Allot Ltd. (ALLT) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Allot's Fourth Quarter and Full Year 2020 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 GK Investor & Public Relations at 1 (646) 688-3559 or view it in the News section of the company's website at www.allot.com. I would now like to hand the call over to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin, please?

Thank you, operator. Welcome to Allot's fourth quarter and full year 2020 conference call. I would like to welcome all of you to the conference call and thank Allot's management for hosting this call. With us on the call today are Mr. Erez Antebi, President and CEO; and Mr. Ziv Leitman, CFO. Erez will summarize the key highlights; followed Ziv, who will review Allot's financial performance of the quarter. We will then open the call for the question-and-answer session. Before we start, I'd like to point out that this conference call may contain 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 of the impact due to the COVID-19 pandemic, changing market trends, reduced demand and the competitive nature of the security systems industry as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission. And with that, I would now like to hand the call over to Erez. Erez, please go ahead.

Thank you, Ehud. I would like to welcome all of you to the conference call. And thank you for joining us today. Our fourth quarter was another quarter of solid growth. Revenues grew 28% year-over-year for the fourth quarter and reached $39.1 million. Revenues for the full year 2020 grew 23% compared to 2019 and reached $135.9 million. Our revenue growth in 2020 accelerated compared to our revenue growth rate in previous years. In the fourth quarter we also achieve non-GAAP operating profit of $0.05 million. This is our twelfth straight quarter of double-digit revenue growth year-over-year. And I am very pleased with the results we achieved during the fourth quarter. During 2020, we succeeded in signing recurring security revenue deals within aggregate MAR of $192 million, 37% above our original goal for the year, a goal which we declared prior to the onset of the global pandemic. I am very pleased with these results. And I believe it shows we are on track and successfully executing on our plan. Our business is expanding across our product lines and markets and we are increasing our market share especially in the cybersecurity business as I will describe in more detail. As we see our opportunities grow we increased our investments to capitalize on the significant number of opportunities that we see. Ziv will provide more details on our financials and forecasts later. The fourth quarter was clearly a very strong finish for a very successful 2020. 2020 was a different year, not in the least as a result of COVID and its impact on business, reduced travel and significant changes in our mode of operation. I think we can all get a clearer picture if we summarize 2020 as a whole at this point rather than focus on the fourth quarter. I want to start by describing what we see in our cybersecurity business and how the market is changing favorably for Allot. Allot is rapidly transforming into a cybersecurity company and this is where we see most of our future growth coming from. Looking at the market, I see what I would call a “perfect storm”. Consumers are under attack and this notion is accelerating during COVID. Phishing, for example, has become more prevalent than ever. In a recent study by Deloitte. We see that nearly half of individuals fall for phishing scams while at home. In Allot study, we found that phishing attacks are more than half of all cyber threats targeting consumers and SMBs. On the other hand, CSPs, or communication service providers, are looking to monetize their networks. They are looking for subscriber services that drive revenues, loyalty and brand differentiation. The quote a Senior VP for wireless products in a major North American operator I recently talked to, “We are hungry for ARPU generating services and if what you are showing us is true, this is a real ARPU growth generator.” In discussions we have with many CSPs, we see this drive becoming accelerated by their 5G deployments. The design of 5G networks for higher bandwidth and multiple internet connection points, makes it makes them more open to threats. In addition, the investment required is very large. All these make 5G networks, in my view, a catalyst for cybersecurity solutions. End users, consumers and SMBs are looking for a simple zero touch cybersecurity service. They prefer a simple security service, and not have to do anything technical like downloading an app to each device and configuring it. A network-based cybersecurity solution is the only way to deliver all of this. A growing number of CSPs want to launch a cybersecurity service for their customers, for their consumer and SMB customers. Previously, even a year ago, many CSPs thought that reselling a security app was sufficient for their customers. This, in my view, has changed significantly in 2020. And now we see that most CSPs we talk to understand that they need to provide a network-based cybersecurity service. North American operators have, based on our interaction with them, “turned the corner” on cybersecurity services for consumers. We are closely interacting with multiple North American operators that are now seriously looking into launching network-based security services for the mass market. This was not the case a year ago. While we cannot be assured of course of any success, the requirement from the operators is now clearly there. Operators worldwide can typically charge for network-based security services, anywhere from 5% to 7% of the consumers’ ARPU, and around 15% of the SMB’s ARPU. The preferred business model that most, but not all, operators worldwide are accepting of is a monthly fee. Whether our revenue share or monthly per subscriber fee 30% to 50% of the perceived end user value is considered a reasonable range for an all-inclusive security service package. As a result of all the above our deal pipeline is very robust, and it has grown significantly. The total MAR of all the opportunities we are actively engaged with is higher than in any previous time. I would now like to look at Allot and how we are uniquely positioned to turn these exciting market developments into accelerated growth. I will start with our