Release Date: February 25, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Allot Ltd (NASDAQ:ALLT) reported a strong fourth quarter and full year 2024 results, marking a key inflection point in its turnaround.
• The company's revenues increased both year over year and sequentially, with a significant contribution from the Security as a Service solution, which grew 56% over the previous year.
• Gross margins improved significantly to around 70%, recovering from 57% in 2023.
• Allot Ltd (NASDAQ:ALLT) returned to profitability with a non-GAAP net income of $5.6 million for the year, compared to a loss of $53 million last year.
• The company generated positive cash flow for the first time in several years, with a year-end cash position of $59 million.

Negative Points

• Product revenue was down 55% year over year, indicating potential challenges in this segment.
• The smart product line's long-term visibility is less predictable, which could impact future revenue stability.
• Gross margin ticked down 200 basis points quarter over quarter, attributed to product mix rather than pricing pressure.
• The company's legacy DPI business has lower predictability and visibility, making it challenging to forecast future performance.
• Incremental ARR for the December quarter was lower than the September quarter, indicating potential variability in growth rates.

Q & A Highlights

• Warning! GuruFocus has detected 5 Warning Signs with ALLT.

Q: What drove the strong free cash flow generation for the quarter? A: The growth was primarily driven by existing customer base expansion and new service launches with customers like Vodafone, MO, and O2. The recent Verizon announcement is expected to contribute more revenue in the future, but it did not impact this quarter's numbers. (Respondent: Unidentified_6)

Q: Support and maintenance revenue increased significantly. What was the reason for this? A: The increase in support and maintenance revenue was due to a year-end catch-up on agreements, similar to last year's level. This revenue is mainly from the smart product line, as the CCA model does not include support and maintenance. (Respondent: Unidentified_6)

Q: Why was product revenue down 55% year over year? A: Product revenue can fluctuate between quarters due to specific deals. The CCA revenue percentage is increasing, impacting the overall product revenue percentage. The decline is attributed to the variability in product sales. (Respondent: Unidentified_4)

Q: How should we think about product revenue for calendar 2025? A: The smart product line is harder to predict and can fluctuate. The current quarter is a good baseline, but growth is expected in the CCA segment, which should continue to grow at high double-digit rates. (Respondent: Unidentified_6)

Q: What is the expected growth rate for CCA revenue? A: The goal is to maintain a 40-50% growth rate, depending on the adoption of services and new account wins. The recent Verizon announcement presents a significant opportunity to scale the security service offering. (Respondent: Unidentified_6)

Q: What is the potential impact of the Verizon business mobile internet security offering? A: The mobile industry is stable, but the new service offers a significant opportunity with 30 million devices now having the option to join cyber protection services. The relationship with Verizon is strong, and there is potential for more services in the future. (Respondent: Unidentified_6)

Q: What caused the decrease in incremental ARR for the December quarter? A: Incremental ARR is driven by new account wins and service launches. Growth is not linear, and some quarters may see accelerated growth due to new service introductions, while others may be more modest. (Respondent: Unidentified_6)

Q: What gives confidence that the gross margin decline was due to product mix and not pricing pressure? A: The year-over-year improvement in gross margin indicates a strong turnaround. The expectation is to maintain a 70% range, with potential improvement over time as revenue shifts from product to CCA services. (Respondent: Unidentified_6)

Q: Are there plans to invest more in OpEx as the security service drives growth? A: The focus has been on internal transformation, and there are plans to invest more in growth engines, particularly in go-to-market and R&D. Overall, OpEx should remain flat with some increase towards the end of the year. (Respondent: Unidentified_6)

Q: How do you plan to broaden the security offering? A: The focus is on R&D to ensure customers are secured both on and off the network. The aim is to provide continuous protection, even when customers are not on their service provider's network. More details will be shared closer to product launch. (Respondent: Unidentified_6)

For the complete transcript of the earnings call, please refer to the full earnings call transcript.