEx for the year to be between $111 million and $115 million. As a result, we expect our loss for the full year 2022 to be between $23 million and $24 million, the same as we expected at the beginning of the year.

Likewise, we believe our net cash reduction for the year will also be as previously guided between $35 million dollars to $38 million. Our goal is to further reduce our loss in 2023 and reach profitability for the full year of 2024. We have set our goal to be profitable in 2024 by growing our SECaas revenues and closely controlling our expenses.

I am fully aware of the challenges that we face. I believe our DPI business is solid and will continue as such. Our SECaas business is where we see our significant future growth.

While our SECaas revenues are happening later than we would like, and later than we expected, I remain convinced of the very large potential of this business and I'm confident that it will grow very significantly in the coming years. I have full faith in our company, our team and our products.

And I believe the actions we are taking make these goals achievable. And now, I would like to open the call for Q&A. Ziv and myself will be available to take your questions.

Operator?.

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer. [Operator Instructions] The first question is from Eric Martinuzzi of Lake Street. Please go ahead..

Yes, I wanted to start off with your big picture commentary around 2024 and the expectation that we'll be profitable in 2024.

I was curious to know, is there a quarterly revenue number that that is based on or maybe an operating expense assumption that that is based on?.

Look, like I said, we're going to control very closely our expenses going forward.

Now it's very, very hard for us to -- we didn't do a budget for 2024, right? But we made certain assumptions internally, we made certain assumptions on what we would consider to be even at the lower end, I would say, realistic SECaas revenues and other revenues for 2024.

And what do we think we can afford to spend in order to get that and we believe that over these target of achieving profitability in 2024 is achievable..

Okay.

The layoffs that you made in Q2 -- well, let me ask, that was made in Q2 or Q3 the cost cuts already?.

I'm sorry, I didn't understand the question..

The cost cuts that you've made already, were these in Q2 or were they in Q3?.

We've made -- Look, we've made some cost cuts in Q2. We've made -- we had good control, I think, of our expenses in Q3 and that's why our overall OpEx is going to be lower than what we had expected or budgeted for at the beginning of the year. It's an ongoing process..

Okay.

So the assumption then that the $27.2 million of non-GAAP operating expenses in Q2, is the assumption then that will be at or -- that that would be a trough as we look to the Q3?.

As we said, the expenses will be -- will be between $111 million to $115 million. So if you take the midpoint, it’s $113 million. And the total OpEx for the first half of the year, it was $53 million, which means for the second half of the year we are going to have OpEx of $60 million. So it's an average of $30 million for each of the quarter..

Okay. I'll step away from the expense question and take that offline.

As you look at the likelihood of these CapEx transactions to several CapEx transactions that you're concerned about and that have pushed out here, are you -- is your probability of those transactions closing? Has that probability -- have you gotten more conservative in this guidance here, the thinking now versus the guidance in May?.

I don't think it's an issue of -- I'll divide that question into two parts. One is that, my assessment on whether or not the deals will close. And I'm just confident that they will close now as they was before. And the other issue is the timing of that. The timing has changed unfortunately on several of them rather dramatically.

And so I hope that answers your question..

Okay.

And then for the reason for that change, I'm assuming these are carriers and back to your comments earlier about prioritization of this particular -- these DPI type projects versus other projects that they are implementing? Is that the right way to think about it?.

I think it's a priority issue on the customer side, but I can't be 100% sure for each one of them..

Okay. And then last question for me.

The -- just the size of the overall pipeline for the business, and again, I'm asking the DPI side, how does the pipeline for DPI compare now versus last quarter and now maybe versus a year ago?.

Look, I think compared to last quarter, I think it's similar or larger today than it was last quarter. And as of a year ago, I'd have to go back and look, but if you have my intuition, I think it's probably larger than what we were looking at a year ago..

Okay. Thanks for taking my question..

The total pipeline of the deals we are working on irrespective of the timing of when they were closed..

Got it..

The next question is from Nehal Chokshi. Please go ahead..

Yes, thank you. Congratulations on the incremental traction in North American markets and what I believe was your largest incremental SECaas ARR quarter. Those are positives. With these go to market changes that you're talking about, especially with the smaller carriers, when you're talking about commercial agreements or independent marketing.

How does that work out? Is that effectively now becoming a CapEx deal, I mean, just define the mechanics there?.

No, it's not a CapEx deal, but we wanted service -- think of it as something like an enterprise wide license. So we would state a small operator in some place and they want to launch a SECaas service, what we will offer them today -- sorry, what we had been offering until now was okay. We'll come -- we'll help you start the service.

