Allot Communications Ltd. Stock

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 Instructions] 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 that 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 1/3 of our revenues and SECaaS ARR up 44%. This continues to scale our recurring revenue base, which represented 2/3 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 example of our land and expand strategy. We secured 4 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 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 expose is exploit. And 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 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 our -- one of our large global telco groups, adding our HomeSecure service in another country. The HomeSecure solution enhances threat protection across the Telstra'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 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 great 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 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 are also open the door to fraud. Attackers are increasingly exploiting vulnerabilities to bypass charging system and consume data without payment.

Our solution, ACSP identified fraud and a case study showed that we reduced fraud and traffic by 87%. This show 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 engagement 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 Coms Day in Sydney. Feedback was very positive with customers and prospects continue 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 the operators globally.

At the end of the second quarter, our Board of Director 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 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 were $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, were $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 measure. 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 reflect 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 onetime costs associated with the modification of one of our office lease agreement following change 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 term 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 onetime $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. Repurchase 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 depends on our product mix.

On the operating expense side, we expect to continue at a similar run rate to the current quarter, excluding the onetime 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 question.

[Operator Instructions] 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. And 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. And I think that this represents also our business model and our, let's say, future expectations around the deals that we are signing. Overall, no major onetime event this quarter around the operating cash flow, just continue the momentum around our business model of the Security-as-a-Service, which is generating a 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 in 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 booking is strong and following the announcements we made in the last 12 months, it's fairly assume that this is -- 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 on the prepared remarks, we see strength both on the SECaaS and the smart product line. The SECaaS is obviously more recurring and consistent as a quarter-over-quarter subscription fees and therefore, more sustainable and predictable. But as we noted this quarter, we had also very strong smart product sales, which increased the share of North America in the region. Product sales are obviously nonrecurring. And therefore, it's not every quarter is going to be the same. But we do continue to invest in the region as we see this as strategic region to support our long-term growth. So, we are very pleased with our performance with both product lines. And specific to this quarter, the strength came from the -- the extra strength came from the smart product line on top of the large contribution to the 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. And as noted, on the product side, we see a demand for the Tera III platform. Tera III platform is sizable deals. Usually, it's 7-digit opportunities. And we had a few of them in the last few quarters that we announced, and they are now translating into revenue. And therefore, it's -- on the quarterly level, it's increased the share of those top customers. Usually, the Tera III is purchased by the larger carriers because it's high-capacity high-end platform. And on a quarterly basis, it's usually get them into the top 10 accounts. 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?

So as noted, the fluctuations are usually around the product side that is depends when the revenue land because we have deals that are in the multimillion dollar range. Therefore, it depends on the timing of the exact revenue recognition. We -- this is very normal for Allot, and this was always the case, and this is part of the plan. And we have and expect to see different balance between regions between quarters, depends 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 Q-over-Q, 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. And if you look at the entire 6 months, also, you 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. And in addition, deferred revenue represents the support and the 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 a very good visibility for the remaining of 2026 and 2027.

So, given that this is deferred revenue, you expect 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. As you can see, we have short-term deferred revenue, but we have also long-term deferred revenue. So short-term deferred revenue, if you look -- should be recognized in the next 12 months. And then we have additional $7.5 million of long-term deferred revenue, which will materialize only 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 in a similar level, and it's quite stable. We are always relied on the performance of our partners on the CSPs that are marketing the service and depends on their marketing campaigns and marketing 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?

So, ARR is driven by 4 vector 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 customers that already market the service. The second one, as we announced this quarter, it's about existing partners that add additional solutions either into new network domains, like one customer that we used to work with them only on consumer, and now they are expanding it into the SMB segment or customers that already offer to a segment like the SMB and now add another application like the identity test monitoring, which create an accelerated growth potential.

Last is, of course, new partnerships, new logos. We had one of those today this quarter as well. In this quarter, it was an existing smart customer that is now offering -- going to start offering the SECaaS. And those 4 vectors are driving growth over time. In the short, more quarter-by-quarter changes, it's really relied on how many end customers are onboarding to the services already available in the market. And this is what we need to -- our partner to execute well in order 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 needs 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. So, the new Tera III platform that we launched during 2025 is high-end capacity that can reach up to 3 terabit of capacity, but it also provide high-density communication like 400-gig links and many 100-gig ports for traffic management. We see a demand both from new customers that are now going into RFPs and definitely also from existing customers that's using our previous generations that the networks are growing. They are refreshing their data centers, their sites to support more capacity. And this creates a demand for expansion. I would note that these Tera 3, as mentioned before, is for the -- typically for the larger opportunities, which usually ends with 7-digit deals. And therefore, we are talking about relatively, I would say, a small number of opportunities, but with very large impact.

The larger amount of our customers are not requiring many terabits in different site, obviously, and they can use different products that we have that are designed for the, let's say, the mid-market and the smaller carriers. So, we do see a very good feedback from customers. They really love the product. They like the ability to see both network intelligence and cybersecurity use case over the same platform. They really like the future-proof of this architecture that is build cloud native to allow us to support and scale capacity. And this is what creates the demand. I think in the last 12 months, we announced about half a dozen of Tera III deals, and this is what was building our backlog, and we still have many more opportunities like that in our pipeline. And we expect this refresh cycle to continue in the next few years as different carriers are upgrading and need this capacity earlier, but some probably will be those 400-gig capabilities and so on a bit later down the road.

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, but the beauty about the ability to run the SECaaS service on this platform is that discrete change that from being the investment in the network infrastructure that is always important, but budgets are tight to a product that can help you to monetize and make money. So, what our customer really love is that now multiple organizations from the [ CTO ] organization, operation, the CISO, but now also the product can share the infrastructure investment. And therefore, in a very CapEx tight environment for the CSP that they are under pressure to improve profitability and show ways to maintain and hopefully increase their ARPU for their customers. This is a very appealing proposition. So, it's really position us different when we are competing with just network infrastructure providers. And I believe this is a great value proposition for our customers. And 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 sort of 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?

So, Jonathan, we just started to market this in the market, and we are seeing the demand coming from 2 direction. One is existing customers that are looking to add more value to their customers. We see some customers that are looking on this as an opportunity to increase their monthly fee, but they want to show more value to their customers. In some other cases, they see it as a need because of competitive pressure, maybe their operator -- competitor operator in the country is already offering a similar service. And therefore, they need to add it to their cybersecurity package they offer. So, it really depends on the specific market conditions. We don't see it as a core offering for our product. We still focus on the network security. This is where our strength, but I think the beauty of this application is the ability to complement and provide 360 degrees protection for our customers.

In addition, with new customers now that we are going into new opportunities, we have a more robust product offering. Not all of the solutions for cybersecurity can offer you like one platform with all the cyber protections you need. And we believe that eventually people are looking for simplicity. And this is why we continue to add more and more applications into the portfolio. So, I wouldn't view it as a one application that is going to be a game changer, but more of a holistic view that the platform is being able to provide multiple additional values and really comprehensive protection is what's going to create the biggest effect 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.

Yes. The Zero product is not a market by its own. It's more of another use case on the Tera III platform and network intelligence. People that implement our smart product lines, they want to see how they can better manage and optimize the network. And as mentioned in previous question, this is a cost. This is an infrastructure investment to improve quality, manage platform mix and so on. Identifying use cases like that, that actually create real monetization for the operator because we unblock even revenue leakage. And by that, we can recover them data packages that they are being ripped off and they can recover and get more money. This is more in an indirect way for them to justify the reason for the platform. So, this is the way we view it, and this is the way we position it, and it's mainly relevant for customers in regions that fraud is popular. We know that in some regions, you can just get all you can in package like in North America. In these cases, it's people spend less to do those fraud. But in some regions, more in developing countries, this is a big issue because they still pay per gigabit, and we are helping our customers to avoid the 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 customers with continued investments?

So, we reason and timing is really because of the strength we see in the business. We see that we have 4 consecutive quarters of double-digit growth. We see that we are cash flow positive, I believe, for 7 quarters, if I'm not wrong. And we see that we have enough cash today to have the balance both on investing in our product growth and investing in organic growth, have the option to explore inorganic growth opportunities, as well as we wanted to keep the optionality to have buyback in case we see the market terms are suitable. So, I think this is, in general, a vote of confidence of the Board in the company's strength, and it shows our maturity. And like many other companies, this is, I would say, normal course of business to have a buyback plan in place, so we can leverage in case of the relevant market conditions allow that.

This concludes Allot's Second Quarter 2026 Conference Call. Thank you for your participation. You may go ahead and disconnect.

Good day to all of you, and welcome to Allot's Conference Call to discuss its financial results for the quarter. I would like to thank Allot's management for hosting this conference call. [Operator Instructions] As a reminder, this conference call is being recorded. If you have not received the company's press release, please check the company's website at www.allot.com.

With me today on the line are Mr. Eyal Harari, CEO; and Ms. Liat Nahum, CFO. Following Eyal's prepared remarks, we will open the call for the question-and-answer session, both Eyal and Liat will be available to answer those questions. You can all find the highlights of the quarter, including the financial highlights and metrics, including those we typically discuss on the conference call in today's earnings press release.

Before we start, I'd like to point out the 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 early 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, delays in the launch of services by Allot customers, reduced demand and the competitive nature of the security services industry as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission.

Also, the financial results in 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 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 tables.

And with that, I would now like to hand the call over to Eyal Harari, CEO of Allot. Eyal, please go ahead.

Thank you, Kenny. We are pleased to report a very strong start to 2026. Our first quarter revenues were up 14% year-over-year, representing a meaningful acceleration over last year and marking our third consecutive quarter of double-digit year-over-year growth. Our results reflect the continued successful execution of our cybersecurity first strategy, both with SECaaS ARR growing nearly 60% year-over-year in the quarter. SECaaS revenue rose to approximately 1/3 of the total revenues in the quarter, up from approximately 1/5 a year ago. SECaaS growth is driving the continued scaling up of our recurring revenue base, which now represents 67% of total revenue and provide us with strong visibility into the quarters ahead.

We clearly have transformed a lot into a profitable growth company. These solid results, combined with the strong visibility gives us increased confidence that we are well positioned to continue our revenue growth trajectory at a mid-teens rate over the coming year. In terms of profitability, we are benefiting from the significant operating leverage inherent in Allot's business model. Improving gross margin, along with significant operating leverage led to substantial improvement in profitability. This operating leverage and enhanced profitability contributed to Allot generating its strongest ever quarterly operating cash flow. Other contributors of this strong cash flow generation of over $10 million in the quarter include the large multimillion dollar Smart projects we have won in the recent quarters as we began to execute on the backlog and the increased contribution from our SECaaS business.

This strong cash flow enabled us to end the quarter with almost $100 million in cash and no debt. Further strengthening our increasingly healthy balance sheet. This gives us significant flexibility to continue investing in our long-term business growth. The Board regularly reviews its capital allocation strategy. Our 3 main considerations are investment in organic growth, pursuing strategic compelling acquisitions and returning capital to shareholders. The goal of our capital allocation strategy is to maximize long-term shareholder value. We are very pleased with the continued growth in the SECaaS business.

Given the significant long-term potential we continue to see in this market, we have increased our investment in R&D, where we are innovating and bringing new products, services and capabilities to the market. We have also invested in increased sales and marketing efforts where we are expanding our reach further into existing customers and reaching new potential customers. These investments are translating into the strongly growing pipeline we see today. The pipeline expands across all of our regions, and we are gaining more prospects all the time. At the same time, we are supporting our existing customers to successfully market more of the cybersecurity services we power, leading to strong end user adoption while upselling new potential services, which would be attractive to their user base.

Our Smart product line remains an important and highly complementary part of the unified cybersecurity first platform. These products are built on decades of Allot innovation and deliver best-in-class network intelligence. We are executing well on the multimillion-dollar projects we have won in the recent quarters, including the deployment and upgrades of our Tera III platform with Tier 1 operators. As a reminder, the Tera III platform is our highly strategic next-generation ultra-high-capacity multiservice gateway, offering deep visibility and control over network traffic and providing a scalable foundation for our advanced cybersecurity and value-added services. During the quarter, we secured a significant Tera III win, a multimillion dollar upgrade deal with an existing Tier 1 customer. This win further underscores the strong customer interest and growing demand we are seeing for the Tera III.

Looking beyond this last win, our Smart pipeline remains very healthy with strong opportunities at multiple stages, both from existing customers planning their upgrades to Tera III and for new customer engagements that are advancing well through our sales process. Our multiyear Smart projects continue to provide good revenue visibility into 2026, 2027 and beyond and add an additional layer of long-term revenue stability. During March, we participated in Mobile World Congress in Barcelona, where we held a large number of meetings with both existing and potential customers and partners and showcased our latest cybersecurity and network intelligence offering. The feedback was very positive, particularly around the converged cybersecurity and network intelligence positioning and our road map for AI-enabled security.

At the end of March, we also attended the RSA Conference in San Francisco, one of the leading global cybersecurity event. RSA was again a highly productive event for us with strong interest in our offering. Both events help us further build our pipeline of opportunities for the rest of the year. It is clear that our broad suite of products and services driven by our cybersecurity first strategy is increasingly resonate with the operators globally, leading to new revenue streams from new customers and from upselling and cross-selling to existing customers. As I discussed last quarter, but I think it's important to stress again, the cyber threat landscape continues to evolve quickly, particularly with the TKI, which together are dramatically expanding the cyber-attack service for consumers, small businesses and enterprises.

Allot plays an important role in protecting businesses and consumers from ever-increasing cyber threats, and we strongly believe that today's environment has never been more conducive to our embedded network native, always-on cybersecurity offering. Allot solution offers a highly differentiated and convenient experience for end consumers who cannot easily protect themselves. Our SECaaS platform delivers real-time zero-effort protection that scales seamlessly with the operator subscriber base with no end-user configuration required, exactly what is needed to defend against fast-moving AI-powered cyber threats.

We continue to invest in extending our platform with new capabilities, many of them significantly enhanced by AI, both to address current risk and to anticipate the next generation of threats. These investments reinforce our competitive position and support our long-term differentiation in the consumer and SMB segments, segments which are underserved by traditional security solutions.

In summary, we are proud of our first quarter performance. Our success was driven by strong growth in our cybersecurity revenues following strong uptake by end users adopting the telco-provided cybersecurity services that we power. This strength led directly to substantial improvement in revenue, margins, profitability, and cash flow generation for the third consecutive quarter. With 67% of total revenues recurring, we have strong visibility. We believe that we can maintain and build on our positive momentum in the quarters ahead.

Looking ahead, we are reiterating our 2026 revenue guidance of between $130 million and $170 million with continued profitability improvements for the year. Following the strong first quarter, we feel increasingly confident towards the upper end of that range. Furthermore, we now have strong visibility ahead to predict 40% or more SECaaS revenue growth in 2026.

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 $26.4 million in the quarter, up 14% year-over-year. Revenue from our growth engine, Security-as-a-Service, were $8.7 million in the quarter, up 71% year-over-year, comprising 33% of our total revenue. Our Security-as-a-Service annual recurring revenue as of March 31, 2026, were $33.7 million, up 59% year-over-year. 67% of our overall revenue this quarter was recurring revenue.

I will now discuss the non-GAAP financial measures. For all our financial results, including the GAAP financial measures 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 71.3% compared with 70.4% in the first quarter of last year. The improvement reflects the high contribution of SECaaS to our overall revenue mix. As mentioned in previous quarters, our non-GAAP gross margin depends on the specific product mix sold in the quarter. Our expectation for gross margin in 2026 remains in the range of 70%, as it has been in previous years. As SECaaS revenue continues growing as a percentage of overall revenue, we expect our gross margin to continue trending higher over time.

Non-GAAP operating expenses for the quarter were $16.2 million compared with $15.9 million in the first quarter of last year. The slight increase in OpEx reflects our increased investment in sales and marketing to support our pipeline build, as well as investment in R&D to support our product development road map and innovation, in particular, our cybersecurity offering, which we discussed last quarter. While we are making select investments in sales and marketing and R&D, we remain disciplined and are working at a high operational efficiency. We reported a non-GAAP operating income of $2.6 million with an operating margin of 9.9% compared with a non-GAAP operating income of $0.4 million or an operating margin of 1.8% in the first quarter of last year.

Allot had 499 full-time employees as of March 2026. In terms of non-GAAP net profit, we reported $3.1 million in the quarter, or a profit of $0.06 per diluted share, compared with a non-GAAP net income of $0.8 million, or a profit of $0.02 per diluted share in the first quarter of last year. We generated record operating cash flow in the first quarter of $10.6 million, reflecting robust profitability and strong cash collection. The strong operating cash flow was partially attributable to one-time advance payments after reaching milestones from a few of our major Smart deals that we reported in recent quarters. This is also reflected in our increase in deferred revenue. This is a positive sign that we progress executing those projects and related revenue will materialize this year.

Allot has a robust balance sheet with no debt. Cash, short-term bank deposits, restricted deposits, and investments as of March 31, 2026, totaled $98 million versus $88 million as of December 31, 2025. Looking ahead to the rest of 2026, we are reaffirming our full-year 2026 revenue guidelines of between $113 million to $117 million. Following the strong first quarter, we feel increasingly confident towards the upper end of that range. And furthermore, we now have the strong visibility ahead to predict 40% or more SECaaS revenue growth in 2026. Our gross margin expectation for the 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 increase our sales and marketing as we continue to build our pipeline for the next several years. We also expect a modest increase in R&D expenses as we continue to invest in developing our products. Overall, we continue to expect profitability improvement for 2026 as the operating leverage inherent in Allot's financial model shines through.

That ends my summary. Eyal and I are now happy to take your questions.

[Operator Instructions] The first question is from Jonathan Ho of William Blair.

I wanted to better understand what opportunities you see ahead, particularly with your pipeline commentary. And also, just a broader question in terms of how you think about the adoption of AI within your customer bases, and particularly the autonomous agents. And what could that also bring in terms of opportunities for a lot ahead?

Good morning, Jonathan. So, as for the pipeline, we see a solid improvement both in both the Smart and SECaaS opportunities. I would start with SECaaS. As we pointed out in previous quarters, we expanded our sales efforts into reaching more CSPs and trying to build new partnerships, as well as working closely with our existing CSP base in order to continue and evolve the current partnerships. We see an increased number of opportunities in different stages, both with new and existing customers and we believe this will continue and evolve and mature along the year.

On the Smart side, as I pointed out earlier, we see a good demand for our newly released platform, the Tera III, which we launched last year, which is coming both from existing customers looking to upgrade their current solution as they need more capacity as their network grow as well as interest from new customers looking to -- on this platform with its advanced capabilities with a mix of networking and cybersecurity protection as a platform of choice. So overall, we see good demand, and we expect this to materialize over the next quarters.

As for AI, as we focus on consumer and SMBs, we mainly see a lot of initial adoption of like we all hear and like the ChatGPT, the cloud, we are not focusing on -- when we are talking about our end customers, we are not focusing on the enterprise customers, but more on the lower end. And there, the current usage is really unprotected. Many people are experiencing those tools without the awareness in many cases of the risk that it's encountered.

We are looking in our product road map and our innovation to see how we can add using our uniquely positioned network protection, and we can also protect them from the new threats that are arising due to those new tools. And what I can definitely say when we talk to our DSP partners and also when we do some surveys with customers, the awareness of the risk that is coming due to the AI agent is increasing and people are worried of fraud and impersonation that might come from those very powerful tools.

And then just in terms of a follow-up, where do you see the most opportunities to continue investing in sales and R&D? Can you provide a little bit more specific color around where those dollars are going? And how do you think about balancing that with showing operating leverage?

So as described last quarter when we laid out the plan for 2026, our main R&D focus is to see how we can continue and add more cybersecurity engines to our portfolio. This allows us to have better protection for consumer and SMBs, but it also provides us an upsell and cross-sell opportunity to our existing base. So, we discussed last quarter about solutions like network firewall and DDoS protection. And also, part of the coming innovation is how we protect from the AI threats. How we add identity protection as people are worried of their credentials being stolen and shared in the dark web. Geographically, we see that most of the advanced market, mature markets are already aware of the need for cybersecurity, but we are starting to see that the demand for cyber protection is also starting to mature also in developing markets.

As we have global partners and Allot with its decades of presence in the CSP space, we have a very global presence, and we try to leverage our good relationships with carriers around the globe. But definitely, the biggest worry today is in the developed market. And we believe over time, this will continue globally.

In terms of operational leverage, the fact we have the installed base of Smart customers, which we have hundreds of customers around the globe that we can have the same sales team also upselling them the security solution and cross-selling them other tools improve our operational efficiency over time. We see that as we continue to grow the revenue, our gross margin strengthen and our profitability expands.

The next question is from Nehal Chokshi of Northland Capital Markets.

Congrats on the good results. I got 2 sets of questions. First one is on the cash from operations, very strong. Is that a result of some outsized bookings that you experienced within the March quarter?

So, the cash expense is overall the profitability expand, and we saw this trend in the last few quarters. As pointed out in the prepared remarks, some of it is coming from new orders that we got through the Q1 quarter, but some of it is also a milestone we reached from orders we received during 2025 as we start to progress with the project milestone of some of our large customers. We start to get prepayments available as we progress well with the project.

Could you describe backlog levels relative to a quarter ago and a year ago?

Can you repeat the question, sorry?

Could you give some characterization as to the backlog levels relative to a quarter ago and a year ago?

So, we don't share on the quarterly level our backlog, and this is something that we focus on the revenues. Overall, we are seeing a good demand for our products, and this reflects by our increased visibility and our comment on our increased confidence that we can meet our highest range of the guidance and also our higher SECaaS projection for the revenue for the year.

Great. And then the other question is around the SECaaS. Glad to see the formal raise from double-digit to at least 40% year-over-year growth, which then you could say roughly equates to about $12 million of incremental ARR for calendar '26. You did almost $3 million in the first quarter. How should we think about the linearity of that incremental ARR as we go through calendar '26? And is this being driven by incremental carriers being layered in, incremental SKUs from carriers or just the ongoing expansion within existing carriers?

Okay. So overall, we see that the SECaaS revenue is growing sequentially, and it's quite stable growth. So, I think it's a safe assumption to assume it will grow about linearly over the year. We have strong growth coming from our base customers. This is what we call the organic growth of customers that already launched services. As we proceed along the year and mainly towards the end of the year, the growth is going to be supported by new wins within our existing customers and mostly new customers that we will win during the year will support our growth into 2027, because there is some time between the wins, the implementation of the solution and the ramp-up of the services.

So majority is coming from the services that we see, and we see higher attach rates and traction for the service. This is the majority of the revenue and the growth. And then it goes with some upselling and new customer that comes mostly support our longer-term growth.

The next question is from Matt Calitri of Needham and Company.

This is Matt Calitri from Needham here. The follow-up on the strong CCaaS strength seen here. Is there any color you can provide on any progress you made with new business wins or rollouts that occurred during the quarter?

So again, the quarter is based on the customer we won last year like Más Móvil in Panama and our good success with other Tier 1 customers around the globe that continue to promote their services with the customer base. I think what we see is that CSP finds cybersecurity as a very important service, and they give more retention in order to promote the service with their customers. We see some customers doing promotions and offer our cybersecurity service as in higher priority, I would say, and use it in some of their promos, which support the growth from our existing base. We do see good progress with our pipeline, as asked before, and we see more areas in different stages of our pipeline.

This goes with both our new models, as we mentioned, like the DDoS, the network firewall, the identity monitoring that are added capabilities that have more value to potential and existing customers as well as customers that we reach with our expanded sales effort as we continue to have more salespeople on the ground working with more CSPs to build new partnerships.

And so then as it relates specifically to the updated guidance for the 40% plus SECaaS revenue growth compared to the commentary for robust double-digit growth given last quarter. How did that change relative to your internal expectations? And what did you see over the quarter that informed this update to the outlook?

So, we are overall aligned with what we plan. We are, let's say, somewhat more optimistic. And mainly once Q1 passed, our visibility is higher. We are relied on our customers to do their promotions and go to market. So, a lot of the growth is dependent on the CSP marketing activities. As we see that Q1 ARR growth was very high. This gives us -- this means that we have the visibility to sustain growth of 40% or more in our SECaaS for the year. So, we are 1 quarter further into the year, and we are more confident that this high robust double digit that we targeted for the year, we can give more color and we also heard our investors want to see a more accurate estimate. So, we try to give more exact number and we are now feeling more comfortable to commit on this 40% expectation.

Just one last one for me. Can you help walk us through the mechanics of the Smart deal that you called out? I think you said you saw some prepayments this quarter that led to the free cash flow strength. Will there be any more of those prepayments coming through? And how exactly is that expected to flush through the revenue line?

So as we pointed, the high cash flow was generated from a few onetime advanced payments related to Smart deals that we started executing. The model of the Smart deals can fluctuate over quarter. So, payments are not necessarily related to revenue. And this is why we also remarked that you see also the increase in deferred revenue and this deferred revenue will be materialized over the year. Basically, the way that those deals are structured is that we are getting a lot of times prepayments that are related to executing milestones, and this is what happened this quarter.

The next question is from Jonathan Ruykhaver of Cantor Fitzgerald. Please go ahead.

So Eyal, your prepared remarks, I thought were quite constructive just around everything you're doing, right, the investments in R&D, sales and marketing, you commented on strong pipeline broadly for new customers, also the expansion opportunity for SECaaS. And I appreciate the heightened confidence just given what we're seeing in the increased guidance for SECaaS revenue growth. But I'm just curious, philosophically, what keeps you from providing a formal SECaaS ARR guidance? It does seem like that is the leading indicator in terms of where you're focused strategically.

So again, as I mentioned, our growth in SECaaS is dependent on our CSP customers, launch time of new services, their service adoption and their marketing campaigns. And therefore, we are relied on their efforts and their success, and their success becomes our success. Our ARR in the quarter give us the visibility to grow the revenue for the year. As we proceed over the year, and we see more and better visibility to the new wins and new launches and then we continue to evolve our SECaaS growth over the this year and next.

We continue to see the cybersecurity strategy as our main focus, and we are focusing both on the short-term growth and long-term growth in order to sustain this high double-digit SECaaS as the main growth driver for the company. And I think that this is working well for us, as you see in the numbers. And we hope to continue to do well as we proceed along the year with the further adoption of the cybersecurity services by our existing customers as well as new services that are going to be offered.

So I'm just curious, product revenue seem to drive more upside than services. And that's the dynamic we saw last quarter as well. So, can you just talk about that outperformance? Obviously, the Smart portfolio is doing well. But how do you see that playing out as we go through the rest of the year? SECaaS adoption seem like it could reverse that trend. Maybe some clarity on how we should think about that going forward?

No. So again, most of our growth is coming from the SECaaS. What we see that Smart is giving us good support with good stability in revenues and with some modest growth so far. As mentioned also in the previous quarter, in Smart, we have -- because this is less recurring, it's more it might fluctuate between the quarters, but so it also gives us the potential upside as it depends on project maturity and execution milestones. As we have some of our customers are in the millions of dollars, and this depends on meeting the milestone. It can move sometimes between quarters. And this includes potential to go even higher on the products if we execute faster and if we continue to see the good demand that we are seeing.

Overall, most of the growth, as you saw in the quarter, and this is the plan for the year, should be supported by the very high growth we are seeing from the SECaaS. And the total revenue is supported and giving us the Smart --given us the scale as well as it's given us the upside opportunity working with existing Smart customers to upsell our security solutions. So, this was the model. This is the model, and we see it working well, and we continue to go in this approach.

Fair enough. And then the last question I have is, can you talk about the adoption trends you're seeing around the introduction of the new security capabilities you've been making available. And that's also just the strategy between monetization of your higher tier price packages relative to a goal of improving subscriber expansion and retention? How do you balance those 2 when you look at those new products?

So overall, we got a very good market feedback about our new capabilities. Obviously, as we have some strategic partners, we work closely with them to share and adjust our road map and development to their strategy and direction. I would say that our customers really like the fact that they could offer very easily or relatively easily additional capabilities as they see this monetization opportunity, both directly as increased revenue. Some of them are looking to increase the cybersecurity package. For example, if I'm offering a package for $1, I can uplift it to $1.50 by adding more capabilities.

Some are looking for those capabilities as a way to attract more users and increase their attach rates. And some are also using it defensive mode as they see competition from their other CSPs and they believe they want to stay more competitive in order to retain their growth rate. Overall, the market understands that the consumer and SMBs are underserved and are under-protected, and they really like the concept that we provide, turning a lot to a wider and more expensive platform with more cyber engines. It's really well received by our customers.

Yes. And just on the CSPs looking at the monetization aspect of those new capabilities, what is the lag before you would begin to see an uptick in ARPU?

So, it really depends on the go-to-market. If they are to go and update the price for existing package, it could be faster. If they are going to launch it as a new package for new customers, therefore, it takes more time. So, it's very hard to give color in this stage, and it's vary between different customers. What we do see is that, and again, back to the previous remarks, we already have this visibility that we can grow at 40% or more in our SECaaS revenue. I think this gives you the most important part of the answer.

The next question is from Shaul Eyal of TD Cowen.

Congrats on a strong start to the year. Eyal, I wanted to ask about how you are using AI internally within Allot on sales and marketing, on R&D. Can you share some thoughts with us? And also, how do you think about hiring into 2026? And I have a follow-up for Liat.

Thank you, Shaul. So, AI is something that keeps us busy. I'm sure like any management in any company these days. We are looking on 3 dimensions. One is, first of all, what is the cyber threats for our customers that require us to enhance our product and road map. And our product team is busy now to identify the new threats and create new innovation to help consumer and SMB be more protected with the newly introduced threats coming from AI. For example, if we are able today to protect from fraud and sites, we see new categories of sites that are purely AI, either gold content that is purely generated by AI or malicious phishing attempts that are generated by AI. So, all of this is changes in the attack surface that we prioritize by our product team to see how we address.

Second, of course, we are trying to see where AI can help us in the development cycle. We are looking on the most advanced tools that are integrated into our R&D cycles in order to see how we can get more efficiency. We are in this stage, mainly focused as we want to create more innovation and to expand our portfolio. We are mainly trying to see how we can accelerate the R&D and accelerate time to market and introduce more capabilities with our current teams.

And third, we are looking how to create more operational efficiency across the organization. We are working on different initiatives trying to create automated processes that will make our team stronger. I would say that in general, what you could see that while our top line continue to grow, we are managing to keep the same operational expense. And again, it stays in similar level, which eventually increase our profitability. If we use AI smartly, we can continue to create more product differentiation and unique value proposition on one end, but also overall organization efficiency that continue to expand our profitability. So, this is very much across the organization.

And how should we be thinking about hedging the U.S. dollar versus the shekel or vice versa? Liat, can you help us in that respect?

Yes, sure. So, as we mentioned also last quarter, we continue to see the shekel strengthening. And we have expenses in Israel since we have headquarters in Israel. However, we are hedged for 2026. And therefore, when we modeled our expectations for 2026, this is already taken into consideration, and we expect to drive continuous profitability improvement, and we feel very comfortable doing so with our hedging approach for 2026.

There are no further questions at this time. I will now hand back the call to Eyal Harari, Allot's CEO, for concluding statement. Mr. Harari, please go ahead.

So, thank you, everyone, for joining us on the call and hope to see you all in our next quarter results. Thank you.

Good day to all of you, and welcome to Allot's conference call to discuss its results for the fourth quarter and full year 2025. I would like to thank Allot's management for hosting this conference call. [Operator Instructions]

As a reminder, this conference call is being recorded. If you have not received the company's press release, please check the company's website at www.allot.com. With me today on the line are Mr. Eyal Harari, CEO; and Ms. Liat Nahum, CFO. Following Eyal's prepared remarks, we will open the call for the question-and-answer session. Both Eyal and Liat will be available to answer those questions.

You can all find the highlights of the quarter, including the financial highlights and metrics, including those we typically discuss on the conference call in today's earnings press release.

Before we start, I'd like to point out the 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 early 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, delays in the launch of services by Allot customers, reduced demand and the competitive nature of the security services industry as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission.

Also, the financial results in 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 tables.

And with that, I would now like to hand the call over to Eyal Harari, CEO of Allot. Eyal, please go ahead.

Thank you, Kenny. We delivered a strong fourth quarter, concluding a year of accelerated revenue growth, significant expansion in cybersecurity ARR and solid improvements in profitability and operating cash flow. In 2025, we returned to double-digit year-over-year revenue growth, reaching $102 million, up 11% versus 2024.

We reported our highest level of profit and cash flow in over a decade, reflecting a significant step-up in operating leverage and demonstrating the scalability of our business model. Our primary driver of growth, our Cybersecurity as a Service offering continues to scale rapidly and is increasingly driving the quality and predictability of our revenue base.

As of year-end 2025, the ARR was up 69% year-over-year, and we continue to experience very strong traction. Recurring revenue continued to grow as share of total revenue and increased to 28% of revenues for the fourth quarter, underlying our transition towards a structurally recurring and more resilient revenue model. For the full year, recurring revenue representing 62% of total revenue, significantly enhancing our revenue visibility.

We ended the year with the strongest balance sheet in many years with over $88 million in cash and no debt, providing strategic flexibility to invest in growth initiatives while maintaining financial discipline. Overall, our results illustrate the success of our go-to-market focus and the power of our Cybersecurity-first strategy.

At the start of 2025, I laid out Allot's strategy for renewed growth. We are focused on being a cybersecurity-first company operating globally under a unified business unit with a proven synergetic capabilities of cybersecurity and network intelligence. Our success in 2025 demonstrates that this strategy is working. We believe our integrated cybersecurity and network intelligence solutions uniquely position us within the service provider ecosystem.

Our subscription-based cybersecurity offering as a service generates recurring monthly revenue and provide us with good visibility. The pipeline of new potential business continues to be strong, and our offering is gaining broad traction. The growth from cybersecurity as a Service offering is built on 4 pillars. First, we constantly are working to expand the number of CSPs and telcos that we work with to launch cybersecurity protection.

Every new CSP we partner with immediately expand our addressable market as it brings us a large new customer base. We recently reported the Compax Venture selected us as a cybersecurity partner, enabling its brands and community-based MVNO customers to differentiate their services with built-in cybersecurity powered by our solution. This partnership significantly enhanced the value proposition that these MVNOs offer to their customers and opens for us another scalable avenue of recurring revenue, extending our reach into new customer segments and use cases.

The second pillar, after launch, we expand our services to new end user segments at the CSP or telco, for example, from broadband to mobile customers. Third, we focus on growing penetration of our cybersecurity protection services among our end users by partnering with the customer to market the solution and ensure those subscribers understand the significant added protection they will get at the marginal increase to the monthly bill.

And finally, fourth, we look to upsell new applications and product to customers. As part of this strategy, we recently released our off-net solution, an example of a product with significant value added because it ensures that the end user can remain connected and protected to the CSPs or telcos even when the end user is not on their network. These innovations enable our customers to introduce high-tier security plans to their subscribers, increasing ARPU and driving incremental recurring revenue for both the operator and Allot. We have already upsell this product to both existing and new customers.

Looking ahead to 2026, as cybersecurity threats continue to intensify, we remain focused on protecting the consumer and SMB markets, segments that we believe remain underserved by traditional security solution. Our ambition is to evolve from providing 360 degrees protection of data to delivering 360 degrees protection of the digital life of the consumer. This expands security beyond networks and devices to the individual encompassing identity protection, scam prevention and AI-driven security services.

This vision reflects how we see consumer cybersecurity evolving over time and is supported by a pipeline of new AI-enabled products that we have been developing for over a year, strengthening our competitiveness and long-term differentiation.

AI is fundamentally reshaping the cybersecurity landscape. Attackers are increasingly using AI to operate at greater scale, speed, precision and personalization. At the same time, enterprises and consumer are rapidly adopting AI-driven application, introducing new and often unmanaged attack surface. This shift requires rethinking of traditional security approach. AI-enabled world must be proactive, seamless embedded into the everyday digital usage and require minimal to no end-user configuration.

Our Cybersecurity as a Service platform already delivers real-time zero effort protection, providing scalable, always-on security that evolves in step with rapidly advancing AI-driven threats. In parallel, we are actively leveraging the latest AI technology to further enhance our solutions, addressing current risk while anticipating emerging AI-powered threats.

The significant global investment in AI infrastructure is creating a growing need for advanced cybersecurity protections, and it is a meaningful opportunity for Allot. Within the SMB segment, we are executing aggressively to deliver more competitive end-to-end security solutions. We believe the small and midsized business market remains underserved in the cybersecurity landscape and that delivering protection via the network is the most effective approach.

We now offer immense protection beyond the business network with OffNetSecure, have launched Firewall as a Service, which is already live and deployed, and we introduced DDoS protection for SMBs, enabling protection of inbound traffic, not just outbound.

In addition, we expanded into identity with domain-level identity theft monitoring, helping SMB protect the digital identity of all the users across the organization. Together, these capabilities bring enterprise-grade security to SMB through a simple cloud-delivered model. Today, our Smart product is sold as part of our unified cybersecurity first platform with its best-in-class technology continue to drive strong demand. We are executing on recently won projects, including SG Tera redeployments and upgrades while continuing to invest to maintain our technology leadership.

Interest in the SG Tera platform remains strong, supported by the healthy pipeline from both existing customers upgrading and new customer wins. We were recently selected by a Tier 1 telecom provider in Asia in a multiyear deal worth high single-digit millions to deploy our network intelligence solution. This deployment will enable the operator to gain detailed application level visibility into network traffic and extract actionable insights. This follows our largest customer win in over 5 years, a tens of millions of dollar agreement signed last year with a Tier 1 operator in the EMEA region.

The deals include a long-term recurring maintenance and support component, underscoring the strength of our cybersecurity first strategy. Together, these 2 deals provide increased revenue visibility with Smart product revenues expected to be recognized in 2026 and 2027.

Looking ahead, we have a pipeline of solid opportunity for Smart. While SECaaS is our primary growth engine, the recent multimillion-dollar project wins reinforce Smart's role in providing multiyear revenue visibility and supporting the overall profitability with potential upside depending on the project conversion timing.

We continue to invest in marketing and sales. These investments are focused on strengthening our go-to-market capabilities, supporting new product launches and driving demand across both service providers and enterprise segments. As part of this effort, we will be participating in major industry events in the coming months.

In a few weeks, we will attend Mobile World Congress in Barcelona, where we plan to meet with many of our existing and new potential customers and partners and showcase our latest product and services. We will also participate in the RSA Conference in March, one of the leading global cybersecurity conferences. At RSA, we will demonstrate our cybersecurity solution and capabilities. Our goal is to generate increased traction with new potential customers interested in our Cybersecurity as a Service offering.

In summary, we are pleased with our 2025 performance, highlighted by the strong fourth quarter, double-digit revenue growth, improved profitability and cash flow and a significantly strengthened balance sheet. We believe 2025 mark for Allot a structural transition to a more scalable and profitable growth model, driven by our differentiated security first strategy and expanding recurring revenue base.

Given the continued growth in our cybersecurity business, strong visibility and solid backlog, our momentum is set to continue in 2026. We expect SECaaS to continue delivering strong double-digit ARR growth, increasing its contribution to the total revenue and driving overall revenue growth in 2026 to between $113 million and $117 million alongside continued profitability improvements.

Overall, I'm increasingly optimistic about Allot's future and excited to continue executing on our cybersecurity first strategy.

And now I would like to hand it over to our CFO, Liat Nahum, for the financial summary.

Thanks, Eyal. Revenue in the fourth quarter were $28.4 million, up 14% year-over-year. Revenue from our growth engine, Cybersecurity as a Service were $8.1 million in the quarter, up 70% year-over-year and comprising 28% of our revenue in the quarter. Cybersecurity as a Service ARR as of December 2025 was $30.8 million, up 69% year-over-year. For the year, total revenue was $102 million, up 11% versus $92.2 million last year, with Cybersecurity as a Service up to $26.8 million, representing 26% of our overall revenue. We finished 2025 with more than 60% of our total revenue being recurring revenue.

I will now discuss the non-GAAP financial measures. For all our financial results, including the GAAP financial measures and the other various breakdowns of our revenue, please refer to the table in our results press release. Non-GAAP gross margin in the quarter was 71.9% compared with 69.7% in the fourth quarter of last year. Non-GAAP gross margin for the full year 2025 was 72% compared with 70.6% for the full year of 2024. Non-GAAP operating expenses were $16.8 million compared with $15.6 million in the fourth quarter of last year. Non-GAAP operating expense for the full year of 2025 were $64.5 million, similar to $64.4 million for the full year of 2024.

We reported Q4 non-GAAP operating income of $3.6 million, up 101% compared with $1.8 million in Q4 2024. Non-GAAP operating income for the full year 2025 were $8.9 million, a significant improvement compared with $0.6 million for the full year of 2024. Allot had 490 full-time employees as of December 31, 2025. Non-GAAP net income was $4.1 million in the quarter or a profit of $0.08 per diluted share, up 105% compared with $2 million in Q4 2024 or a profit of $0.05 per diluted share. Non-GAAP net income for the full year 2025 was $10.9 million or a profit of $0.23 per diluted share compared with $1.6 million in 2024 or $0.04 per diluted share.

We reported $8.1 million in positive operating cash flow in the fourth quarter and $17.8 million positive operating cash flow for the full year of 2025. Significantly improving our liquidity position and demonstrating the cash-generating nature and potential of our business model. Cash, bank deposits and investments as of December 31, 2025, totaled $88 million versus $59 million as of December 31, 2024. As of year-end 2025, Allot has no debt.

Looking ahead to 2026. As mentioned in previous quarters, our non-GAAP gross margin depends on the specific product mix sold in the quarter. Our expectations for gross margin in the coming year is in the range of 70% as it has been in the previous years. Significant spending on AI data centers has created a sharp increase in demand and supply constraints for key components such as memory and servers. While we are actively managing our supply chain and cost structure, we expect this industry-wide trend to contribute to cost of goods pressure in the near term.

As for operating expenses, we expect an increase in our sales and marketing expenses as we invest in sales and building our pipeline for the next 3 years. We also expect a modest increase in R&D expenses as we continue to invest in developing our products. In addition, since the beginning of Q3, the U.S. dollar weakened significantly versus the Israeli shekels. Given the fact that our headquarters are in Israel, we have significant operating expenses in shekel.

Although we are hedging part of that expense exposure for 2026, the negative effect of this weaker dollar has been included in our profitability projections for 2026. Despite this FX and cost of hardware challenges, as Eyal noted, we are seeing strong traction with our security-first strategy that integrates cybersecurity and network intelligence, and we are forecasting double-digit revenue growth in 2026, driving revenues to between $113 million and $117 million. We also expect to drive continued profitability improvement. That ends my summary.

Eyal and I are now happy to take your questions.

[Operator Instructions]

The first question is from Jonathan Ho from William Blair.

Congratulations on the strong results and guidance. I just wanted to see if you could give us a little bit of additional detail on maybe what drove the strength in the SECaaS business this quarter as well as any additional detail on your comments about robust double-digit ARR growth in 2026. Is there any way you can maybe triangulate that for us in terms of what that ARR growth could look like?

Thank you, Jonathan. The results in the quarter for the SECaaS ARR were definitely strong and above our expectations. This was based on the very good adoption rates we see for the security services we already have launched with our customers. We announced in the last 4 quarters, multiple wins between Verizon and Vodafone and adding the new wins in MasMovil in Panama and additional services that were launched with new and existing customers. This expanded our addressable market. And we see that the traction for the security service continues to be strong and therefore, deliver this increased ARR number and revenue.

As for next year, we are just in the beginning of the year. We are still seeing that the demand is very high for our security services. And we are expecting, as we said, robust double-digit growth, which means we are -- while our revenue for the total company is double digit in about 13% to 14% in the midpoint, we are expecting the SECaaS ARR to be much higher than that.

While we don't have exact number to share in this stage, we believe it will be significantly strong. And this is why most of the growth for the year will come from the SECaaS ARR. The SECaaS ARR, just as a last comment, as you saw, was just passed 1/4 of our total revenue. So it starts to be affecting our total revenue with that increase.

Excellent. And then just in terms of your opportunity with the MVNOs, can you talk a little bit about what that could mean in terms of unlocking additional total addressable market? How long it takes for that partnership to maybe translate into revenue and bookings? Yes. Just help us with a little bit more detail there.

So I will start with the general comment about the MVNO market. We identified that our cybersecurity as an add-on is a unique value proposition. While we started focusing on the MNOs, the network providers, we identified that if we target MVNOs that are coming with a unique business proposition, this might make a lot of sense because they are typically looking for a differentiator. And we are working to offer different MVNOs to add cyber to their base package. And by that come with a more secure network proposition. They are typically not differentiated by the network quality or the big network provider brand like the Verizon or the Vodafone.

And we believe cybersecurity could be a nice differentiator. The partnership with Compax, which is an enabler to an MVNO launch is around embedded our security in their infrastructure, which makes it easier to the MVNOs to launch new services. We are currently targeting 2 new MVNOs that are about to launch during Q2 that the cybersecurity will be embedded in their offering. It's hard to know the exact influence because it's -- our success is relied on their success. We know they are targeting into going to millions of new subscribers, and therefore, it could be significant, but we really are dependent on their success in the market, and it's very hard for us to assess it internally at Allot.

So overall, we believe it's a new seed we planted that might evolve into something bigger over time. It's not going to influence in the next couple of quarters. But over time, with their subscriber growth and their new network launch, this is another addition to the mix. And we are hoping that following the successful 2 new MVNOs, we will be able to continue to market to additional MVNOs across the world.

The next question is from Nehal Chokshi of Northland.

Congrats on the great results, fantastic cash from operations. On the SECaaS ARR, you've already given a lot of color here on the qualitative drivers. Could you remind us a year ago, you, I believe, described also in a somewhat nebulous way your SECaaS ARR expectations of double digit. And I guess this is additional characterization from robust ARR -- SECaaS ARR growth. So the first question here is, is the wording intentionally more positive than a year ago?

I don't want anyone to speculate. We do see good demand for the solution. We are giving the visibility we have as we shared before, we are dependent on when we will bring the new customer wins, when there's new wins will be launched and go to market and the timing of those launches are not always in our control and also different marketing campaigns that our customers are having.

We believe that the overall strong growth will continue, and this is reflected in our overall top line growth. And we will share more visibility as the quarter progress, and we have more certainty and clarity on service launches. I would say that a significant part of our growth is coming from services that are already launched and already in the market. And we don't see any reason why this should not continue to drive strongly.

Okay. And then as far as the sequencing of incremental ARR as we go through calendar '26 by quarter, what are your initial thoughts on what that profile would most likely look like? I understood that there's a lot of uncertainty still.

So again, we are looking for strong double digit. If you compare to where we are and you see the incremental growth quarter-by-quarter, you can see that we are progressing very well. And even if you just take Q4 number, compared to where we were in Q1, you'll see an increase. We believe that the incremental revenue and also incremental ARR to be in the same range.

But as mentioned, this all depends on the go-to-market campaigns of our customers, which can bring us to even higher numbers as we see some strong campaigns going on in the market for the beginning of the year. And we will know more once we see the results coming in from the campaigns that are undergoing now and to see how they are successful.

On the first quarter, we are not -- we are building mostly on what we already have launched. And this is the shorter-term growth as we described in the different growth pillars. And when we go down into the year, we are relied on additional service launches that will drive additional growth to the second part of year. So overall, we are very confident about our SECaaS opportunity this year.

Okay. Great. Last question for me is that in the beginning part of your prepared remarks, you talked about a new SKU already being adopted by existing customers. Can you just give a little bit more detail around that?

I mentioned the OffNet product that last quarter, we announced the first customer win since we are continuing to work with both our existing and new customers to add this OffNet security component. While our key differentiator is that our security is embedded with the network, we identified additional demand for customers that they want to keep the same best-in-class protection even when they are not on the home network of their customer or their carrier.

So if I am now moving from a cellular connectivity to a WiFi, I want to make sure that I don't lose the same high level of protection. And this is where the off-net protection step in. This is an increased value that helps our customers to increase the revenue from the security package. It's like a higher deal of security. And by that is another revenue generator for Allot.

As I also added, we are adding additional new products that are being launched as we speak. We are going to share more information as part of the product launch campaign to further increase and add more cybersecurity protections and capabilities that will add into our upsell, cross-sell growth opportunity and drive the shorter and midterm growth for the company.

The next question is from Shaul Eyal of TD Cowen.

Congrats on completing a very solid year. Eyal, one of the topics [indiscernible] in recent weeks is whether AI is hitting software. And in that context, the more resilient cyber arena was not immune to sharp stock declines, although a lot shares showed great stability. Talk to us about what your customers are telling you in that context as you drive a different model than other pure security companies? And I have a follow-up.

Thank you, Shaul. So we do see that AI is increasing the awareness of the cybersecurity threat. I remind we are focusing on the lower-tier customers, the consumer and the SMBs that are typically more open market for cybersecurity. So most of us as consumers and small business owners are still very much unprotected and the awareness is much lower compared to where other enterprise customers are.

We see that it's easier to explain consumers that cyber threat is real and the whole buzz around AI and with all the good that it brings, but also the cybersecurity hazards that are created by it. This is something that we believe overall increase the demand and helps carriers to sell more cybersecurity protection in Israel, we see some commercial ads that are targeting for this audience. And this is why we believe that this will drive our demand for our product. And the beauty is that it comes from the network, and therefore, it's always on embedded in the solution and provide you a more secured service.

Eyal, maybe talk to us about progress at Verizon, maybe as an example. And how do you envision any potential upsells you haven't seen previously? In other words, how long does it take you to penetrate one of those CPSs and then start and upsell new capabilities that, for example, were not under the master agreement. Just curious.

So obviously, working with CSP is a long sales cycle. The beauty is that once you are working with the CSP and once you show you are a trusted partner and you already have the contractual framework, the sales cycle is typically shorter. And we definitely demonstrate that in past expansions, even with Verizon that we, in the past -- in the middle of last year, announced the expansion from -- moving from the protecting the fixed wireless access to protecting the mobile business customers.

Without getting into specific opportunities with specific customers, I would say that definitely those new additions of the OffNet, as mentioned, and the other new cyber protection engines that I shared on the prepared remarks, these are creating opportunity with our installed base to further enhance our revenue and ARR from those customers.

The next question is from Jonathan Ruykhaver from Cantor Fitzgerald.

So the question I have -- the first question I have is just around the opportunity you're seeing from Sandvine. From what I've read, it seems like Sandvine has emerged as a new entity. It seems like the focus might be more enterprise, cloud and MSP relative to Tier 1 carriers. So I'm just curious if you're seeing any incremental change as it relates to share gains vis-a-vis Sandvine?

In general, we are not commenting on competition. I would say that -- most of our focus, as you see in our plans and results is around the cybersecurity. So this is where we are mainly putting most of our R&D efforts and our strategic investment. We do see, as mentioned before, that our Smart product line is performing very well. As mentioned in my prepared remarks, we added another high 7-digit new agreement during the last few months that is adding to our backlog of opportunities around the Smart that give us good visibility into '26 and '27 to continue have the Smart product line as important contributor to our revenue growth and profitability.

And we continue while executing well and capturing the opportunity in the network intelligence space, we continue to grow and invest strongly into the cyber and continue to grow strongly in this space.

Yes. No, that -- I understand that completely. It just -- it seems to me, obviously, the Smart business is still pretty meaningful overall. And as it relates to AI as a potential disruptor, I am just curious when you look at resources and where you're going to invest in the future and just how does that coincide with the potential increase in network traffic that could be driven by AI. It seems that, that could be a benefit for the SG-Tera III platform.

Yes. Definitely, AI adds some network traffic in the AI data centers, and we are looking on ways how this adds more demand for traffic intelligence like giving more visibility on the AI use cases that are implemented, getting the right priority to make sure AI critical workloads are getting the right quality of service. And this is why we believe part of the Smart product line should add more capabilities that are in this space.

Yes. Okay. That makes sense. And then the final question, and you've alluded to this already, but from where I sit, it seems like being deployed across the telco infrastructure really has a lot of advantages as it relates to the traditional endpoint deployment for most consumer cyber vendors today. And I know you've talked about new capabilities on the cyber side coming out. Can you give us any more color on timing and specific products? It seems like AI-driven malware, phishing scams, identity theft. It's all a network native problem that you seem to be well addressed to -- well positioned to address. So any other details on that?

Yes. So one of the things I mentioned before that we see that consumers are looking for a higher level of protection, not only from the network threats, but more from, as you indicated, fraud-related concerns. And part of our innovation and where we are going to add more value is how we can further enhance our protection around identity, how we can use the network data to identify fraud.

For example, if you are trying to go into your bank account and suddenly you get a fraudulent domain like phishing attempts or that becomes today much easier to create. And we see that with AI, you create a new domain like instantaneously. And this is something we want to add as additional level of protection to our customers.

So from a timing perspective, are these opportunities that become monetizable as we look into 2027?

Yes. We are going to launch those capabilities during 2026, the first batch of capabilities. And therefore, we believe this will start to contribute to our revenue, some of them even in '26 and some of them into 2027.

The next question is from Matthew Calitri of Needham & Co.

This is Matt Calitri over at Needham.

I wanted to stick on the fraud point for a second here. And I was wondering if you guys have any anecdotes you can share on what end users are seeing in regards to the rapid evolution and increased occurrence of AI-generated fraud attempts and how Allot's technology is keeping pace with these more sophisticated attacks.

Yes. So I don't know if there is, again, a specific anecdote, but as pointed before, we see an increased sophistication and celerity in how often you are encountered with sophisticated impersonation when it's so easy to create new application and it's so easy to create new websites, it's easier for attackers now to go and target you with those fraudulent activities. While in the past, maybe it was done for larger enterprise because it required a lot of efforts to implement.

We see that today, it's so easy that also all of us as consumers and small businesses are under attack. What we are trying to do is leverage the unique visibility we have to the network, the fact we see the whole network traffic. We see new network patterns that are happening. And by that, we have -- we are well positioned to identify those frauds in a faster and more accurate way and give this level of protection to our customers.

Got it. Very helpful. And then are you seeing any acceleration in pipeline progression? And specifically, I'm wondering if you're hearing from CSPs that they've either lost deals because they don't have a security offering or they've had customers get breached and need more protection there? Anything in that regard would be helpful.

Yes. We definitely see around the globe, different occasions of cybersecurity events that affect dramatically the carriers around the globe. This usually gets front page on this -- on the country. And we all see that the risk on the consumer is higher, and we see different use cases and events that are populated.

Now we are seeing that cybersecurity services are becoming more and more popular but still a lot of -- there are still a lot of CSPs in different countries that are not yet offering that. So we do see some countries which we start to work with and then some other carriers also want to add this service. We see regions that in a certain country, there is no offering, and they are looking to now get also this as cybersecurity becomes more important.

So overall, the awareness for cybersecurity for consumer market is getting higher. And SMBs are -- weren't so concerned years ago, now are being more and more concerned with this and asking for higher level of protection. For example, we launched a new firewall as a service. Firewall is very well known and commoditized in the enterprise space. And we see that now also small businesses want to get the same level of protection from the incoming traffic, not only making sure their outbound is protected.

Adding to that, we are also looking to add DDoS protection based on the assets we have from the Smart product line that we are introducing as part of the SECaaS. So small businesses could get higher care of protection with the higher risk evolves.

The next question is from Rory Wallace of Outerbridge.

I was wondering if you could comment on book-to-bill in the Smart business in 2025. I know you mentioned securing the additional high single-digit millions order from an APAC customer in Q4 on top of the tens of millions order earlier in the year. So is it safe to assume that the book-to-bill was fairly positive? And if so, maybe you could contextualize the guidance for 2026 and what you're baking in as far as how much of the pipeline converts to revenue and backlog?

So the book-to-bill we have is way over 1 as we announced during the year. Starting the year, we announced multiple new accounts of multimillion dollars, then further updating about the tens of millions of dollars and then another new opportunity that we talked about with high 7 digits. All of that is accumulated to many millions of dollars that are still not recognized and our backlog is in a very good shape. And as we start '26, we have very good visibility with the mix of those new wins that adds to the backlog, adding to the recurring revenue that we ended the year of north of 60%.

So we are very well positioned to the year, and this is why we guided for continued accelerated double-digit growth on the total revenue for the company.

Got it. And with the new product launches, for example, the Firewall as a Service and even identity protection at the domain level, which you mentioned, I believe, for the first time today, how is Allot specifically well positioned to sort of modularly add on these additional products for SMBs and consumers? And is this something that's allowing you to stand out in current RFPs or bids with new carriers that see that you can offer more than just a simple anti-malware product, but you can actually bring this one-stop shop solution.

So Rory, it's both. It's -- first of all, when we are now going into new customers, our offering in cybersecurity engines is more enhanced and we can meet more and more requirements and demand. Part of our strategy was always to this 360 degrees protection. So in the years of product innovation, we build protection from the network, from the WiFi routers and from the DNS. We added the OffNet protection, and we added more capabilities on those different touch points.

So firewall, DDoS, identity are different additions that make our portfolio more robust and more attractive when we enhance with new customers. But as you pointed, it's super critical for our existing customers. We have more than a dozen of customers that contribute significantly into our ARR today. Large Tier 1 customers that are offering our current services. And all of those additions are an easier, quicker wins to add on top of the service because we already have the relationship, we already have the agreements.

We already have the success in the market with the current service. And they like us looking to see how we can make more money together. And all of those additions are going to support the growth in the coming year.

Got it. And then with the vision on the consumer side and how you plan to sort of extend capabilities beyond just data protection to digital life cycle. Could you maybe elaborate a little bit on how you see that unfolding?

Yes. So if we take the value of the networking as the anchor and the base of our protection, but once we are already offering a solution to the customer and with AI coming and creating those additional worries and threats, we want to have a wider and more robust protection to all of these capabilities or requirements. And identity is one example. So even if you are -- your identity is transverse in the network and exposed from different websites and different applications, while this is not a network security, that we are providing.

We believe that for the same customers that have already sold from the CSP new service, they want to see and hear how we can protect from identity tests and how we can help them with fraud, how we can help them with increased phishing attempts. We all get those messages. And with the current technology, there are still a lot of concerns from customers. And we are trying to get and answer this demand and create this upsell opportunity for us.

So networking is our anchor. This is our secret sauce. This is where we see a lot of the data. And we are taking this not only to protect the data part of the customer, but the whole identity, the whole experience and try to minimize all the threat that he has in the digital environment.

Got it. And then with the near-term environment, you mentioned kind of the incremental SECaaS ARR that we saw in Q4 of around $3.3 million. That's sort of a good level to use in Q1. And you mentioned promotional activity and go-to-markets that are going on. It seems like Verizon, in particular, is really leaning into the FWA business Internet security product. And is that something that you think could bode well, I guess, for the SECaaS business this year?

Yes. We see a lot of potential and demand for the SECaaS. As mentioned, our existing customers are promoting the services in different campaigns without specifying which customer is doing what. And as you saw the incremental revenue and incremental ARR this quarter was very strong, we don't have any reason to assume it's going to be softer in the coming quarters. We still see a lot of potential demand coming from our base.

And on top of that, we want to add more upsells and cross-sells with new customer launches that we are working -- our sales team are working to add new CSPs to the mix and upsell into existing CSPs, those new cyber protection.

So we have all the reasons to believe that the SECaaS growth will continue to be very strong this year. And we are working to continue to ensure that it's going to be a multiyear opportunity and some of our investment is already to secure additional very strong growth into following years.

Got it. And sorry, I'm running on here, but one more question just on the cost side. Liat mentioned the DRAM shortages impacting margins, which I think is no surprise for people in the networking space. With the Smart gross margins at around 70%, is it safe to assume that the -- I guess, the percent of the BOM of the product that's DRAM is likely not too material. And so this is maybe a few hundred basis points of margin headwind? Or is there any way that you could help us think a little bit more about gross margin and the DRAM impact in 2026?

Liat?

Yes, sure. So in general, as we said, we factored some of the cost constraints that we see around the hardware due to the demand and the constraints that we see with AI and specific chips and related items. We are still forecasting the 70% gross margin. And as we also stated, SECaaS is becoming more and more material as a percentage of our revenue. So of course, it also compensates. So we don't expect to be on the lower ranges like previous years, still in the range of 70% factors in those constraints as we currently know [indiscernible].

Got it.

Just to add to this, Rory, we still look on -- as you saw in the prepared remarks, that our profitability will continue to improve. We are seeing that while this external pressure is there, there is an opportunity for -- some of it will be to increase the price with the customers because we cannot control the whole price of the supply chain. And some of it is going to continue to improve because of the SECaaS, as Liat mentioned, that is coming with higher margin, and this goes into a higher portion of our total revenue.

So with all this pressure, we are still looking for expansion of our profitability. And with the growth that is expected, both top line and bottom line will improve very positively.

Understood. So it's more of an acknowledgment of the DRAM cost, but not a warning that it's going to significantly hinder the progress.

Well, I think you -- great job with the results in the call. I think you really -- you laid out the vision here for why a lot is both the traffic management and security capabilities really play into the current environment and how AI is a force multiplier for the hacking side and requires that protection on the SMB and consumer side. And I think also talked a lot about how Smart is benefiting.

So in light of the volatility in the stock today, would just encourage you and the Board to think about having a share buyback authorization to take advantage of days like today, I think with $88 million of net cash and $18 million of cash flow in 2025. You're more than adequately capitalized. And as we know, markets can be volatile and irrational in the short term. So just few steps from a long-term committed shareholder.

Thank you Rory, noted.

There are no further questions at this time. Allot's replay will be available on Allot's website in the next day. Thank you for your participation. You can go ahead and disconnect.

Ladies and gentlemen, thank you for standing by. Welcome to Allot's Third Quarter 2025 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 EK Global Investor Relations at 1(212)378-8040 or view it in the news section of the company's website at www.allot.com.

I would like now to hand over the call to Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin, please?

Good day to all of you, and welcome to Allot's conference call to discuss its financial results for the quarter. I would like to thank Allot's management for hosting this conference call. [Operator Instructions] As a reminder, this conference call is being recorded. If you have not received the company's press release, please check the company's website at www.allot.com.

With me today on the line are Mr. Eyal Harari, CEO; and Ms. Liat Nahum, CFO. Following Eyal's prepared remarks, we will open the call for the question-and-answer session and both Eyal and Liat will be available to answer those questions.

You can all find the highlights of the quarter including the financial highlights and metrics including those we typically discussed on the conference call 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 early prediction 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, delays in the launch of services by Allot customers, reduced demand and the competitive nature of the security services industry as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission.

Also the financial results in 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 includes the GAAP to non-GAAP reconciliation table.

And with that, I would now like to hand the call over to Eyal Harari, CEO of Allot. Eyal please go ahead.

Thank you, Ken. We are pleased with our excellent third quarter 2025 results. We reported double-digit year-over-year revenue growth for the first time in multiple years, continued strong SECaaS momentum and our highest level of operating profitability in over a decade.

We saw strength across all parts of our business, both in cyber security as well as network intelligence solutions. Revenue for the quarter was $26.4 million, up 14% year-over-year. Our profitability has likewise expanded strongly, and we reported a solid operating profit in the quarter versus a loss last year.

Our Cybersecurity as a Service growth engine continued with its excellent performance. As of September 2025, our SECaaS ARR was up 60% year-over-year, which demonstrates very strong traction for our service among end customers.

As each quarter passes, SECaaS is becoming an ever more important part of the revenue pie and it's made up 28% of our revenues in the quarter. We ended the quarter with over $80 million in cash and no debt, and Allot is back to a very strong financial position with a resource to further execute on our growth strategy. Overall, our results demonstrate that we are executing exceptionally well on our cyber-security first strategy and reviewed go-to-market focus.

Looking at some of the trends within the business, I first want to discuss our SECaaS growth engine. We are seeing increased traction among major telco for Cybersecurity as a Service solutions. As we progress, we are starting to see the fruits of our long-term investments in this solution.

The recent customer launches of our Cybersecurity service are going very well. We are actively supporting our customer launches and offerings are gaining traction with our end customers, driving our strong sales momentum.

During the quarter, we gained our first customer for our newly released OffNetSecure solution. OffNetSecure will allow the extending of network-based cybersecurity protection beyond the operator's infrastructure to subscriber using any network or Wi-Fi connection. It allows the operator to better seamless always-on security experience that travels with the user without requiring complex installations or device level configuration.

For the operator, OffNet Secure strengthens the customer loyalty, increases subscription-based revenue opportunities and reinforce their role as a trusted provider of digital security, backed by Allot technology. The pipeline of new potential business continues to increase. Our SECaaS offering is gaining traction not only with new CSPs and telcos, but also among the end customer of our existing partners. The positive momentum is allowing us to show accelerated growth and is providing us with a strong forward visibility. As you can see, we are working hard to successfully bring new SECaaS customers to Allot.

Our smart product for network intelligence continued to perform well and was also a contributor to our growth in the quarter. We are winning new customers, which are driving higher revenues, stronger backlog, improved visibility and we have a robust pipeline. Today, our smart product is being sold as part of our unified cyber-security first platform. And this integrated solution, best-in-class technology and innovation is enabling us generate increased demand. We are actively executing on the various projects we have recently won, including new Tera III deployments and upgrades where we are working closely with the customers to roll out the platform.

We are investing to bring new capabilities and functionality to maintain our technology leadership and our recent enhancement around visibility is creating new opportunities for us. Overall, our efforts to grow the smart business and product line continues to progress well and the backlog that we have built over the past few months provide us with solid visibility heading into next year.

In summary, we are very pleased with our third quarter 2025 results, driven by strong performance across all parts of our business, namely accelerating SECaaS traction and increased network intelligence solution sales. Looking ahead, we have good visibility. Our backlog is strong and our pipeline continues to be broad with many opportunities. I'm increasingly optimistic about our long-term future, and I'm excited to continue progressing on our cyber-security first strategy.

Given the continued accelerated SECaaS growth, our solid visibility and high level of backlog, we are increasing our guidance. We expect 2025 year-end SECaaS ARR to show an exceptionally strong year-over-year growth, surpassing 60%. We are also raising our full year 2025 revenue guidance to between $100 million and $103 million. As we move into 2026, Allot is exceptionally well positioned for the year ahead, and we see ourselves at the inflection point of a longer-term trend of ongoing profitable growth.

And now I would like to over our CFO, Liat Nahum, for the financial summary. Liat, please go ahead.

