Prepared remarks
Good day to all of you, and welcome to Allot's conference call to discuss its financial results for the Second Quarter 2026. I would like to thank Allot's management for hosting this conference call. Operator provided instructions to participants on how to ask questions. As a reminder, this conference call is being recorded. You should have all received by now the company's press release. If you have not, please check the company website at www.allot.com. With me today on the call are Mr. Eyal Harari, CEO; Mrs. Liat Nahum, CFO. Following the prepared remarks, we will open the call for the question-and-answer session. All the highlights of the quarter are in today's earnings press release. Before we start, I'd like to point out the following safe harbor statement. This conference call may contain projections or other forward-looking statements regarding future events or the future performance of the company. Those statements are 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 changing market trends, delay in the launch of services by Allot customers, reduced demand and the competitive nature of the security service industry as well as other risk identified in the documents filed by the company with the Securities and Exchange Commission. Also, the financial results of this call will be presented mainly on a non-GAAP basis. Allot believes that these non-GAAP financial measures provide more consistent and comparable measures to help investors understand Allot's operating performance in the quarter. For all the data, please refer to the financial tables published in the results press release issued earlier today, which also include the GAAP to non-GAAP reconciliation table. And with that, I would now like to hand over the call to Eyal Harari, Allot's CEO. Eyal, please go ahead.
Thank you. 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 growth we expect in the second half. Our Cybersecurity as a Service business, SECaaS, continues to power our growth with SECaaS revenue growing 47% year-over-year to account for over one-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 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 the 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 continuously monitors for exposure of the business digital identities and it's designed to alert the customers when credential or other identity data has been compromised, so that they can act before that exposure is exploited. And it is designed to do so for every user across the organization. It is a good example of how we are expanding our SMB security suite beyond the network alongside off-net Secure, 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 product customer. Together, these wins reflect the breadth of our SECaaS growth: 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 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 deployments and upgrades of our Tera III platform with Tier 1 operators. As a reminder, Tera III is our next-generation ultra-high capacity multiservice 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 have already made. This quarter, demand for our smart product was particularly strong in North America. As part of the smart product innovation, we recently ran a case study with a Tier 1 operator to demonstrate Allot's new zero rating fraud detection and mitigation service. Zero-rated applications and app-based charging plans create value for subscribers, but they also open the door to fraud. Attackers are increasingly exploiting vulnerabilities to bypass charging systems and consume data without payment. Our solution, ACSP, identified fraud and a case study showed that we reduced fraud and traffic by 87%. This shows our 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 engagements advancing through our sales process, and these multiyear 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, FutureNetWorld in London, Interop in Tokyo, NetworkX America 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 SECaaS, 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 $130 million to $170 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 SECaaS. Allot is in its strongest position in over a decade, and it is well positioned to build on its profitable cash generation and recurring revenue-led growth in the quarters and years ahead. And 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. Sixty-seven percent 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 remained 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 changes we made in this office. While making this selective investment in sales and marketing, we remain disciplined and operationally efficient with operating expenses as a percentage of revenue declining to 62% from 68% a year ago. We reported non-GAAP operating income of $2.7 million with an operating margin of 9.9% compared with a non-GAAP operating income of $1.2 million or an operating margin of 5% in the second quarter of last year. Allot has 501 full-time employees as of June 30, 2026. In terms of non-GAAP net profit, we reported $4.6 million in the quarter or a profit of $0.09 per diluted share compared with a non-GAAP net income of $1.5 million or a profit of $0.03 per diluted share in the second quarter of last year. On a GAAP basis, net income for the quarter was $2.6 million or $0.05 per diluted share compared with a net loss of $1.7 million or a loss of $0.04 per diluted share in the second quarter of last year. GAAP net income for the quarter includes a one-time $1.2 million financial gain related to our office lease modification, reflecting the remeasurement of our lease liability. We do not expect this to reoccur. We generated particularly strong operating cash flow of $8.5 million in the second quarter compared with $4 million in the second quarter of last year, reflecting robust profitability and strong cash collection. On June 23rd, our Board of Directors approved a share repurchase program of up to $40 million, which we will execute in line with market conditions. Repurchases may be made at management discretion in the open market. The timing and the amount of the repurchase will depend on market conditions, share price, liquidity and other factors. According to the company regulation in Israel, we are obliged to give 30 days' notice during which any creditor may object to the buyback. The 30 days has now passed, and there were no objections. Allot has a robust balance sheet with no debt. Cash and cash equivalent, bank deposit, restricted deposit and investment as of June 30, 2026, totaled $107 million versus $88 million as of December 31, 2025. Looking ahead to the rest of 2026. Given our performance in the first half of the year and the strength of our backlog, as Eyal mentioned, we are raising our full year 2026 revenue guidance to between $115 million to $118 million. For the full year, we expect Security-as-a-Service revenue growth of 40% or more. Our gross margin expectation for the full year remains in the range of 70%, with a specific gross margin in any given quarter depending on our product mix. On the operating expense side, we expect to continue at a similar run rate to the current quarter, excluding the one-time expense. Overall, we continue to expect profitability improvement over the coming quarters of 2026. That ends my summary. Eyal and I are now happy to take your questions.
Questions and answers
Operator provided instructions to participants on the question-and-answer session. The first question is from Shaul Eyal from TD Cowen.
Congrats on yet another very solid set of results and guidance. Liat, actually, I want to start with you and ask about operating cash flow, still more than doubling year-over-year this quarter, but slightly below last quarter, which, if I recall correctly, had some cash advancement. So, just asking if there are any unusual items this quarter we should be mindful of? And I have a follow-up.
Yes. So, as we shared last quarter, we had a very strong operating cash flow in Q1 related to the major deal that we reported a year ago, and we started collecting. Last quarter, indeed, it was a one-time event. We continue to see a very positive momentum in our cash flow. We finished the quarter at $8.5 million. I think that this also represents our business model and our expectations around the deals that we are signing. Overall, no major one-time event this quarter around the operating cash flow, just continued momentum around our business model of Security-as-a-Service, which is generating very good cash flow.
Understood. Understood. Eyal or Liat, I know you don't disclose backlog or RPO metrics on a quarterly basis. But given your improved profitability and visibility, what kind of qualitative commentary can you offer us as we think about backlog or RPO? Is it fair to assume it's pretty much at all-time highs right now?
So, we reported in our yearly report RPO and as you could see, I believe, end of March, it is really at a very high level of backlog. We are going to issue media reports as we do every year, and the KPI will be available there. Overall, our performance and bookings are strong and following the announcements we made in the last 12 months, it's fairly safe to assume that this continues to be very high.
The next question is from Matt Calitri from Needham.
This is Matt Calitri over at Needham. Is there any more color you can provide on the strength you saw in North America? Maybe just anything on like how much of the strength you would attribute to product versus SECaaS? And then where are you getting the confidence that this is a sustainable long-term opportunity?
Thank you, Matt. As we commented in the prepared remarks, we see strength both in SECaaS and the smart product line. SECaaS is obviously more recurring and consistent as quarter-over-quarter subscription fees and therefore more sustainable and predictable. But as we noted this quarter, we also had very strong smart product sales, which increased the share of North America in the region. Product sales are nonrecurring, and therefore it's not every quarter that will be the same. But we continue to invest in the region as we see this as a strategic region to support our long-term growth. So, we are very pleased with our performance with both product lines. Specific to this quarter, the extra strength came from the smart product line on top of the large contribution from SECaaS.
Got it. That's clear. Are you able to dive into it and all like was a lot of the strength associated with the top 10 customer? Or what drove the large increase in top 10 customers as a percentage of revenue in the quarter?
Yes. We have some large deals. As noted, on the product side, we see demand for the Tera III platform. Tera III platform is sizable deals. Usually, it's seven-digit opportunities. We had a few of them in the last few quarters that we announced, and they are now translating into revenue. On a quarterly level, that increased the share of those top customers. Usually, Tera III is purchased by the larger carriers because it's a high-capacity, high-end platform. On the company level, we still see that the company is very healthy with relatively low concentration. As of last year, we didn't have any 10% account, and we continue to see demand coming from all regions and from multiple accounts.