You don't pay us anything, don't commit to anything. And as you your operator -- as an operator, your revenues grow when you get more customers and so on, you will pay us more additional -- you double the number of customers, you pay us double, etcetera, per month.

Now we're confident and say, look, we don't want to --you're too small for us we will be a lot more nicer. We'll phrase it nicer than I'm telling you now. But the answer is, we're not going to be dealing with helping you get penetration rates. We're not going to spend resources, but teaching you how to go to market and so on.

If you want to work with us, finally we'll provide you a package of everything that you need to launch the SECaas service and you will pay us X dollars a month. And the more successful you are, the more money you make, we still make the same amount of money, but we also make the same amount of money regardless if you don't have one customer.

That's a very, very different deal..

And Nehal, maybe you should think about this like a regular ticket deal or the other, but with a minimum amount. And on the other hand, maybe there is also a cap. So apically speaking, it's the same service that we are providing. It's not lighter, the same feature, the same security service, but with a minimum amount of cash..

And so between the minimum and the cap, there is some scaling with success of the carrier than in the case of these commercial agreements then?.

I don't -- we're not going to spend on these operators, we're not going to spend our resources to optimize the results..

Okay..

And that's going to take a significant burden off of us..

Okay. All right. And based on the Q&A from the prior speaker, it sounds like you don't have well defined yet what kind of OpEx savings you're going to have from this new go to market motion.

But just to be clear, the layoffs that have been executed thus far, has that been just in the DPI business or is that also on the SECaas business?.

When we say we're having a good control of our expenses and reducing our expenses it doesn't necessarily mean lay off, reducing expenses could be from a whole variety of factors like subcontractors and many other things. What we're able to share is what the total expense we expect to be for the year which we did.

And we are, of course, looking at our costs across the whole company..

Okay. So presumably this new go to market motion with respect to SECaas is going to be effectively a lower SG&A to revenue ratio short term, mid-term and long term.

Is that a correct assumption?.

Could you please repeat your question, I didn't understand..

Yes, the SG&A spend as a percent of revenue with this new go to market motion that you're talking about, where you're not going to focus on the success of mid small CSPs, you're going to be looking at lower SG&A as a percent of SECaas revenue on a short term, mid-term and long term basis.

Is that correct?.

SG&A portion is out of the total revenues. We don't take it out of the -- we don't split it out of the figures for revenues. So, altogether, the total revenue, we shouldn't expect major changes..

All right..

But revenue will be lower..

Sure. Okay. Understood.

And then what about the Vodafone six deal? That sounds like that might be meaningful if they have a quest go to market? Can you talk about that a little bit?.

We did -- they are discussing with us, of course, the go to market in the difference countries that they're going to launch this. But unfortunately, I'm not free to discuss the details of how they plan to take this service into their markets. But I think it's a very important deal.

I will add things that if you already really know, we already have a really -- our close historic network secure service with Vodafone, which was a CapEx deal and still it is. So this is an additional type of security, at this time, a SECaas type contract that Vodafone is contracting with us for..

And the historical network security deal was deployed over 10 operators and now we plan for the unsecure deployed over seven operators. This is the initial stage..

Perfect. Got it. Thank you..

The next question is from Tal Liani of Bank of America. Please go ahead..

Hi, guys. I want to focus on revenues and ARR. And the first question is, how much of the weakness that you see is you attribute to your own internal things, whether it's not the right go to market, not the right service to customers, etcetera. And how much of it is related to customers not spending push out of projects.

I'm trying to -- I’m not looking for a number, I'm looking for understanding of the sources for the weakness..

I think the main source in my mind is, I'd say, the key factor is how interesting is SECaas service and what is the value of the operator of this service. If it's strategic to them, then a lot of things happen quickly and aggressively.

And we see that with some of the operators that -- when they look at it this way and they really see it as strategic then a lot of the problems we have become a lot simpler.

With other operators, if they just perceive it as another value added service, then it's one of many services, they don't necessarily -- and even if it's successful and brings them revenues and so they don't attached the same important to it.

Now our challenge has been to change the mindset of operators that we signed with that have looked at this just as another value added service revenue generating to show them that there is more strategic value on it. In a few of them we've been successful. In most of them, we have not yet been successful. I'm not sure if I answered your question..

But Erez, is this -- so taking your answer, is this a lot issue, meaning, you don't have the right products or you don't have the right -- you don't cater to the right needs or is this a spending issue? I'm trying to understand if the solution is just a recovery in the market, meaning, recovery of spending or the solution is -- you need to do something else with your portfolio.

That was my question, whether it's an internal issue or external issue?.