Thanks Eyal. Revenue in the third quarter were $26.4 million, up 14% year-over-year. Revenue from our gross engine, SECaaS was $7.3 million in the quarter, up 60% year-over-year and comprising 28% of our revenue in the quarter. Our SECaaS annual recurring revenue, ARR, as of September 2025 were $27.6 million. Our revenue increase was driven by growth in both our SECaaS and our smart businesses.

From a geographic perspective, I want to point out that in the third quarter, we had an increased level of America sales in line with our strategy to increase business in this region.

Specifically, we recognized revenue on a relatively large smart order and on the SECaaS front, we experienced a growing contribution from the U.S.

Finally, I want to point out that recurring revenue continued to grow as a percentage of our overall revenue, spending at 63% in Q3 2025 versus 58% in Q3 2024.

I will now discuss the non-GAAP financial measures. For all our financial results, including the GAAP financial measures and the various other breakdowns of our revenues, please refer to the table in our results press release.

Non-GAAP gross margin in the quarter was 72.2% compared with the 71.7% in the third quarter of last year. Non-GAAP operating expenses were $15.4 million compared with $15.6 million in the third quarter of last year.

During the quarter, we received the grant of approximately $1 million for research and development funding. This grant was also received in the third quarter of last year.

We reported non-GAAP operating income of $3.7 million compared with $1.1 million in Q3 2024. The growth in revenue and improved gross margin on a similar operating expense base led to significant growth in our operating income.

Allot had 497 full-time employees as of September 30, 2025.

In terms of non-GAAP net income, we reported $4.6 million in the quarter or a profit of $0.10 per diluted share as compared with $1.3 million or $0.03 per diluted share in the third quarter of last year.

During the quarter, we completed $46 million follow-on share offering, of which $40 million in gross proceeds were received during the second quarter and the remaining $6 million in gross proceeds received this quarter. Our share issued and outstanding as of the end of September were 48.4 million shares.

We reported $4 million positive operating cash flow in the third quarter. We're presenting the third quarter in a row that we are generating positive operating cash flow. We added over $10 million to our cash balance, and we are well positioned to drive profitable growth. Cash, bank deposits and investments as of September 30, 2025, totaled $81 million versus $59 million as of December 31, 2024. Allot has no debt.

That ends my summary. Eyal and I are now happy to take your questions.

[Operator Instructions] The first question is from Nehal Chokshi from Northland Capital Markets.

Congratulations on a good quarter. Eyal, you mentioned that you're seeing increased traction with the major telecom customer. Can you outline whether or not that's coming from higher attach rates? Or is that coming from more at-bats because potentially, you've now bundled at the default at the base premium bundle here?

Thank you, Nehal. So overall, we are seeing good progress with all of our new customer launches. I think we'll see positive trend both on the tax rates as well as we have good progress with new services we launched with our customers. This quarter, we updated on a Más Móvil in Panama that launched our SECaaS service and expanded our customer base. And overall, we are seeing good results with all of our customers that drove this very significant goals on both the SECaaS revenue and ARR and supported our highest revenue growth for the company in a while.

Okay. Great. You also mentioned that you secured your first customer OffNet secure. Can you give a little bit more detail of what is the customer profile of this first customer here?

So we have -- the OffNetSecure is a product we launched a few quarters ago with an aim to enhance our security protection for our end customers, not only when they are connected to the operator network, but also when they are leaving the network and using other ways to connect to their services. With the new product is starting to build pipeline, and we are in a multiple sales opportunities with both new and existing customers that are looking to enhance their service with this option.

I don't want to go too much into the specific of this first launch, but I would say that the main value for these specific customers that they really want their customers to be protected 24/7, and they wanted to combine our unique network security with the OffNet. So no matter where the customer is connected, they are always using our cybersecurity services and they don't have any -- and they mitigate the risk or minimize the risk to be under security threat.

Is it fair to say that this is customer materiality to Allot?

We appreciate the customer, and it's very important. I don't want to go into specifics. As I said, with the first customer that we already added this service, but we have additional multiple opportunities with both new and existing customers that are looking to further enhance our cybersecurity service with OffNet.

Okay. Great. My final question is that in the past quarters, you've commented on a strong smart pipeline. Do you continue to see that?

Yes. We announced in earlier -- earlier in the year that we won several multimillion dollar deal as well as very large deal we announced, I believe, in July or August. And we still see strong pipeline with opportunities both with existing customers looking to further expand their platforms. We see good demand for the Tera III new product, which is very high capacity service gateway solution. And we have a good mix of new and existing customers in the pipeline. So overall, as commented earlier by Liat, we see in this quarter strong results, not only from the SECaaS, but also from the smart product line, and we are hoping for this trend to continue.

The next question is from Jonathan Ho from William Blair. Please go ahead.

Congratulations on the strong results. Starting with SECaaS. Can you maybe unpack for us a little bit more what the drivers of the growth were? How much of this growth is maybe coming from newer contracts that are now coming online adoption and growth in existing contracts?

Thank you, Jonathan. So our main growth is coming from the large Tier 1 contract we announced in the last 2 quarters that onboarded, launched their service and continue to onboard new and additional customers. Overall, we are very pleased from the result of most of our strategic accounts that are continue to add new subscriptions and supporting the service. We announced this quarter about one new launch, Más Móvil in Panama. And some of the new projects and activities are going to support our longer-term growth. But when we look on our short-term quarterly changes, this is mainly by new customers joining on the services we already launched.

Got it. And then in terms of your network intelligence offerings, can you talk a little bit about the competitive landscape and pricing environment? It looks like this is inflected back to growth, but I just wanted to understand sort of the sustainability of that growth opportunity?

So our networking technologies, part of our call asset. We have a very large and a significant installed base of customers. Overall, the competitive landscape is less, I would say, easier these days due to some of the changes in the dynamics. We see that the overall telco CapEx spend is still tight and the telecom industry is still challenging, but we believe we have unique technology and with the Tera III product that is very unique, we are able to get best price performance in the market and by that, get really competitive edge.

I believe that in the next few quarters, there is definitely a potential to continue to grow well with this product, and this still continue to be a significant part of our plans. While in parallel, as you could also see that the SECaaS starts to be very meaningful. We passed more than 25% of our business from the cybersecurity. And if we continue with this pace, we are going to allow 30% of our business with the cybersecurity SECaaS service. So this positions us very well to continue the growth next year.

Got it. And maybe one last one for me. Can you talk a little bit about the drivers of growth in some of your larger SECaaS contracts and whether some of the ad campaigns that were launched that were pretty public and had an impact in terms of adoption. Is there any way to measure that or anything that you've taken away from a learning perspective?

So we are seeing 4 drivers for our SECaaS growth. One is, obviously, when we add new customers that are expanding our TAM into new subscriber base. This is what we are busy with our expanded go-to-market team that is going after new accounts. On accounts that we already work with, usually, we start with certain services, but we will continue with our customer success teams to further offer additional services, example, start with the mobile network. We are offering the fixed security. In some area, we are doing the business customers. We are looking into the consumer and vice versa.

So every accounts definitely those Tier 1s has a lot of potential to do more. For the services already launched, we are working closely, our marketing team and our consultants that bring best practices on what is the best way to go to market for our partners to reach to their customers. We are trying to help them with marketing materials, marketing campaigns and really more on a consultancy supporting mode. And we are really relied on their go-to-market efforts.

Typically, new services once launched, they are speaking after 2 to 3 years, and we see strong double-digit attach rates in many of our customers. And this is why this growth is usually sustainable along this time.

And last is we are looking to further upsell and cross-sell of new innovation, new products. We are very pleased that our latest release of the OffNet is now part of the portfolio. And this is helping us to get more revenue for the same customers that already attached to the cybersecurity service. We are continuing to work on additional innovations and bring more value to our customers to further help them to protect their customers.

So all of those are working together. Some are more longer-term growth. Some of them are more shorter-term growth. And because we are investing in all those in parallel, we are seeing a very good result in the 60% range -- 60% range of the -- range year-over-year, which we are very pleased of.

The next question is from Matt Calitri of Needham & Company.

This is Matt Calitri of Needham. On the SECaaS side, how is Verizon Live's penetration trending versus expectations? Are you seeing fairly linear scaling here? Or is it more of an exponential path?

So we cannot refer to specific customers, but as commented before, we are overall very pleased with our progress with all of our customer base. We see the results in the quarterly numbers. And as you saw, we raised our expectations to express 60% on a yearly level. So overall, we are very happy with the progress.

Okay. That makes sense. And then a cleanup here. When you said SECaaS revenue is going to about 30% of the business, was that expectation like by the end of the year?

Yes. So if we will continue the current trend and as we gave already guideline for the remaining of the year to reached 60% and above year-over-year, then this is indeed the expectation, yes.

Okay. Great. And then last one for me. On the product revenue strength you're seeing, how is Tera III playing a role in customer conversations? And what kind of color you can give there as far as new opportunities that's opening up and how conversations are changing there?

So we do see a good mix in our pipeline of new opportunities as well as discussion with our existing customers. Overall, we are putting a lot of focus on our customers success and making sure we are helping to support our customer business goals. And a lot of the growth and a lot of the potential we see is already with a very impressive installed base. We have some of the best carriers in the world that are working with us, both on the smart and secure product line.

We are trying to continue and improve and delight our customers to maximize the business value they get from our solution. And overall, in the telco industry, this is the best way to provide longer-term sustainable growth. We also see every quarters additional new customers that are adding to the potential. As we mentioned in the previous comments, we see -- we saw part of the quarters, new logos joining in -- on both product lines, and we are trying to keep the investment on hunting and going after new accounts and maintaining a healthy mix in our pipeline between the 2.

There are no further questions at this time. So that ends our question-and-answer session. In the next few hours, this call will be made available on Allot's IR website.

I would like to thank everyone for joining this call today and especially to Allot's management for hosting this call. And with that, we end our call. Have a good day.