Great. Awesome. And then maybe just one more on those other regions. So, revenue in EMEA and APAC actually declined sequentially. What do you see there during the quarter? And how did that compare to expectation?
As noted, the fluctuations are usually around the product side that depends on when the revenue lands because we have deals that are in the multimillion-dollar range. Therefore, it depends on the timing of the exact revenue recognition. This is very normal for Allot, and this was always the case. We expect to see different balances between regions between quarters, depending on the specific timing of the larger deals that we recognize.
The next question is from Nehal Chokshi from Northland.
Sorry, I had myself on mute there. Congrats on another strong quarter. Two questions, if I may. First one is current portion of deferred revenue is up $7.5 million quarter-over-quarter, which is on top of another $13.4 million from Q1. So, the driver of these big increases presumably is Tera product revenue and associated maintenance. Is that correct?
Yes. So, as you mentioned, indeed, Q2 versus Q1, our deferred revenue increased. If you look at the entire six months, you also see the big increase in our deferred revenue. Deferred revenue usually for us represents those product deals that have not yet been recognized. As we shared last quarter, we had a large deferred revenue related to the big deal that we announced last year. In addition, deferred revenue represents the support and maintenance recurring revenue. Overall, for us, it's a very good positive sign because when we look at our deferred revenue growing quarter-over-quarter, it gives us very good visibility for the remainder of 2026 and 2027.
So, given that this is deferred revenue, you expect it to roll off, obviously, within the next 12 months. But can you give us a sense within which of the quarters in the next 12 months we can expect this to roll off in the income statement?
So, it really depends. If it's product, as Eyal mentioned, product can fluctuate between quarters. But if you look at our support and maintenance, this is more or less on the same run rate. We have short-term deferred revenue, but we also have long-term deferred revenue. Short-term deferred revenue should be recognized in the next 12 months. Then we have additional long-term deferred revenue, which will materialize starting in the second half of 2027.
Okay. All right. And then in order to hit the guidance SECaaS ARR growth of at least 40%, incremental SECaaS ARR for 2H '26 will need to be $7 million. How should we think about the sequencing of that incremental SECaaS ARR in Q3 and Q4?
So, it's very hard to predict the exact number, but you could see from the past performance the run rate is relatively at a similar level and is quite stable. We always rely on the performance of our partners, the CSPs that are marketing the service, and it depends on their marketing campaigns and activities; this could go a bit faster or slower in a specific quarter. But overall, on the full year, we see that we are in a quite sustainable growth rate.
Okay. And just to be clear, this does imply a step-up in the SECaaS ARR in 2H '26 relative to 1H '26. What do you expect to be the driver of that step-up?
ARR is driven by four vectors of growth, as we always mentioned. The first and most short-term is additional customers that are onboarding to the SECaaS service with our existing partners that already market the service. The second, as we announced this quarter, is existing partners adding additional solutions either into new network domains, like one customer that we used to work with only on the consumer segment and now is expanding into the SMB segment, or customers that already offer to a segment like SMB and now add another application like identity theft monitoring, which creates accelerated growth potential. Third is increased adoption within existing partners' customer bases, and last is, of course, new partnerships and new logos. We had one of those this quarter as well. In this quarter, it was an existing smart product customer that is now offering SECaaS. Those four vectors drive growth over time. In the short, quarter-by-quarter changes, it's really reliant on how many end customers are onboarding to the services already available in the market, and that is what our partners need to execute well to achieve growth.
The next question is from Jonathan Ruykhaver from Cantor.
So, Eyal, I wanted to dig down a little bit more in terms of the Tera III adoption you're seeing and the correlation to the opportunity around the Smart platform. What I understand is that some of those carriers that are on an older version of the hardware infrastructure need to migrate to Tera III first. So, maybe you can talk to that dynamic as it relates to demand you see for the Smart platform.
Sure. The new Tera III platform that we launched during 2025 is high-end capacity that can reach up to three terabits of capacity, and it also provides high-density connectivity like 400-gig links and many 100-gig ports for traffic management. We see demand both from new customers now going into RFPs and definitely also from existing customers using our previous generations whose networks are growing. They are refreshing their data centers and sites to support more capacity, and this creates demand for expansion. I would note that Tera III, as mentioned before, is typically for the larger opportunities, which usually end with seven-digit deals. Therefore, we are talking about a relatively small number of opportunities, but with very large impact. Many of our customers do not require terabits across different sites, and they can use different products designed for mid-market and smaller carriers. We have seen very good feedback from customers. They like the ability to see both network intelligence and cybersecurity use cases over the same platform. They appreciate the future-proof, cloud-native architecture that allows us to support and scale capacity. In the last 12 months, we announced about half a dozen Tera III deals, and this is what was building our backlog. We still have many more such opportunities in our pipeline, and we expect this refresh cycle to continue in the next few years as different carriers upgrade, though some will adopt 400-gig capabilities earlier and others later.
Eyal, that's very helpful. How important is the integration of some of the SECaaS offerings into that platform to competitiveness in winning deals? Is that something you're seeing attach rates for? Or is it mostly the high-performance requirement that's driving that growth?
We believe it's both. The ability to run SECaaS services on the Tera III platform changes the investment case from being purely network infrastructure—where budgets are tight—to a product that can help carriers monetize and make money. Multiple stakeholders—from the CTO organization, operations and the CISO to the product teams—can share the infrastructure investment. In a CapEx-tight environment, carriers are under pressure to improve profitability and show ways to maintain and ideally increase ARPU. This is a very appealing proposition. It positions us differently when competing with just network infrastructure providers, and I believe this is a compelling value proposition for our customers. This is why we are seeing success in this area.
The next question is from Jonathan Ho from William Blair.
I just wanted to maybe start with your identity services. Can you talk a little bit about the initial reception from customers and pipeline build opportunity around some of these SECaaS services? And what does that look like from an uplift standpoint?
Jonathan, we just started to market this and are seeing demand coming from two directions. One is existing customers looking to add more value to their customers—some see it as an opportunity to increase their monthly fee while showing more value. In other cases, it's a competitive response where an operator's competitor in the country is already offering a similar service and they need to add it to their cybersecurity package. It depends on market conditions. We don't see identity monitoring as replacing our core network security offering; our focus remains on network security. The beauty of this application is its ability to complement and provide 360-degree protection for our customers. With new customers, having a more robust product offering helps when going into new opportunities. Not all cybersecurity vendors can offer one platform with all the protections customers need, and we believe simplicity and a comprehensive platform will create the biggest effect over time. I wouldn't view identity monitoring as a single application that will be a game changer on its own, but rather as part of a holistic platform that delivers increasing value over time.
Got it. Got it. And then maybe a little bit more color on the zero-rating fraud prevention that you talked about. How big of a market opportunity could that be? And is this similar in terms of maybe improving the competitiveness of your product, but not necessarily a stand-alone market on its own? I just want to get a sense for how you think about that zero-rating product as well.
The zero-rating fraud solution is not a market on its own; it's another use case for the Tera III platform and our network intelligence. Customers implementing our smart product lines want to see how they can better manage and optimize the network. This is an infrastructure investment to improve quality and manage plans. Identifying use cases like zero-rating fraud that create monetization for the operator because they unblock revenue leakage is valuable. We help recover data package revenue that was being consumed fraudulently. This is mainly relevant for regions where fraud is prevalent. In some regions like North America, where pricing and package structures differ, the issue may be less pronounced. In developing regions where customers still pay per gigabit, fraud can be a significant issue and our solution helps operators avoid revenue leakage.
That makes sense. Just one last one for me. How do you think about your capital allocation priorities? I'm just wondering why the share buyback now? And how do you sort of balance returning value to shareholders with continued investments?
The timing is based on the strength we see in the business. We have four consecutive quarters of double-digit growth and are cash flow positive for several quarters. We have enough cash today to balance investing in product growth and organic growth, keep the option to explore inorganic opportunities, and also have the flexibility to execute a buyback if market terms are suitable. This is a vote of confidence by the Board in the company's strength and demonstrates maturity. Like many companies, having a buyback plan in place allows us to act if market conditions are appropriate.
This concludes Allot's Second Quarter 2026 Conference Call. Thank you for your participation. You may go ahead and disconnect.