Fair enough. Look, I don't think it's a product issue. The whole concept of operators offering network based security services to consumers a few years ago was non-existent. They didn't do that. They were reselling apps. So this is something -- this is a mindset that is changing for operators.

It's not a product related issue in the sense that if we had a different feature set or we will develop a different product and so on, then something would change. It's all about that. Of course, we have to have a good price, etcetera, that's -- but notwithstanding, you're asking at a very, very high level. It's not about the product.

It's about the realization or not of the operator that they really must provide kind of service. Now, to me, the most dramatic change happened in the North American market. A few years ago, none of the operators were interested in offering the network based security services. They didn't see it as something of value.

They didn't look at it as anything strategic. This has changed. The mindset of the operators in North America has changed. And I mentioned how many we're interacting with and what we're closing. So even though we don't see any revenue numbers from it, because we haven't launched anything on SECaas in North America.

I see the change in the mindset of the operators and important they put on this and why they want to do this, which they didn't want to do two, three years ago. Now in other places in the world, that change is sometimes happening and sometimes not. And some operators in countries understand that they really need to make a difference and some don't.

But I'm seeing the shift from -- in the operator's mindset overall, from understanding that, okay, from thinking that they can get away as a -- just as a “dump pipe” to know they have to provide a secure connection and become a secure broadband operator to their customers. That's changing, but it's not related to our products as such.

[Multiple Speakers] It’s not a product issue, it’s the big success with this product with the Vodafone -- Vodafone use 10 operating calls over the last few years. So the product really match or already solved the problem..

So why now? Why we didn't see this a year ago? I mean, what you're talking about is not something related to the current times.

It's more high level kind of preference of customers? And the question is, why now? Why in 3Q and 4Q and we didn't see it a year ago? What changed that suddenly your pace of growth is slowing down to negative year-over-year?.

No, it's based on -- growth on SECaas is not slowing down. [Multiple Speakers].

It's not right. I'm sorry. I talked about -- right, I'm mixing two things. You're correct.

But why now? It's -- still the question is still why now?.

Why now? What I explained is --.

Why now you're talking about the match of products and convincing and educating customers that this is the right thing to do, etcetera? Why now you're talking about issues? And a year ago, we spoke about growth.

I'm trying to understand what deteriorated, because if you told me there is an issue with spending and there is an issue with budgets or something happened and you say, okay, we're waiting for things to recover. I understand why it's happening now.

But when you talk about more strategic issue of customer, understanding why they need this application, understanding how to sell it. And it's kind of an ongoing thing at the high level that we should have seen the same problems a year ago. This is not something new..

I'm not sure if we should have seen it or not. I think that as this market is developing and we're interacting with more operators, we ourselves are learning more about this business.

A year ago, if you would have asked me, I would have said that, I see absolutely no reason why operators, because that's what they were telling us, would not go after the additional revenues that security provides because even as a value added service, it will make them more revenues than any other value added services.

That has proven after -- we are looking at more operators and spending more time with them, that has been proven as not an accurate enough assumption. And we've learned more about this market and how it's evolving. So why now? If you're looking some Tectonic shift that happened in the operators, I'm not sure you will find it.

I think what you will find is that the realization that they have to make the strategic shift to be a broadband -- a secure broadband provider. As you look at the whole -- the whole set of hundreds of operators globally it is happening slower than I would have expected.

Even though the rate of operators that are willing to go and launch these kinds of services is not that slow. They're still looking to add lots of security services, but they're not looking at it with the aggressive enough mindset that I would have opened to look at it..

So Erez, sorry, last question. You're guiding for 25% -- almost 25% decline year-over-year next quarter.

Can you break it down? Can you break the 25% of what is related to legacy products? What's related to new products? I'm trying to understand why such a -- the Street was expecting for 8.8% and you're guiding for 25%, that's a big – 24.5%, that’s a big decline.

So I'm trying to understand where is your confidence when things will recover, because at the end of the day you're a small company and you're talking about market education, which is a very costly thing.

And I'm trying to understand of the decline, what is in your control, meaning, things that you can do in products or other go to market, things that you can do that will improve and you have some visibility into it or some control over it? And what is more difficult because you need to educate customers that are 100 times bigger than you, how to do? And I assume that they are logical, meaning, if they have -- if they see that the revenues are coming in, we see them doing it in all other areas.

If they see a chance for greater revenues, they are investing in new products. I mean, they're doing it in every other area. So it's hard for me to understand. It's so simple on its face. Tighter -- leads to higher revenues, it's a big problem consumers, leads to higher revenues.

And I have difficulties to understand the concept of them not investing in an area that can generate revenues and is a big problem for consumers.

That's why I'm trying to break down the decline and understand what's coming from things that are in your control and what's coming from these areas that you need to educate your customers?.