platform and product. The Allot Secure 360 platform is a clear differentiator. To remind us all, Allot offers a unified management, thread database, policies, user experience reporting and user control protecting families across all devices. This can be done regardless if the connectivity is mobile, fixed or even off network. Allot provides enforcement points for the security in the mobile network, 4G or 5G, in the home router, in the business router and even security apps on the devices for off network protection. These holistic capabilities are unique in the industry and are very appealing to many operators. I believe we have to date the widest range of security enforcement points available from any competitor. I am not familiar with other technology companies that can provide such a unified experience across access means, devices and threats. Recently, we announced an agreement to develop together with PowerDNS, a DNS security enforcement product DNS Secure, that will be an integral part of the Allot Secure platform. I explained in the past, the DNS security is inherently inferior to network secure and cannot provide the same level of protection. This is true for our DNS Secure solution as well. However, DNS based security is a much lighter touch on the network and requires less hardware. We believe our DNS security solution will expand our addressable market to include fixed networks, especially in low ARPU countries, where the perceived dollar value of a security solution is lower. When we look at our recurring security revenue growth path, we see our revenues growing in three dimensions. One, signing up and launching cybersecurity services with additional CSPs. Two, in a CSP that launched the service, having more end users signed up for this security service. And three, CSPs, expanding the security offering to the market from an initial market segment, such as mobile to additional segments, such as the home or off-net protection, or the SMB market. I believe this threefold growth opportunity is what can make our recurring security revenues grow very rapidly. I would like now to turn our attention to the deals we signed in 2020. And the results in services the operators launched. In 2020, we signed multiple new security deals with operators who intend to launch the security service in 2021. Most of these deals primarily due to COVID related delay, were assigned in the fourth quarter of 2020. These deals were with CSPs in EMEA, APAC, and Latin America. They include network secure, home secure and endpoint secure. In 2020, several operators, who started with one product typically network secure for mobile, decided to expand the service to include endpoint secure for off net protection, and home secure for fixed network protection. Another interesting area we see is the SMB segment. A growing number of operators see SMB as a lucrative segment. Several of the deals we signed in 2020 are either focused exclusively on SMB, or have specific plans to service this specific segment. During 2020, several operators in Europe and Asia Pacific, who previously signed deals with us, launched the services to their customers. The take-up rates we see in these operations are very encouraging. I will note that the actual rates depend significantly on the go-to-market strategy the operator takes. The more aggressive the go-to-market, the higher the rate of customers signing up. We see that selling in shops is a very effective means of adding new customers. When offered as a paid value – excuse me when offered as a paid value-added service, one operator is seeing that over 80% of new customers who joined our network in shops, choose to add the security service option. Moreover, a year after they purchase the service, two out of three customers keep it. These are very high conversion and look and longevity numbers. Another operator who launched the service as a paid-on service, offered to customer with every operator interaction, managed to get 10% penetration in less than six months. While this is a truly outstanding penetration rate that we should not expect to replicate in many operators, it shows the appeal and potential of the service to consumers. On the other hand, operators who launched the service with less aggressive go-to-market plans, such as digital means only achieve significantly lower take-up rates. Our marketing team is heavily engaged with these operators marketing teams, to show them how they can improve the results. On average, the penetration rates we are seeing in the services launched are very encouraging. We also continue to see take-up rates from SMB, typically higher than the average rate for consumers. One SMB service reached more than forty, 40% penetration in 18 months. I will note though, that there are much fewer SMBs than consumers, so the potential value of SMB deals is typically lower than that for consumers. As I mentioned in the previous calls, Allot not only enables the CSPs to protect consumers and SMBs, but we also protect the CSP network itself from attacks. In the 4G world, we protect the network with our DDoS Secure product. As 5G networks are rolling out, they are more susceptible to volumetric DDoS attacks. As a result, we are seeing significant traction for our #NetProtect product. As I discussed in our previous call, Allot has a unique position to play in securing the user plane in 5G networks. Our combination of being able to analyze in real-time the full traffic flow, ability to mitigate DDoS attacks in line very quickly and to protect the network from rogue IoT devices puts us in a unique position to help operators secure their 5G networks. Allot comes to the 5G world with a very strong telco-grade technology, products that scale easily to the 5G bandwidth requirements and full multi-tenancy support to enable differentiated services. These abilities are key differentiators for us in future 5G deployments. We are currently working on several 5G #NetProtect deals. And while we cannot ensure we will win I hope we will be able to close one of these deals in the coming months. To summarize, I believe the market for cybersecurity services by ISPs to consumers and SMBs is taking off and our pipeline is stronger than ever. I believe Allot is uniquely and very well positioned to take advantage of this and grow significantly. New deals with CSPs still take time, usually between 12 and 18 months. And with COVID, some even take 24 months. One sign it takes nine months to launch the service and start gradually building a revenue base. COVID-19 may cause even several months further delays in launch of services after the deal is signed. Factoring in all this, we expect recurring security revenues in 2021 to be between $6 million and $8 million. Looking farther ahead, we expect recurring revenues from security deals in 2022 to be $25 million and to keep accelerated growth year after, year after that. We also expect to sign in 2021 new recurring security revenue deals totaling at least $180 million of MAR. Before turning to the DPI, or Allot Smart market, I would like to say a few words on the changes we went through in 2020 and their impact on the company. As with many companies, COVID dramatically restricted our international travel and ability to be physically present at customer sites and meet customers face-to-face. As a result, we made a series of changes to adapt our mode of operation. Our sales team transformed the way we initiate interaction and generate leads. From mostly physical meetings, conferences, customer gatherings, et cetera, we partially adopted targeted digital means to approach the relevant decision makers and potential customers. This has been successful for us and opened up quite a few interesting opportunities for recurring revenue security deals, both for consumers and for SMBs. Implementation was harder this year as we could not send engineers to install systems on site. Work was done mostly by remote connection. In one case, we had to install a complete network in a country we had never worked in before and we're not even familiar with local integrators. Everything was built and pre-installed in racks in Israel and shipped to the country whole. We identified a local integrator, trained them remotely with video clips on how to install and turn on the service and succeeded to pass acceptance without stepping into the country. Internally, we modified our structure this year to fit the changing needs. As we discussed in our previous call, we created two separate product business units: one, for Allot Secure and one for Allot Smart. In the short months that passed since the change, I can see the value that focusing on each product line is already bringing to product development and to new deals. In our Global Support Services, we moved headcount and resources from expensive region to lower cost geographies, mostly to India and Colombia. This transition and transfer of knowledge was not easy. We succeeded to complete the task this year, while reducing the number of open trouble tickets despite the growth in revenues and the growth in our installed base. In addition, we strengthened significantly the number of salespeople focusing solely on security deals worldwide. But I think perhaps the biggest change for us resulted from a political change. The Abraham Accords, peace treaties that Israel signed with Arab countries. These agreements opened up the Gulf market to Allot, especially in the UAE and Bahrain. My first and only international trip after COVID started was actually to Dubai in December. Little could I have guessed that a year ago. I am very pleased to say the business atmosphere in the Gulf region is very positive towards working with Allot. And we are actively engaged in several opportunities in both DPI and security. I would like to turn now to discuss our visibility and control business, address by our Allot Smart product line. This business grew well for us in 2020. The main use cases we see today are in congestion management, quality of user experience, especially for video, policy and charging control and digital enforcement. We won several deals this year, where we replaced a direct competitors product that was installed, one of them in a tier-one in Europe. We are discussing similar opportunities with other CSPs using our competitor's product. In addition, we are involved in several RFPs with operators who do not have such systems today on their networks. While we cannot be assured of success we are optimistic regarding our chances if some of these opportunities. Our enterprise business grew and had a record year. The deal we signed in the beginning of 2020 with Broadcom to position Allot as the replacement for packet tier product, which is end-of-life is starting to show results. We sign new distributors for our enterprise products in several countries, including the U.S. And we expect continued growth of the enterprise business in 2021. To summarize, I believe demand for the Allot Smart product line including congestion management, traffic management, analytics, digital enforcement and enterprise use cases will remain healthy with growth for Allot in the years to come. I would now like to summarize the overall picture and key messages. We are proceeding according to our plan and continuing to grow the business. In the Allot Smart product line, we see a strong pipeline. Multiple use cases such as congestion management, digital enforcement and the enterprise business are growing. Overall, we see a solid demand for Allot Smart. The security area is where we see our long-term growth. We are very encouraged by the pipeline growth we see, and by the consumer and SMB take-up rates, as they sign up for the service. We signed significant deals for our various products and succeeded in exceeding our MAR target for 2020. While these deals always take time to close, COVID-19 pushed the closure of several deals a bit more. It is also postponing services, commercial launch in some of the deals that were already signed. Overall, the pipeline is robust and growing. Across our product lines, we see positive signs from the market to take advantage of these growth opportunities we decided to continue our significant investment in developing the full breadth of Allot Secure products and our solutions for 5G, as well as in our sales and support teams. Ziv will discuss the numbers in more details later. Looking at our backlog, the market demand, as we see it now, and the pipeline of deals that we are working on. Our revenue guidance for 2021 is between $145 million to $150 million, including between $6 million to $8 million of recurrent security revenues. We further expect to sign additional recurring security revenue deals with an MAR exceeding $180 million. And now I would like to hand the call over to Ziv Leitman, our CFO. Ziv, please go ahead.

Thank you, Erez. Before I begin reviewing the financial results for the quarter and for the year, I would like to inform everybody on this call unless otherwise noted, I will refer entirely to the non-GAAP financial measurement when discussing operational results, which is what we use internally to judge the performance of our business. Non-GAAP financial measures differ in certain respect from the generally accepted accounting principles and exclude share-based compensation expenses, revenue adjustment due to acquisition, restructuring expenses, expenses related to M&A activities, amortization of certain intangible assets, exchange rate differences, changes in tax related items and changes in deferred taxes. Now regarding the financial results. We are pleased with the revenue for the fourth quarter of 2020, which were $39.1 million, growing by 28% compared with those of the fourth quarter of 2019. Revenues for the full year of 2020 were $135.9 million, growing 23% compared to 2019 and in line with our expectations, despite a much more difficult year than anyone could have anticipated at this time last year. Our year-end backlog was $110 million. You may remember we said backlog would be below that of year end 2019 because of the outstanding order that were received in the second half of 2019. For the year 2019 and 2020 together, the book-to-bill ratio was 1.17. Now I'd like to give you some more color regarding the revenues breakdown and diversification. The geographic breakdown for the fourth quarter of 2020 was as follows: America was $1.9 million or 5% of revenues, EMEA was $29.6 million or 76% of revenue. And Asia Pac was $7.6 million or 19% of revenue. For the full year of 2020, geographic breakdown was as follows: America was $8.1 million or 6% of revenues, EMEA was $104.3 million or 77% of revenues and Asia Pac was $23.5 million or 70% of revenues. Regarding the breakdown between products and services, for the fourth quarter it was as follows: product revenues were $28.8 million compared to $18.2 million last year, professional services revenues were $2.5 million compared to $3.3 million last year. Support and maintenance revenue were $7.8 million compared to $9.1 million last year. For the full year of 2020, the breakdown was as follows: product revenue accounted for $94.4 million compared to $67.4 million last year. Professional services revenues were $11.4 million compared to $8.5 million last year. Support and maintenance revenues were $30.1 million compared to $34.2 million last year. The portion of communication service providers' revenues out of total revenues were 82% in the fourth quarter compared to 76% in Q4 last year, 84% for the full year of 2020 compared to 81% last year. It is a worthwhile mentioning that the enterprise revenue in dollar term slightly increased versus 2019 to a level of $21 million. And we do expect a double digit increase in 2021. Enterprise revenue mainly because of the healthy pipeline, which was generated due to our deal with Broadcom. Security revenues in 2020 were $22.8 million or 17% of total revenue. This is compared to $26.3 million or 24% of total revenue in 2019. I would like to address that we are in the process of shifting from security capital deal to a revenue share model of recurring revenues. By nature, the outcome of such transition is typically a short-term reduction in the security revenue. While the long-term ongoing revenue potential from the security as a service deal will be significant. The new secret deals will take time to ramp, and there are typically nine to 12 months before signing with the customer and the commercial launch. After the launch revenue should start to ramp up slowly over many months as the subscriber sign on to the new service and the penetration gradually increases. Furthermore, the COVID-19 pandemic has increased the time it takes to sign new deal. And the pandemic is somehow – somewhat delayed the launch of already signed deals. Also, please note that the revenue breakdown whether geographically or by product line or any other may fluctuate from quarter-to-quarter, depending on the specific revenue and deal we recognize in the specific quarter. Our top 10 end customers made up 71% of our revenue in 2020 compared with 56% in 2019. Looking further down to the income statement, gross margin for the quarter was 70.9% compared to 68.7% in the fourth quarter of last year. Gross margin for 2020 was 71.2% compared to 70.2% in 2019. The variation between the quarter reflect the product mix sold and it is not indicative of any specific trend. Operating expenses for the quarter were $27.3 million compared to $22.8 million as reported in the fourth quarter of 2019. 2020 operating expenses were $102 million – $100.2 million compared to $85.3 million in 2019, which primarily reflects an increase in head count mainly in increase in R&D expenses in order to capitalize and opportunities we see in our market. The total worldwide market number of full-time employees as of December 31, 2020 was 676. This is an increase of 82 full-time employees compared with that of the end of 2019, which stood at 594. Operating income for the quarter was $475,000 compared with an operating loss of $1.8 million in the fourth quarter of 2019. Net income for the quarter was $382,000 or $0.01 earnings per share versus a loss of $1.7 million or $0.05 loss per share in the fourth quarter of 2019. Net loss for 2020 was $3.6 million or $0.10 per share versus $7.5 million or $0.22 per share in 2019. For the three months ending December, 2020, the number of basic shares was 35.3 million. And the weighted average number of fully diluted share was 37.6 million. Turning to the balance sheet. Our cash reserve comprised of cash, cash equivalent and investment as of December 31, 2020 totaled $99.4 million compared to $107.2 million as of September, 2020 and $117.6 million as of December 31, 2019. I know that toward the end of 2019, we received large advance payment from deal signed in 2019 and the comparative cash decreased between December 31, 2019 and the year end 2020 was primarily due to debt. We are expecting a negative cash flow in 2021 in the range of $23 million to $25 million, while our operating loss is expected to be between $6 million to $8 million. The reason for the gap between the expected loss and the cash flow is mainly due to the following: pertaining to the highlight that in 2019 and 2020, we had a typical high advanced payment – typical high advanced payments from customers which led to a low level of year end account receivables of $21 million. We are not expecting to receive such high level of advances in 2021. For the account receivables level at the end of the year is expected to be significantly higher than the AR level at the end of 2020. Second, we expect increased revenues – we expect increased revenues in 2021, which will lead to even a higher AR. Third, as part of our accelerated goals of security revenue share deal deployment we will need to invest a few million dollar in CapEx. We expect gross margin for 2021 to average around similar level as in previous year to around 70%. However, it is important to understand that gross margins may fluctuate on a quarterly basis as a result of a deal mix and revenue recognition. As we continue to invest in sales and marketing and R&D to facilitate the growth for the company, we expect 2021 operating expenses to be in the range of $110 million to $111 million. This increase in expenses is expected to be a combination of increasing head count, negative effect of exchange rate to the U.S. dollar and others. The outcome of the above is expected to generate an operating loss in 2021 of $6 million to $8 million as I mentioned earlier. I want to highlight that we have actively taken the decision to increase our investment in R&D and sales and marketing with the balance sheet – with a significant amount of cash we feel that investment to capitalize on the opportunities we see for strong long-term goals is a much more important in driving short-term profitability consideration. Our view that eventual profitability will come via growth and we do not feel it is necessary right now to anchor to a short-term profit target. In 2020, we signed secret deal with MAR of $192 million, which bring us an accumulated MAR of $280 million. We believe that in 2021, we will sign the additional deal with MAR of $180 million. I would like to remind everybody that MAR which stands for maximum annual revenue potential of concluded transaction was estimated by Allot upon transaction signature and constitute an approximation of the theoretical annual revenues Allot would receive if 100% of the customer’s subscribers as estimated by Allot sign up this service. As I have explained, thanks a lot of time from contract day to commercial launch, and then the ramp up of penetration. Therefore in 2020, we booked SECaaS revenues of only $1.9 million since most of 2020 new SECaaS deal. We signed toward the end of the year. The expected recurring security revenue in 2021 will be in the range of $6 million to $8 million. To sum up my comment, we are very pleased with Allot 2020 achievements and goals $18 target. This is even more impressive when we take into account the COVID-19 headwind throughout 2020. We are expecting to continue our goals and investment in 2021 in order to fortify the company foundation, and capitalize on the potential, given the expected accelerated goals starting 2022. That concludes my remarks. We would be happy to take your question now. Operator?

Thank you. [Operator Instructions] The first question is from Alex Henderson of Needham & Company. Please go ahead. Alex?

Sorry. Forgot to unmute. Thank you very much. I heard a little crack along the line when you gave the book-to-bill comment, could you just restate what you said about book-to-bill for 2020 for 4Q?

2020 it was around the 0.8. But for 2019 and 2020 together, it was 1.17 that's what I said.

Yes, okay. I didn't catch it, it was just crackle. Thanks. So as I'm looking at the numbers here and the mechanics associated with them, it looks like the growth in 2021 at the low end of the band, you're looking at essentially 2% kind of growth, excluding the security business and with the comments about double digit growth in enterprise, it would suggest that you would actually see maybe some – a little bit of shrinkage in the service provider, a more traditional business. Is that mechanically correct and is that a function of the – obviously drawdown and backlog that occurred over the course of 2020 which ultimately is a reflection of COVID and the like, am I doing the math right there?

Yes, the number was okay. But as we said in the past few times, we think that the DPI market, including the enterprise is supposed to go single digit each year. But since it's not such a huge market and there might be big deal, so there might be fluctuation. One year it might go more and the other it might go less and hopefully we will do more than the lower range of our guidance.

Look, I'm not saying that it's a bad thing. I just want to make sure I had the calculus correctly. So the second question is around the acceleration in investment to drive this security business, which I think is probably the right thing to do, certainly the opportunity here is significant in MAR [ph] that you've already delivered is outstanding. But can you give us some sense of the mechanics around that? Have you already started that investment in the fourth quarter, are you going to ramp it from there sequentially into the March quarter, or is it going to be spread out over the course of the year? What's the tempo of that acceleration in investment?

As we said, that's – the total OpEx for the year will be between 110 to 111, and this includes the efforts everything, and it will be spread all over the year, it’s not going to be a one time investment in Q1.

So it's fairly evenly distributed in terms of the sequential increase. And is it more in sales and marketing, more on R&D? How do we split between the growth in those two?

I would say it’s more in R&D, but also in sales and marketing.

Okay.

It's more in R&D. Now, if you take it evenly and you take the 110 divided by four, you see that similar to the expense level of Q4.

I see. Okay. In terms of the ramp of programs that you just signed obviously very heavily skewed to 4Q. One of the obvious questions is, what kind of programs are the customers putting in place in terms of marketing, are they the more aggressive programs? Are they – do they tend to be more conservative coming out of the COVID environment? Can you qualitatively talk a little bit about what you're hearing and seeing from them in terms of their marketing programs against that very large MAR number?

We're seeing a mixture. Some are looking at it very aggressively. Some are looking at it less aggressively. But this is still in discussions between us and them and for the operators also internally. So until they actually launch, these plans can change. Hopefully, we will help convince them to change for the more aggressive route. But I think that from the get go, it's really, there's a mix, each operator has his own view on what he wants to achieve with this. Those that are more skewed towards – let's get revenues and get revenues quickly are taking aggressive go-to-market. Those that are looking more at an overall brand recognition and that's there and after beginning may be a bit more hesitant on how aggressive to go, but we're working very tightly with them to show them the advantages, what they can do and how they could go more aggressively.

I got it. Great. I'll see the floor [ph]. Thank you.

The next question is from Tal Liani of Bank of America Merrill Lynch. Please go ahead. Tal? The next question is from Marc Silk of Silk Investment Advisors. Please go ahead.

Thanks for taking my questions. Excuse me. A lot of information there. So the first question is on your – the 10 million on the European tier one customer with 10 million users. Initially how many companies were you competing with?

Not quite sure which customer I mentioned was 10 million users. So maybe you want to refresh me with…

In January, you might have two deals you mentioned Europe.

Okay. Yes, we didn't name the customer, we were competing.

You can tell us if you want.

Not now, yes. I want to – it's not like – it's not my lack of one. We were competing with at least two competitors on that deal.

At least two. And it was at the same for the other deal in Europe as well.

I would say that's a typical number. I mean, I don't want to now tell you if somebody else has a third or one less, but that's a typical number.

So that's pretty small. So basically is that mean that there's not that many people that can kind of do what you can do? Is that a good assessment of that?

There are not many companies that do what we can do, or I will tell you, there are not many companies at all in the network security for CSPs to enable them to sell to the mass market, which is where we're in. Most of the security companies that are out there are focusing on the enterprise market where we are, I would say more unique and where we think that is that there's an interesting place in the market is to enable telecom operators, to provide security-as-a-service precisely to the mass market, to consumer SMBs and so on. There are few companies like us that are targeting this exact segment. I believe that this segment is growing significantly now. And like I said on the call, then I think that many operators are understanding that they need to provide the service. So there aren't a whole lot of companies that they can go to get technology and product to enable that, which is good for us of course.

That's great information. So can you tell us kind of why you would pick for those, let's just say those two recent deals. Why were you chosen? Again, it just gives us more light as far as how important you are or how different you are?

Look, I think it's always a combination of several factors, right? I think one is the fact that we're really the only ones there today that offer a 360 holistic approach. So if an operator works with us, he can see his past, not only what he wants today, say an operator today says, I want to launch a security as a service to constitute the mobile customers. But if you work with Allot, he can see his past to now expand that service also to the fixed access market – to this fixed customers. He can see how he can add to that off-network protection. He can see how we can expand that to small, medium businesses. And you can see how we can do all that with fundamentally the same, the same user experience, the same misread databases, the same management system, et cetera. That's something that nobody else provides today. And that's a very key differentiation even if the operator wants to start with only one specific segment. So that's one reason. Second reason is, specifically on mobile networks, what we do today with our network secure product is superior simply provides a much higher, say higher security level, better functionality, it's safer and so on than what we regularly see as our competitors in that market, which is DNS based security. So it's also a better product. And third, we're focusing on this market to a large extent. So customers that talk to us, see our commitment, our drive, the fact that we that we know how to, we know how to help them in their marketing endeavors. And we bring our marketing team as part of our value to show them how they can do better and what will work better what will work not as good and so on. And last but not least today on network based security solutions, we're a market leader. So which is also a good reason to choose us now, operators choose us for any kind of combination and different weights of all of these.

That's a great answer. When you sign a deal, especially smaller companies and you signed deals with like tier one companies, it gives you guys more legitimacy. So after announcing those last two European deals, have you maybe seen some more interest in your technology or maybe somebody who you were talking with is now getting more, let's just say aggressive because of those recent announcements?

I can't tie directly to those specific announcements. I can't tell you, and I hope it came across in the tone of what I discussed during this call that we are seeing a significant acceleration in the interest on behalf of CSPs in the last year and specifically in the last few months. We're seeing that the interest in providing these services, want to provide them is definitely much larger than it was before. And we're seeing a lot more engagement from operators that we didn't see before. Some of them, no doubt as a result of – okay, they either talked to a customer of ours, who's doing this, or they heard about it, and this creates interest, but I think most of it comes from the fundamental of the market where they see the need for to protect their consumers. They see the want from side of their customers to get that protection and they see the need to monetize their network. So…

Okay. So, someone personally who's invested in Israeli companies for, I don't know, more than 25 years that that was a nice development as far as the Arab, that opening new markets, what – the conversations you've had, what products are they kind of interested in?

It's really across our product line. I mean, we're talking to them both on DPI products, on security as a service products where it's across the product line.

Fantastic. You did mention you had a conversation and I have to ask this like every call I do. You talked about an American company who kind of now sees the Allot as a way to generate additional revenue. Was that just initial talks? Or are you in an RFP or anything – any color you can give us that would be helpful.

Okay. So I can tell you that we're in serious discussions with the operators, I do not know what the result of these discussions will be. I do not know if we will win anything or anything of that sort, but I can't tell you that compared to say, even a year ago, when the discussions were more exploratory, now we see multiple American operators that think they need to do something from the network. And that's about what I can say.

Stay tuned. Right. Okay. So it's – a few years ago when you're stock was $7, I said maybe use some of that cash to buy the stock at $7, but now that it's more than doubled from all your hard work. I think it's nice to see that instead of artificially I'm not flip-flopping, but at these levels, I like that you're taking some of your money and investing in the company to have real earnings per share gains down the line, as opposed to just artificially generating earnings per share growth. And then the other thing is, a few years ago, when – and I'm not comparing it to Apple, but when Apple was really more of a hardware company and they went to services and their revenue didn't really grow, these analysts were rerating it because of their – the more gross margin, more higher gross margin business was starting to evolve and kind of, I see the same thing with you guys is once you continue the recurring revenue model, I think that the street has got to rerate you as well down the line. So just a great progress. I like how you take in the long term in that continued success.

Thank you.

You're welcome.

The next question is from Jacob Stephan of Lake Street Capital Markets. Please go ahead.

Yes. Hey guys. Thanks for taking my question here on behalf of Eric Martinuzzi. Just kind of wanted to drill down on the securities, do you see that as a double digit or more of a single digit long-term growth?

If you are referring to the SECaaS revenues. So we were talking about the accelerated goals. We said that our guidance for this year is between $6 million to $8 million. And next year we are expecting at least $25 million. So it's definitely more than a single digit and even a year after we still see accelerated goals, this is the only issue of such a Rev-Share model.

Right. Okay. You guys had mentioned that you had two competitors kind of on the Europe deals. What are you typically competing with more than two competitors or less than two in all geographies?

No. I mean, typically we'd find another two, maybe three competitors in a specific deal. If there's going to be four, it's really a lot of competitors. Okay. I'm talking about security deals.

Yes. Okay. Let's switch it over to the DPI business. Where do you see the long-term growth rates for that?

I think we continue to say at least in the next few years, we're continuing to see something in the single digit growth rate, not more than that for the overall business. And I think that there will probably be some use cases may grow faster. Some may grow slower, but overall the whole market we think is going to grow single digit.

Okay. All right. I'll have back in line. Thanks guys.

Thank you.

The next question is from John Roy of Water Tower Research. Please go ahead.

Thank you. When you were describing your perfect storm in 2020 of really drivers of growth, I was curious if you could give us a little color of what elements of that you expect to continue in 2021. And as an adjunct to that, is the Peace Accord going to be a substantial contributor in 2021, or is that more of a 2022 event?

When I described the perfect storm, I think that's the situation that we're looking at now. And I think that that's going to drive new recurring security deals that will be signed in 2021. And I see those trends continuing. With regard to the peace accords, and the Gulf region, it's really a completely new region for us. Unlike anywhere else in the world, this is not someplace that we were doing business in the past, and that we know people, and individuals, and companies, and so on, we're learning it. I can say again, that the atmosphere was extremely positive, and very, very acceptance now. Is this something – is there something there that we can close already in this year, or is that going to wait for 22? I'm not expecting that to make material difference in 2021, because usually working with operators takes time. And so not knowing the Gulf region, not working with these operators in the past, I'm going to assume that they are like all other operators in terms of the time it takes to close deals, which means it probably won't have any material effects on 2021. But I'm hopeful for the future.

Yes, so it sounds like it might even slip into 2023, given how long it takes to sign a normal deal? So thank you for that. In the broader geography, if you were to put in 2021, what is the geography? Will you expect to see the most growth?

It’s hard to say. I think, look, our – it depends how you define growth. Look, EMEA, and you can see it in our numbers was our strongest area geography this year. So, I would certainly hope and expect it to grow in 2021 and further on. But then I look at North America, North America, our revenues are very, very small. So it's easier to have a high – it's easier to have high percentage of growth on something that's small. And there is an opportunity in North America. But I don't know to answer you what we'll actually see. I can describe the potential as I did. And I hope that all the geographies will grow.

John, I think, it depends on the definition of goals, because there could be growth in terms of revenue, there could be growth in terms of EMEA, which you see the revenues starting picking up maybe a year later. You can see growth in terms of bookings, this will not be recognized as revenue. So, there are a few dimensions. It's not…

Right so…

It’s not only revenue.

Yes. If you sign one North American operator, it may take quite a while to get it going. But MAR would be huge.

Yes, and also, as we said previously in the call it takes to close a deal with an operator, it takes more than a year, it can take 18 months, it can be even higher. So…

Great. Well, that answers my question. Thank you so much.

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

Can you hear me now?

Hopefully, I can. Perfect. Thank you. Sorry, I don't know how to operate mute buttons. I have two questions. The first one is you mentioned book-to-bill, 0.8 for the year. I missed parts of your prepared remarks, maybe you explained it. But can you explain the basics why book-to-bill below 1? Does it have to do with recognizing revenues ratably or something? Just tell us a little bit the story behind book-to-bill? I have another question not related.

Last year 2019, the book-to-bill for the fourth quarter was 1.63%, which was extraordinary. We got a lot of bookings. And this year, we said in the guidance, for this year, we said the book-to-bill will be lower than one. This is why I mentioned that the book-to-bill for 2019 and 2020 together, it was 1.17%. By the way, the book-to-bill for the last three years, 2018, 2019 and 20 was 1.16%. So, there's between one year to another depends if you get the order, sometimes you can get the order in Q4 a bigger order that relates to the next deal, sometimes a big order slip from one year to another. We're not talking about – not talking about the thousands and thousands of small olders.

Yes. The only reason why I'm asking it is because book-to-bill is a reflection or it's a proxy for future business. And the question is the fact that book-to-bill was 0.8, and since we're always looking forward, does it mean that you're concerned with your visibility for 2021? Or does it mean that there is a likelihood of having less confidence? I don't know how to phrase it less confidence in the numbers for 2021?

For 2020, we had higher confidence in number since the backlog goals are higher. But when we provided now the guidance for revenues between $145 million to $150 million, we do believe this is achievable, this is our goal. And even though we don't have 100% visibility, we believe in those numbers, this is why we provided the guidance.

Well, Tal I think we feel comfortable with the guidance we provided for 2021. We're entering 2021 with a pretty strong backlog, what was the number?

$110 million.

With $110 million of backlog. Most of which were significant enough portion will be what is expected to be recognized in 2021. And we're guiding to $145 million to $150 million. So now we feel really good with the guidance we gave.

Got it. Second question is about the DPI business. Last year was a good year for DPI in general there were some good quarters, now when you look back in retrospect, can you explain the reason for the better-than-expected results for the year kind of throughout the year? Was it related to COVID by chance? And then how would 5G, when you talk to your customers, how would 5G impact DPI? Do you expect the relatively solid trends to continue into 5G, or is it still unknown at this point?

I think that COVID at the end didn't increase the business as I had thought to when COVID started. When COVID started I thought that would be okay, a lot more working-from-home, a lot more bandwidth on operators, and so on, they would need to buy more DPI systems, licenses, et cetera, et cetera, that turned out to have a relative negligible effect. They ended up buying a little bit more, but nothing really significant. So no, it didn't – that didn't contribute much. Actually, COVID if anything, it’s contributed to postponing deals and delaying them more than anything else. Now it's a guessing game. But if we didn't have COVID, in 2020, the year might have looked better. I don't know for sure. But based on how I see the deals, we're closing it – there's a good chance it would have looked better without COVID. With regard to 5G, I think, 5G will generate more interest for what I see it already generating more interest, and I think it will actually generate more business, mostly on the security side, both on providing security for the consumers and SMBs and on the network itself as a derivative of, or partial derivative of our DPI technology on protecting the network itself. When we say protecting the network, that is protecting the use of IoT devices that the millions of IoT devices connected to the 5G network, use of them as box to attack somebody, or something, or the ability to spread attacks in this very, very broad pipe that 5G brings. Our ability to prevent that is a combination of our DPI capability and our DDoS prevention capability. And I think that there is going to be a lot more interest for that. We see that already. And I think that that's going to generate nice business for us going, hopefully, also in 2021. But definitely going forward.

Got it. Last question to Ziv. Ziv just housekeeping item, how much money did you save in OpEx in 2020 from not travelling, not doing customer engagement activities, et cetera? And then do you expect these expenses to come back in 2021? What's your plan for the year?

We saved few billions of dollars, but we decided to invest this money in other activities. And also for 2021 we think that part of those expenses, the level of expenses to travel and other things will be higher than 2020. Maybe not the same as the 2019, but more than 2020.

Got it. And that's already embedded in your…

The numbers already.

Got it? Okay. Perfect. Thank you.

The next question is from Shawn Boyd of Next Mark Capital. Please go ahead.

Good morning. Can you hear me okay?

Not so clear.

Good morning, gentlemen. I just want to jump in and summarize something off the backlog comment. You were pointing to the book-to-bill with a two-year average. And if I heard the comments correctly, even to a three-year average, which certainly makes sense. I've heard also that the pandemic and reduction in travel and everything else has certainly impacted us a little bit on the Allot Smart side of the business. And hence our bookings were down in 2020, as expected. Can we assume there's some pent-up demand there, and that as we continue to progress, we should be able to see bookings growth here in 2021?

We don't know. I think we'll have to see how this really progresses. I think that there is a strong demand, as I said. Will this translate into booking growth or not? I'd rather not comment on that at this point. Beginning of 2020 we didn't see what COVID was going to do at all, right. And now in 2021, I can tell you that we still don't see what the effects are going to be of COVID, to what extent is going to delay things, to what extent it's going to affect? I feel reasonably confident with the revenue guidance. I'm a bit more hesitant on bookings. So, I'd wait and see.

Got it. Okay. On the revenue guidance, this is not a question, this is more just a comment. And it's appreciation from a shareholder. I'd like to commend you all for being one of the few companies in my portfolio that actually met your revenue guidance for 2020 that you gave pre-COVID. So, I think, that as we kind of look forward, and think about what you are saying, and what you have confidence in, that all helps us just a little.

Thank you.

Last question for me is on the January deal that you announced. There were 10 million subs and when we do rough math of 10 million subs, at perhaps the equivalent of $0.50 a month, that could be if I'm doing it properly, that could be MAR of $60 million on that single win. Am I looking at that properly? And if so, is that all in the $180 million that you are targeting here in 2021?

That has included, the deal that we announced in January, we’ll sign in December. So, it's already part of the $192 million MAR of last year. Regarding the calculation of the MAR unfortunately, we cannot disclose the MAR of any individual deal. You know the formula how it is calculated. So, it's simple math.

Okay.

I cannot disclose the real MAR of such a deal.

Okay. I understand that on a single deal. And I appreciate the additional color about that being part of the 2020 deals. May be coming at this one other way, let's get away from specific deals, and simply look at the entire $192 million in MAR that you just reported for 2020, what's the average monthly revenue share to the company from that $192 million in MAR, that you're pointing to?

Like we said in my comments earlier, I think, that – I don't think, I can tell you that 30% to 50% of the share of – sorry, I'll rephrase that, of whatever the operator decides that he is going to charge his end users roughly 30%, to 50% is a reasonable percentage that of what Allot will get. I will remind you though, that when we state the MAR numbers, those are the numbers of what Allot should get theoretically if 100% of the of the end users, of which the operator has actually signed up for the service.

Got it? Okay. And last question from me. And I really mean it this time, I apologize for going over. On the increases in operating expenses, you've kind of got a tiger by the tail here in terms of the secure offering and what you are doing on the security side and going after these. So, I think all of us thoroughly understand you trying to optimize that and take advantage of that and grow the business as much as you can. I'm also guessing that you've got an idea of what you're getting on those incremental operating expenses. So, I'm almost thinking about kind of a return on investment. But maybe that's not the right way to think. But for each incremental dollar that you take operating expenses up right now, can you give us a feel for what kind of a payback you are thinking about and what you see the market providing, especially on that Allot Secure side? And that's it for me. Thanks so much.

Unfortunately, we are not a project company, we are a product company. So, we invest in R&D, we invest in sales and marketing. And then of course, we can leverage on those expenses if the revenue will really growth – if there will be accelerated growth. But it's not like a project, specific project that I can tell you I invest $100, and I get the return of 6% [ph]. It doesn't go this way, because the R&D is generic; and the sales and marketing is across-the-board, it’s not per project. So, it's very difficult to measure it this way.

Okay, well, got it did I hear you. Good enough. Congrats on the continued execution guys. Great to see.

Thank you.

The next question is from Alex Henderson of Needham and Company. Please go ahead.

Yes, I'll be very brief since we've run way over here. But I just wanted to ask as you look at the portfolio of potential transactions from MAR in 2021, how concentrated is that? Is that a large number of smaller deals? Is it a handful of very large deals? Is it a reasonable distribution? What does the distribution look like in terms of the size and scope of the number of deals we're looking at?

I think we're looking at a reasonably broad distribution. There are some deals that are very large, obviously, not a whole lot of those. There are some deals of midsize and quite a few that are smaller. And we just make some factor analysis of what we think we can close. But it's a pretty wide distribution.

Great I’ll cede the floor, thanks.

Thank you.

[Operator Instructions] There are no further questions at this time. Mr. Anteb, would you like to make your concluding statement?

Yes, thank you. So, on behalf of the management and myself I want to thank you for joining us on this call, for your interest in the company and your support of our business. We are unfortunately still not travelling. But we will be holding virtual meetings with investors. So if you we would be happy to meet with you that way. Please be in touch with our Investor Relations team to schedule that. Beyond that thank you very much. And I look forward to talking to you next quarter. Have a good day.

Thank you. This concludes Allot’s Fourth Quarter and Full Year 2020 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.