Allot Ltd. Ordinary Shares 2026 Q2 Earnings Call

We are pleased to report another strong quarter with growth in revenue, profitability, and cash flow. Our fourth consecutive quarter of double-digit year-over-year growth and an acceleration over recent quarters. We were particularly pleased with North America, where strong execution drove a solid increase in sales and backlog, underpinning our confidence in the goals we expect in the second half. Our Security-as-a-Service business, SECaaS, continues to power our growth, with SECaaS revenue growing 47% year over year to account for over a third of our revenues, and SECaaS ARR up 44%. This continues to scale our recurring revenue base, which represented two-thirds of total revenue in the quarter, giving us greater visibility into the quarters ahead and improving the predictability of our revenues. Overall, our business is executing well and performing ahead of our expectations.

Let me focus on North America, one of the highlights of the quarter. The region made up 31% of the revenues, versus 17% in the second quarter of last year and 14% last quarter. This was driven by very solid product sales, with particularly strong interest in our new Tera III platform and by continued demand for our Allot Smart product line, reflecting the value operators see in the network visibility and control our platform delivers. In addition, our major U.S. SECaaS customer continues to perform very well, in line with our strong expectations. Beyond that, we entered the second half with a strong backlog and healthy demand, giving us added confidence for the rest of the year. North America is a strategic priority for us, and it is very encouraging to see that focus translating into revenue, backlog, and pipeline.

Turning to our cybersecurity as a service business. This continues to perform strongly and in line with our expectations. We had several wins during the quarter, each demonstrating a different way in which we are growing the business and all classic examples of our land and expand strategy. We secured four new SECaaS deals in the quarter, all of them in the EMEA region. First, we won an upsell deal in Europe, selling a new service to an existing SECaaS customer, the first sale of our identity monitoring service. This telco will be offering our identity monitoring service to its SMB customers. This is a domain-level identity theft monitoring service. It continues monitoring for exposure of the business' digital identity, and it is designed to alert the customers when credential or other identity data has been compromised so that they can act before that expose is exploit.

It is designed to do so for every user across the organization. It is a good example of how are we expanding our SMB security suite beyond the network alongside OffNetSecure, Firewall-as-a-Service, and DDoS protection. Second, we won an expansion to the SMB segment within an existing European-based customer. Third, we secured a new win within one of our large global telco groups, adding our HomeSecure service in another country. The HomeSecure solution enhances threat protection across the telco's mobile and broadband networks. It integrates into the existing home router and provides zero-touch home network visibility, cybersecurity, and parental controls. Finally, we won a new SECaaS deal in Africa with a telco that is already a Smart customer. Together, these wins reflect the breadth of our SECaaS goals, new customers, geographies, end-user segments, and applications all on the same platform.

We expect these deals to contribute to our future SECaaS revenue growth in 2027. Our Allot Smart product line remains a highly complementary part of our unified cybersecurity-first platform, built on decades of Allot innovation and delivering best-in-class network intelligence. We continue to execute well on the multimillion-dollar projects won in recent quarters, including deployment and upgrades of our Tera III platform with Tier 1 operators. As a reminder, Tera III is our next-generation, ultra-high capacity multi-service gateway. It is among the highest capacity platforms of its kind in the market, and it consolidates deep network visibility, traffic management, and cybersecurity services onto a single platform. Customer feedback has been excellent. Operators are running both cybersecurity and traffic intelligence workloads on the same gateways, and they value its carrier-grade stability and reliability, its ability to scale cost efficiently with 5G and fiber traffic growth without expanding their footprint.

We also provide a smooth upgrade path from our earlier service gateway generations, which protects the investment that they've already made. This quarter, demand for our Allot Smart product was particularly strong in North America. As part of the Allot Smart product innovation, we recently ran a case study with Tier 1 operator to demonstrate Allot's new zero-rating fraud detection and mitigation service. Zero-rated applications and app-based charging plans creates value for subscribers, but they also open the door to fraud. Attackers are increasingly exploiting vulnerabilities to bypass charging system and consume data without payment. Our solution helps CSP identify fraud, and a case study showed that we reduced fraudulent traffic by 87%. This show how operators can recover lost revenue while protecting the integrity of their zero-rating offers.

We are already building our backlog for 2027 with an additional win of an important Tera III upgrade project with a customer for a new site expansion. Our pipeline remains healthy, with existing customers planning their Tera III platform upgrade and new engagement advancing through our sales process, and these multi-year projects are expected to provide good revenue visibility into 2027 and beyond. During the second quarter, we presented and met customers at a number of key industry conferences. This included DTW in Copenhagen, FutureNet World in London, Interop in Tokyo, Network X Americas in Dallas, and CommsDay in Sydney. Feedback was very positive, with customers and prospects continuing to respond well to our converged cybersecurity and network intelligence positioning. Events like these continue to build our pipeline, and it is clear that our cybersecurity-first strategy resonates well with operators globally.

At the end of the second quarter, our board of directors approved a share purchase program of up to $40 million. This reflects our confidence in Allot's strategy and financial strength. With more than $100 million in cash and no debt, we are well positioned to increase value to shareholders while continuing to invest in the long-term growth of the business. In summary, we are very pleased with our second quarter performance. Our fourth consecutive quarter of solid improvement with accelerating growth, continued momentum in CTAS, standout performance in North America, and further gains in margin profitability and cash flow. As we are performing ahead of our expectations, we are raising and narrowing our 2026 revenue guidance to between $115 million and $118 million from the previous range of $113 million to $117 million with ongoing improvement in profitability.

This is driven by accelerating order momentum from our North American customers, our backlog, and the continued high growth of CTAS. Allot is in its strongest position in over a decade, and it is well positioned to build on its profitable cash generation, recurring revenue-led growth in the quarters and years ahead. Now, I would like to hand it over to our CFO, Liat Nahum, for the financial summary. Liat, please go ahead. Thanks, Eyal.

We reported revenue of $27.7 million in the quarter, up 15% year-over-year. Revenue from our Growth Engine, Security-as-a-Service, was $9.4 million in the quarter, up 47% year-over-year, comprising 34% of our total revenue. Our Security-as-a-Service annual recurring revenue as of June 30, 2026, was $36.1 million, up 44% year-over-year. Deferred revenue, which includes recurring maintenance and support, continued to grow both year-over-year and quarter-over-quarter, increasing the strong visibility we have into remaining 2026 and 2027 revenue. 67% of our overall revenue this quarter was recurring in nature. I will now discuss the non-GAAP financial measures. For all our financial results, including the GAAP financial measure and the other various breakdowns of our revenue, please refer to the table in our results press release.

Our non-GAAP gross margin in the quarter was 71.8%, compared with 73.4% in the second quarter of last year. The year-over-year decline mainly reflects the product mix in the quarter. That said, gross margin remains strong and consistent with our expectation of around 70% for 2026. Non-GAAP operating expense for the quarter was $17.2 million, compared with $16.4 million in the second quarter of last year. The increase reflects our continued investment in sales and marketing to support our pipeline build. General and administrative expenses in the quarter increased compared with the second quarter of last year, mainly due to one-time costs associated with the modification of one of our office lease agreements following change we made in this office.