Tal, I think you're confusing if I may say so. I think you're confusing two issues. We have two areas of business, right? We have the DPI business, which is a CapEx business, which is the majority of our revenues.

And we have the SECaas business, which is recurring revenues and that's the cybersecurity business that we have -- I've been answering your questions about in the last few minutes. The cybersecurity business continues to grow. We're not forecasting any decline for that.

It's growing slower than we would like, it's happening a bit later than we would like, but it's continuing to grow and it's going to -- we're -- it's been growing quarter-over-quarter and we continue to forecast it to grow quarter-over-quarter.

The decline that we're talking about in the third quarter is in our traditional DPI business in Allot Smart. And specifically what I discussed in the call was that there were a few deals, very specific deals that we had expected to close and deliver partially in the second and third quarter and recognize revenues and therefore delayed to Q4.

It has nothing to do with the cybersecurity SECaas business. There were several CapEx deals that got delayed and that's the reason for the decline in Q3..

Okay. We'll take it offline. That's why I was asking about this Security and the legacy DPI, but we'll take it offline, because I want to dig deeper into it. Thanks..

And Tal, maybe just one piece of the data, our previous guidance for SECaas revenues this year was $7 million and we are still guiding for this number. So this quarter, we didn't change the forecast for SECaas for 2022..

Got it. Thank you..

The next question is from Mark Silk from Silk Investment Advisors. Please go ahead..

Thanks for taking my question. So when I started building this position in 2015, the stock price was right around $5. As far as I can see, your DPI is even better than it was in the past, but your SECaas was more of a concept than anything you had no customers. So now you have, I don't know, 11 -- 24, but 11 active.

So I'm just trying to figure this out. The Street is really not confident in this area as far as your growth. So can you -- I just need some more explanation.

So you're thinking of saying to a customer, okay, we'll sign you up and you're going to pay just some money upfront, but you're still going to try to get the recurring revenue model with some of these smaller players, but then some of the big guys you're hoping that this model will work that you've talked about before as far as you pay the upfront costs as long as there's a commitment for them to aggressively market it.

Can you kind of explain more? Because again, the Street is giving you zero value for your SECaas. And I agree, I think this thing is very exciting..

Okay. So I'll try and explain. Our model for SECaas, our business proposition in SECaas for operators so far has been okay. Sign up -- signed contract with us was low.

We will help you launch the business, we will provide you everything you need if you need -- you need obviously software, you need -- maybe you need hardware, maybe you don't depend on the network and so on. We'll provide you guidance, we'll provide you support and so on. Don't press anything upfront.

As you -- when you launch the service, and as you accumulate more and more customers, consumers, SMBs and so on, you will pay us a lot X dollars per month per year for each of those customers that are in service. And as you grow the number of customers, we will be making more money and back to our growth.

We will still be making that kind of -- that same business proposition to either very, very large operators. And you can imagine that our ability to get very large operators to give us a whole bunch of different commitments is limited.

Portal operators of reasonable size of -- that are sizable, but are willing to commit to go aggressively go to market. They will commit maybe to launch it in all their channels. They will commit maybe to bundle it in some of their price plans, etcetera, etcetera, and those are open areas for discussion.

Now the smaller operators, the operators that are not willing -- that are not really huge and are not willing to commit to any aggressive go to market, we will make them a simple view from our perspective. We will tell okay.

So we are not going to spend the resources, energy and so on to make sure that you launch quickly, because you're not going to -- you will probably not launch quickly. And we're not going to work with you day in, day out in order to make sure that you get more paying customers and so on and teach you how to do that.

Do whatever you would like with the SECaas service and pay us a fixed amount per month, regardless of the number of customers you have, and maybe we will have minimum number per month and the cap with the maximum number per month. So the success will be more dependent on them and we would be much, much less reliant on it.

That's the difference in the approach for the smaller operators.

Was that more clear now?.

Yes.

So how is that -- is that just something you just came up with or is that something you're implementing and if you are talking to customers about that, what is the reaction to these smaller customers?.

We are talking to customers about that. Some of the smaller customers tell us we're not interested in doing that. So finally, we'll just walk away. And some of the customers are saying, okay, let's talk about the numbers. And those kinds of discussions are going on..

And as far as discussions, out of the 13 that are -- so you have 24, you signed up 11 and use –.

None of the contracts that we signed up are using this model..

No, I understand that, but how many more of the 11 should be online by the end of the year? What would be a realistic number, 15?.

I'm a little cautious, because I had expected to have many more customers launched this year and I will prove it wrong. So I don't want to venture a number for the remainder of the year. I do expect additional customers to launch, but I really feel uncomfortable giving a number, given my lack of ability to stand behind the previous number I gave..

That's fine. And I hate to bring it up when your stocks write down at this $5 level, because I agree. I mean, I think everyone agrees that your technology is fantastic. It's getting to profitability.

So two things, is the SECaas impacting you, because you're not a big company that maybe if you're under the umbrella of a bigger company, you can put more pressure on these people. I don't know if that's the issue. That's something that needs to be discussed internally.

And then on another note, when you talk -- it's very easy to say, we'll be profitable in 2024, but you also have to look at these -- some of these loyal shareholders, because you've got some activist shareholders, it the shareholder that basically gave you $40 million, so there's a lot of support there.

I think you have to be realistic that in 2023 we're not seeing that guide to -- if we're not seeing the path to profitability, I think that the tough decisions need to be made, because I don't mind holding on to the stock as long as I'm seeing the progression there.

And obviously 2022 is disappointing, but we need to see the path in 2023 as opposed to just a promise in 2024. So you can try to comment on both of those things, but I think there are important issues to discuss internally..

First of all, I really value and appreciate the support we're getting from our long term shareholders, including yourself and others. And I agree with you that just saying we will be profitable in 2024 is not enough. And therefore, our plan is to use our lots in 2023.

So you will see -- so first of all, that we will be on the path to profitability in 2024, but you will also see that next year as well..

Okay. And the last -- the previous caller, I mean, he had the right point. It's kind of like it's a win-win-win. It's a win for the consumer, it's a win for you guys and it's also a win for these telcos. And that's the most frustrating part. I mean if someone wants to dump the stock, I don't mind adding more at ridiculously low prices.

But again, I don't think it's a product issue, but hopefully you can get to profitability and hopefully this new strategy works. And as always, I wish you luck going forward..

Thank you very much..

You're welcome..

[Operator Instructions] There are no further questions at this time. The next question is from Jeff Bernstein from Cowen. Please go ahead..

Yes. Hi, guys. Could you just give a little bit more information on DPI? Obviously, it's a little confusing here.

The big impact to the numbers seems to be from the legacy business and delays in closing deals as opposed to the SECaas business despite your commentary as we've all seen for probably over a year things moving a little slowly in deployments. But it seems like the big change here is DPI.

What's going on with delays from customers? Is this related to the macroeconomic issues out there? Ukraine, a lot of your businesses in Europe.

Just a little bit more color on DPI?.

Specifically in the third quarter, as I said, there were several deals that we had expected to close during the second and third quarter and will most probably be closed in the fourth quarter at earliest.

And as we think they were sizable, then even though we expect that the -- we look at the DPI mark in our pipeline, we don't see a decline in the pipeline. We will see a decline in the revenues in Q3 like we guided today. Why are these delays happening? As I said in my commentary, I'm not sure I really know.

It could be because these are larger deals and larger deals sometimes get -- take longer time. It could be because of the general economic environment. I'm not 100% sure and I don't know if this is a trend or this is just a combination of very specific circumstances to these deals. I just don't know..

Understand. And then just a quick follow-up on that. When we built our position also going back to 2015 or 2016, something like that. To me, the bigger risk was that the DPI business was going to fall off over time.

You guys have done a good job of keeping that business growing, despite it being a kind of a legacy business and you've taken advantage of some of the consolidation. But the issue was that a fair piece of DPI functionality was being given away in routers, and particularly there's competition from guys like Huawei who were giving away those routers.

It seems like that competitive environment is changing a bit and that their changes in the network have increased the value of that core DPI.

Just talk a little bit about where are we now on that legacy business? Is that to you still a big risk to this story? Assuming we all believe in SECaas, is the DPI piece still a big risk? Is it less of a risk than it was four years ago? Just talk a little bit more about that?.

I think the DPI market that I see is solid. I see a pipeline that if anything is growing actually, when I look at the competitive landscape, our main competitor there in DPI world was really Sandvine. We do see Huawei. We do compete with them. And many times we win against Huawei as well.

I don't see -- right now, like we've said there in the previous years, I don't see the DPI market growing in weeks and down. So it's not -- it's going to be very, very hard to grow significantly in DPI. But we have been growing in DPI over the last few years as evidenced from the numbers.

And I think that this market is solid and I think that the business is solid for whatever the foreseeable future that I can see at this point..

Fantastic. I appreciate that. Thank you..

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

Yes. Thank you. I want to thank you all for joining us today and listening to us. Thank you all for your support. And I look forward to leaving you either privately or in the earnings call next quarter. Thank you very much..

Thank you. This concludes the Allot second quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect..