Allot Ltd (ALLT) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Allot's Second Quarter 2020 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. You should have all received by now the company's press release. If you have not received it, please contact Allot's Investor Relations team at GK Investor & Public Relations at 1 (646) 688-3559 or view it in the News section of the company's website at www.allot.com.

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

Thank you, operator. Welcome to all of you to Allot's Second Quarter 2020 Conference Call. I would like to welcome all of you to the conference call and thank Allot's management for hosting this call.

With us on the call today are Mr. Erez Antebi, President and CEO; and Mr. Ziv Leitman, CFO. Erez will summarize the key highlights followed Ziv, who will review Allot's financial performance of the quarter. We will then open the call for the question-and-answer session.

Before we start, I'd like to point out that this conference call may contain projections or other forward-looking statements regarding future events or the future performance of the company. These statements are only predictions and Allot cannot guarantee that they will, in fact, occur. Allot does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of the impact due to the COVID-19 pandemic, changing market trends, reduced demand and the competitive nature of the security systems industry as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission.

And with that, I would now like to hand the call over to Erez. Erez, please go ahead.

Thank you. I'd like to welcome all of you to our conference call, and thank you for joining us today. Our second quarter was another quarter of solid growth. Revenues grew 23% year-over-year for the second quarter and reached $32.8 million. This is our tenth straight quarter of double-digit revenue growth year-over-year and I am very pleased with the results we achieved during the second quarter. I believe it shows we are on track and successfully executing on our plan. The number of opportunities we see continues to grow. And we continue to close new deals, win against competition, bring more business and grow our revenues. We expect revenue growth in 2020 to accelerate compared to our revenue growth rate in 2019. As we see our opportunities grow, we are continuing to increase our investment to capitalize on the significant number of opportunities that we see. Ziv will provide more details on our financials and forecast later.

Like most everyone else, over the last 5 to 6 months, our customers, our employees and our way of working has been affected by COVID-19 epidemic. I would like to discuss how this is changing the way we operate and then turn to see how we see our customers reacting.

As the pandemic and restrictions started, we set for ourselves 2 primary goals with equal importance that have remained our goals throughout. One, to maintain and safeguard the health of our employees and their families. And two, to continue to meet our commitments to our customers in a timely manner and achieve the goals we set for ourselves.

Most of our employees worldwide are continuing to work from home. While the numbers change from country to country as rules and conditions differ, in Israel, for example, approximately 25% of employees work from the office and the rest, work from home. Meetings, even those in the office, are held by videoconference to minimize physical contact. We continue to see high productivity across all departments.

For example, on July 31, R&D released several product releases in both Allot Smart and Allot Secure product lines. They were released on time with the required content and quality. Our customer success group continues to deliver, install and pass acceptance on new installations. Our global service organization is constantly lowering the number of open customer trouble tickets. Our ability to continue to sell, deliver and service according to plan is a testament to the spirit and dedication of all Allot employees worldwide. I want to take this opportunity to thank them all for their efforts and fantastic work.

We do, however, hear from our employees that the current situation is stressful for them. This is a result of working from home, lack of physical interaction and also due to the fact that communications are very structured in video conference meetings. The lack of the informal "coffee room" and corridor type interactions is starting to show. This is an issue we plan to address over the next few weeks as the holiday season will come to an end.

As I mentioned in the previous call, Allot has not laid off people as a result of COVID-19 nor have we forced any of our employees to go on vacation, with or without pay. In fact, we are continuing to invest in our products and capabilities and we are taking advantage of opportunities to hire talent as they present themselves.

It is worthwhile to note that while some companies are laying people off, voluntary attrition is lower these days, both in Allot and from what we can see, in other companies as well. Voluntary resignations in Allot during the second quarter were about half of those in the first quarter and were also lower compared to 2019.

I would now like to turn our attention to our interactions with our customers worldwide and share with you a few broad observations. CSPs are continuing to provide services to their customers, even though many of their employees are working from home. While initially, we saw significant traffic growth in the networks, traffic has now stabilized and even come down somewhat.

However, we now see that networks experienced higher than normal traffic surges as conditions in the countries change.

Overall, operators are adjusting well to the situation and for the most part, have managed to handle the change in traffic patterns. Most CSPs are continuing, not only with the regular business, but with new projects as well. While delays in processes and decisions continue, we do see accelerated efforts by CSPs to get back to business as usual despite not physically returning to their offices. Interactions with existing customers and people we know is continuing, and I think, to a very large degree, we are all adjusting well to virtual meetings replacing physical meetings. This is going very well, and we are able to actually do more than we used to as we are saving significant travel time. The more challenging part is establishing new relationships and generating new leads with operators we are not familiar with.

To this end, we are modifying our sales approach to increase our demand and lead generation. We are also increasingly transitioning our demo and proof-of-concept capabilities to the cloud to enable us to show our customers more with less physical presence. This approach is evolving, but we are already seeing new opportunities coming from it.

I will now try to briefly address each of the different market segments we are active in and provide a bit more granular color on what we see in the market. Allot Smart traffic management is used to provide operators visibility on their networks and manage their traffic. We are seeing growing interest by CSPs to gain visibility on the network as well as manage traffic surges and congestion on both mobile and fixed networks. I believe Allot Smart is well-designed to address these needs, and this gives us an advantage.

Given the increase in time spent on the Internet, we are seeing a growing need for governments to protect their citizens from malicious or illegal activity. As a result, we are seeing growth in the number of opportunities for our digital enforcement use case.

For example, the Department of Internal Affairs in New Zealand recently awarded us a bid to enforce the prevention of child exploitation by blocking sites that contain exploitative content. The growth we see in this use case is worldwide. In the enterprise market, larger enterprises, which are the focus of our business, do not seem to be significantly affected by the COVID-19 pandemic. However, in smaller businesses, we do see larger delays in projects and hesitancy to spend money now. We are seeing very positive signs from the agreement we signed with Broadcom to serve PacketShaper customers. In the few months since signing the agreement, our enterprise pipeline has seen a strong double-digit growth as a result of the agreement. I am very optimistic about the growth in this -- sorry, I am very optimistic about the growth this deal may bring to our enterprise business.

While some deals take longer to materialize, and it is a bit more challenging to bring new deals into the pipeline, some use cases are showing strong demand growth. So overall, on balance, I think the market demand for Allot Smart product family is similar to pre-COVID-19 demand.

To summarize, I believe demand for the Allot Smart product line, including congestion management, traffic management, steering, visibility, digital enforcement and enterprise use cases will remain solid for Allot in 2020 and beyond.

I would now like to turn our attention to the security segment. We see a significant increase of cyber attacks, most notably phishing attacks on both consumers and SMBs, small and medium businesses. This is giving rise to growing awarenesses on behalf of consumers and SMBs of the need for protection. It is also contributing to a growing awareness on behalf of operators that they should provide a secure broadband connection. Our security segment is seeing good traction.

Since the previous conference call, we signed several security expansion deals, 2 of which are recurring security revenue deals with operators in APAC and EMEA that already had recurring security revenue deals with us and decided to expand them. These operators saw the commercial benefit from providing security services to their customers and decided to go ahead and provide additional services to an additional customer base. This is very encouraging indeed.

We are also seeing new projects initiated and new RFPs published during the pandemic and even after lockdown started. Interest by CSPs to deliver secure broadband connectivity to their customers looks to be growing worldwide. We see new opportunities in EMEA, in APAC, in North America and even in Latin America despite the COVID-19 situation there.

Our pipeline for recurring security revenue deals is growing, and I am very encouraged from it. However, at the same time, we are seeing some projects getting delayed as operators are more focused on delivering existing services rather than new services. I remind everyone again that working with CSPs takes time, with sales cycles typically exceeding 12 months and the time from signature to launch of the service around 9 months. The current COVID-19 pandemic may delay some sales cycles by even a few months more and even delayed the launch of some of the deals we already signed. As I've discussed in the past, Allot is endeavoring to sign security deals in a recurring security revenue deal model. While not all operators will accept this model, we are encouraged to see that more and more operators do accept it. Our goal, therefore, is to build a substantial base of CSPs who accept the recurring security services model, which will launch security services to their customers. We will work with them to help a large number of end users sign up for the security service. These are the types of deals that will ensure the long-term growth and success of Allot.

It is still challenging to accurately assess the impact of the epidemic and behavioral changes on recurring security services, both in terms of number of operators and in terms of take-up rate of customers. Currently, we see a growth in our pipeline of operators looking to launch security services. And while there are delays in decisions and implementation attributed mainly to COVID-19, the pipeline growth is very encouraging.

In services that were already launched, we initially saw some lower growth during the weeks of lockdown compared to the period before. However, as countries open up, we see a return to pre-COVID-19 growth rates. One of the operators that launched the consumer services to customers that physically enter their stores is reporting that more than 40%, 4-0%, of the customers that are offered the service, sign up for it. In another operator who launched the service to SMBs, small and medium business customers, more than 30%, 3-0%, of the entire SMB customers signed up for the service within a year of service launch. A third operator who launched the service to fixed customers is showing that 17%, 1-7%, of the customers exposed to the service chose to sign up for it. These numbers are very encouraging.

I would like to say a few words about 5G networks and where we fit in. An increasing number of operators are moving ahead with their 5G plans and are rolling out 5G services. We expect this trend to continue, and we see a very large opportunity for Allot here. 5G networks have significantly higher bandwidth and will have a very large number of IoT devices on them as well as many breakout points connecting to the Internet. When asked in surveys, telecom operators and industry experts overwhelmingly agree that security will be a bigger challenge in 5G networks, and most would say that core network security is very important.

Allot has a unique position here to play in securing the user plane in 5G networks. Our combination of being able to analyze in real-time the full traffic flow. Our ability to mitigate DDoS attacks in line very quickly and to protect the network from rogue IoT devices puts us in a unique position to help operators secure their 5G networks.

Allot comes to the 5G world with a very strong telco-grade technology, products that scale easily to the 5G bandwidth requirements and full multi-tenancy support to enable differentiated services. These abilities are key differentiators for us in future 5G deployments. We are currently active in several major RFPs and technical trials of 5G networks, including in several Tier 1 carriers, and we view 5G as a potentially significant growth engine for Allot.

As I mentioned today, we see significant opportunities in the market across multiple products and use cases. We believe there is a market opportunity here we should take advantage of. Given the strong opportunities we see even in the current environment, we remain committed to leveraging our strong cash position to invest for future growth.

As we work with more Tier 1 operators worldwide, we take upon ourselves additional commitments that expand product development, delivery and customer support. In order to take advantage of these opportunities, we are temporarily increasing our R&D investments this year by using subcontractors to help us close product gaps quickly. In 2021, we expect R&D expenses to be lower than those in 2020.

I would now like to summarize the overall picture and the key messages. We are proceeding according to our plan and continuing to grow the business. In the Allot Smart product line, we see a strong pipeline. While some deals take longer to close, some use cases such as digital enforcement are growing. Overall, we see a solid demand for Allot Smart at similar levels to pre-COVID-19. It is in the security area that we see our long-term growth. We are very encouraged by the pipeline growth we see and by the consumer and SMB take-up rates as they sign up for the service. While these deals always take time to close, COVID-19 has pushed the closure of several deals away by several months. It is also delaying services launch in a couple of the deals that were already signed. Despite these delays, the pipeline is robust, and I am confident we will meet our goal for recurring security revenue deals this year.

Looking at our backlog, the market demands as we see it now and the pipeline of deals that we are working on, I would like to reiterate our revenue guidance for 2020 to be between $135 million to $140 million. I would also like to reiterate our guidance for 2020 of new recurring security revenue contracts signed in 2020 to exceed an MAR of $140 million. This will be, of course, on top of the $85 million MAR deals we signed in 2019. In addition, we expect to become profitable during the last quarter of this year.

And now I would like to hand the call over to Ziv Leitman, our CFO. Ziv, please go ahead.

Thank you, Erez. Before I begin reviewing the financial results for the quarter, unless otherwise noted, I will refer entirely to the non-GAAP financial measures when discussing operationally results, which is what we use internally to judge the ongoing performance of our business. Non-GAAP financial measures differ in certain respects from the generally accepted accounting principles and exclude share-based compensation expenses, expenses related to M&A activities, amortization of certain intangible assets, exchange rate differences and changes in deferred tax.

And now to the financial results. Revenues for the second quarter of 2020 were $32.8 million, growing by 23% compared to those of the second quarter of 2019. I would like to give you some more color regarding the revenue breakdown and diversification. The geographic breakdown for the second quarter was as follows: Americas was $2.8 million or 9% of revenue, EMEA was $23.6 million or 72% of revenues and Asia Pac was $6.4 million or 19% of revenue. The breakdown between product and services in the second quarter of 2020 versus the comparable quarter last year was as follows: product revenues was $22.3 million compared to $16.8 million last year, professional services revenues were $3.4 million compared to $2 million last year and support and maintenance revenues were $7.1 million compared to $7.8 million last year. The portion of communication service providers' revenues out of total revenues in the second quarter were 84% compared to 86% in the comparable quarter last year. I know that revenue breakdown may fluctuate from one quarter to another, depending on the specific revenue and deals we recognize in a specific quarter. Our top 10 end customers made up 71% of our revenues in the second quarter of 2020, at a similar level to that of the second quarter last year. Gross margin for the quarter was 70.7% compared to 69.8% in the second quarter of 2019. I would like to reiterate that our gross margin over the year is expected to average at around 70%. However, I remind you that the variation between the quarter reflects the product mix of deal mix sold in the particular quarter and is not indicative of any specific trend.

Operating expenses for the quarter were $25.4 million compared to $20.6 million in the second quarter of 2019. During the current quarter, we booked an expense of $1.5 million due to a doubtful debt, which impacted our G&A operating cost. This was due to a system integrator in Latin America and financial difficulties due to the COVID-19. In particular, I want to highlight that our R&D expenses were $9.9 million or 30% of revenues versus $7.3 million or 28% of revenue in the second quarter of last year.

Given the emerging opportunity in our target market, we have decided to accelerate our development plans and increase R&D at a faster rate than originally planned when we issued our expectation at the start of this year. We have taken this decision as we believe it will enable us to take better advantage of the market opportunities we see and build on our competitive advantages.

The total number of full-time employees at Allot worldwide as of June 30, 2020, was 674. This is an increase of 41 full-time employees compared with that of the end of the prior quarter, which stood at 633. Non-GAAP operating loss for the quarter was $2.3 million compared with $2.1 million in the second quarter of 2019. Non-GAAP net loss for the quarter was $2.4 million or $0.07 per share versus $2.1 million or $0.06 per share in the second quarter of 2019. For the 3 months ended June 30, 2020, the weighted average number of basic share was $34.9 million, an increase of 7,000 -- $700,000 compared with the same period last year, and the weighted average number of fully diluted shares was $37 million.

Turning to the balance sheet. Our cash reserve comprised of cash, cash equivalents and investment as of June 30, 2020, were $109.2 million compared to $110.7 million on March 31, 2020. $23.6 million out of the total cash balance is restricted due to advanced payment from customer, margin required for foreign currency hedging activities and other collaterals. Our inventory increased in the second quarter by $2 million to $17 million due to equipment waiting at customer sites for revenue recognition terms to be fulfilled.

Finally, in terms of guidance, as Erez has mentioned earlier, we continue to expect revenue to grow in 2020 to between $135 million and $140 million, representing accelerated year-over-year revenue growth. Our original plan for 2020 was for OpEx to be in the range of $95 million to $98 million. However, given both the doubtful debt expense in this quarter as well as our decision to accelerate our development plans, which will increase our R&D in the coming quarter, our OpEx will likely be a few million dollars above this range. We mentioned the expectation to be profitable in the fourth quarter of the year.

Finally, our focus is to sign additional recurring security revenue deals. While the pandemic has slowed down business development and there has been a delay in the rate of signing those deals, we remain optimistic and mention our expectation that in 2020, we will sign deals with MAR of $140 million.

As it takes some time from contract date to commercial launch, I know that the new deals will have -- sorry, the new deals we have recently signed and expect to sign this year will produce little to no recurring revenue in the current year, but will build a strong foundation for revenue growth in future years.

Overall, we continue to stand by our financial plan for 2020 and remain clear with our financial performance even more so, given the unique macro background we all find ourselves in 2020. That concludes my remarks. We'll be happy to take your questions now. Operator?

(Operator Instructions) First question is from Alex Henderson of Needham & Co.

So I wanted to drill down a little bit on the OpEx line commentary. You're suggesting that you're going to accelerate the R&D spend, was the most of that acceleration captured in the near $10 million number that you posted in 2Q? Or should I be expecting moderate acceleration again in the September and December quarters? And if that's the case, to get to profitability, should I be assuming fairly modest spending on sales, marketing and G&A, given the lack of travel? And then finally, just kind of stringing those 3 thoughts together. As we look out into '21, your comment that OpEx for R&D would be down year-over-year. Would that imply that the offset would be a rebound in sales, marketing and T&E travel expenses that would offset that decline, so you're flattening out the overall spend sequentially? Can you talk a little bit about how those interact?

Initially, our guidance where the OpEx this year would be between $95 million to $98 million. And now we're saying that it will be a few million dollars more than this range. So you can expect that there will be an increase in the OpEx in Q3, Q4. But having said that, we still stand the guidance that we'll be profitable in Q4. Regarding 2021, we didn't prepare the plan yet. So we cannot share with you the number of OpEx that we are expecting for 2021.

Yes. I'd just add to that, Alex. Let me add a couple of comments. Look, yes, like Ziv said, the OpEx will still grow a little bit in Q3 and Q4, but also look at the revenue line, right, where if you look at our first half revenues and we're guiding to total year revenues of $135 million to $140 million, means our revenues in the second half, we expect them to be higher than those of the first half. So that's why we believe -- when we run all the numbers, we believe that we will be profitable in the fourth quarter.

And like Ziv said, we -- I mentioned in my comment that what we're doing in increasing R&D this year in 2020 is we're using subcontractors on a temporary basis to accelerate some developments and close some gaps. And we expect those to go down next year. And hence, we believe that year-over-year in '21, we will have lower R&D expenses. As for the rest, we can't comment any further because we didn't really build yet the plan, the annual operating plan and budget for '21. And we'll be giving guidance on that as usual beginning of February next year.

Okay. So one of the questions I get fairly frequently is, it was great that you guys came in with such a big backlog increase into 2020 and I think the book-to-bill, if I remember correctly, was up 1.6 -- it was 1. 6 in the prior year. And I think that was the second year in a row of building your backlog. Are you able to sustain that -- are you refilling the backlog pipeline as we go through the year? Or is part of the growth here coming from a work down of a build in the pipeline and backlog that will leave us with less visibility because obviously, you had the year in hand in your backlog coming into this year. Can you talk a little bit about whether you're, in fact, able to deliver enough orders to hand them out as opposed to be working down backlog over the course of the year?

Sure. I believe we even guided to that at the beginning of the year. We said that we're coming in with a very strong backlog and booking off of 2019, like you've mentioned. But we also said that we expect that in this year, in 2020, our bookings will be lower than our revenues, and we guided to a book-to-bill of under 1 for the year, but still maintaining a higher booking level in 2020 versus the revenue level of 2020 -- of 2019. And I still believe that that's the case.

Great. And then one last question, and then I'll cede the floor. When you looked at the security transactions that you've done, I was actually expecting you would be lowering the MAR numbers because of the inability to get deals done in the COVID world that we find ourselves in. It sounds like what has happened is you've actually found it pretty normal to get deals done, but the execution is the primary issue, which means that the time line from the time you closed the deals to the time you revenue recognize them and the ramp of existing deals is a little slower. Is that the right spin to what you're seeing here that you're still able to get a pretty hefty attention around closing deals, but it's just an execution issue on ramping them?

It's -- first of all, definitely, there's an execution issue on ramping them, which is pushing out a couple of the launches that we have already signed and it's pushing out a couple of the launch dates where the execution actually begins and revenues start flowing. But it's also pushing out actual closures of -- closure of the deals themselves. Now despite that, the pipeline is growing, and we're seeing more interest, and we're getting more operators involved. And given where we are and looking at what we've signed so far this year, and what we expect to sign in the coming months, I feel confident with meeting or exceeding the $150 million MAR number this year -- $140 million. Is it a different MAR? I'm sorry, $140 million MAR target for this year.

Next question is by Eric Martinuzzi of Lake Street.

Yes. I also wanted to visit the delayed sales cycles and the delayed launches. Are we talking about issues where the -- because of maybe facility closures, customers aren't available to maybe run proof of concepts or aren't available to install equipment and that's what's delaying here? Or is it something beyond that?

That's part of it. But I think it's -- it all stems from the fact that the operators, they're not working from the offices and from their facilities as usual. So now they prioritize things a bit differently than they would have 6 or 12 months ago. So that means that -- and honestly, what they prioritize as they should is being able to deliver the current services, the current products and so on into the market, doing that as best they can. And then new things, while they are definitely getting back to new projects, signing new deals and getting new products out to their customers, they're getting a slightly lower priority when they have to prioritize. Some of that means, okay, when they send people to the labs, what are the projects that those people deal with? When they have people go and test things, what are the things that they test, et cetera, et cetera? So I think a lot of it has to do with not being physically on site, but I wouldn't say that's 100% of the picture. However, the other side of it, I think what we saw in the first months, like in March, April, we saw, really, them telling us, "Guys, we're focusing on what we've got now. And we'll deal with new stuff later." And now we're seeing much less of that. Now they're trying to get back to business. They understand, I think, like most of us around the world understand that this COVID-19 situation in one flavor or another is here to stay for a long time. It's not going away in the next few weeks. And we have to adjust and do things, and we have to do everything we used to do before in a different way. So deals are getting delayed a bit, implementation is getting delayed, but the interest is there. The necessity to do it is there. So I think we'll be able to meet our targets and sign up the deals, but it will just take us a bit longer than we expected.

Okay. And then diving a layer deeper on your outlook for the third quarter, you did -- you spoke in general that you do anticipate sequential growth in the third quarter versus the second quarter. Curious to know, right now, consensus is at $35.1 million. That would imply about a 7% sequential growth rate. Do you view that as realistic?

As you know, we don't give guidance on a quarterly basis, but it seems realistic.

I'm sorry, I didn't catch that.

We don't give guidance on a quarterly basis. But relating to your question, it seems realistic.

Okay. And then lastly, on the bad debt issue or the doubtful account write-down, just curious to know, do we have any other exposures like that in the accounts receivables, Ziv, either Latin America-focused or system integrator focused? Or do you feel like this is -- the house cleaning is done for the near term?

Of course, we have account receivables, open account receivables. You see it in the balance sheet, but I think this case was really exceptional. It was a combination of the specific company, the specific customer, the geography and I don't think that we have such an exposure in that scale.

Next question is by Marc Silk of Silk Investment.

In the 2 recurring security revenue expansion deals that were signed with existing customers, what percentage of the customers were offered the service initially? And what percentage are being offered to service now?

I'm not sure I have a percentage number. I would, as a broad comment, I would say it's a difference of tens of percent, but I don't know to give you a more accurate number.

Okay. In the past, you've talked about having discussions with U.S.-based telcos. Have these discussions intensified after the effects of COVID-19?

They've actually continued, I think, as they were before. Obviously, remotely and without the physical meetings and so on because operators in the U.S. don't meet people -- on a general sense, I'd say they don't meet people face-to-face. But beyond that, they've just continued as they were before, along the same track. And I'm quite positive about them.

Okay. So if there's a new president in the United States in the fall and they once again changed the net neutrality laws, how will this impact the DPI part of your business?

The DPI part of our business in the U.S. is very small. So that's one. And number two, even the fact that they opened up or rescinded net neutrality and allowed operators to put in DPI, most operators in the U.S. did not change their stance and didn't really install anything as a result of that, at least nothing significant. So I don't see that -- I don't see any measurable effect on our business, if there's a change on the net neutrality rules.

That's what I thought. I just figured we get it out there just in case there's no sell up after the election. Can you talk more about 4G? Like, for instance, like when did you start having discussions with -- I mean, 5G. When do you start having discussions with 5G providers? Because obviously, that's such a buzzword now and people want companies that are exposed to 5G. So maybe if you can talk more of those opportunities, I think that would be interesting.

Well, we started talking to operators, I think, last year sometime. But these things are -- they accelerate over time, right? You start discussions in a broad sense and then the operators start thinking about it more. So discussions intensify, you get more into technical issues and more into details. And then they issue some RFI and you respond to that. And they issue an RFP and you respond to that. Then they run proof of concepts and you participate in that. And all the time, the interaction is accelerating and intensifying. So this is a long process. This is not an easy one. It doesn't have a very, very definitive start and hopefully, will have a definitive and positive end.

We're seeing -- we're talking to operators today, really, that are launching 5G networks, either have launched or are planning to launch. In the U.S., in Europe, in APAC, there's -- really, there are more and more operators that are committing to 5G now. Each one has very different time lines. The U.S. is pretty much ahead of the game here, and you're installing faster than most other countries.

I think that recognizing our value in delivering user plane security to the network and not necessarily the traditional type of traffic management, I think, that's been an important factor in the evolution of our discussions with the various operators around the world of what is the value that we could bring them because 5G is simply -- it's not 4G on steroids. It's something different. Yes, it's much faster than 4G and in that sense, one may think, okay, it's like 4G was faster than 3G. So now 5G is even faster than 4G, but that's only one element. It's -- the architecture of the network is dramatically changing in 5G, where previously in the 4G networks, all the traffic from the phones, devices and so on went from these -- the devices that are spread all over to -- and brought into a central core, and from that core, they were connected to the Internet. And the same, obviously, back traffic from the Internet went into the core and then was sent over the network to the devices.

In 5G, the core is going to be distributed. It's going to be in many, many locations. You can have an operator in the U.S. with dozens of locations for the core, if not more than that, if not many dozens. And then many dozens of breakouts in connection to the Internet. So as the topology changes and the architecture changes around that, the challenges also change. So many connections to the Internet, so many IoT devices that could be affected. If you remember the Mirai incident a couple of years ago, where somebody took control of many IoT devices and created disruptive cyber attack on sites and locations. This is something that can be significantly intensified with 5G, and it's harder to protect against. And I believe that our technology, our ability to sit in the core and look at traffic at very high volume, understand the difference between legitimate traffic and illegitimate traffic, manage the illegitimate traffic and suppress it immediately wherever it hits the network first and so on, these kinds of things enable us to protect the 5G networks probably better than competitors. And I think that's something that is starting to resonate with operators that we talk to.

It sounds like an exciting opportunity, and I can't wait to hear more about that. I want to go back to my first question on the recurring security revenue, the expansion. So when you said -- again, you didn't really have the number, but you're thinking about at 10%, so what you're trying to tell us is that even more...

I said tens in plural.

Okay. So am I right to assume that there could be even more opportunities for those 2 customers beyond this one extension?

I'm thinking yes, there could be. There could be. I don't know if they'll take them or not, but there could be.

(Operator Instructions) There are no further questions at this time. Mr. Antebi, would you like to make your concluding statement?

Yes. Thank you. On behalf of the management of Allot, I would like to thank you for your interest and support. As we are currently not traveling, we will be holding virtual meetings with investors. So if you're interested, please be in touch with our Investor Relations team. Beyond that, thank you very much for participating, and I look forward to talking to you in the next quarter. Thank you.

Thank you. This concludes the Allot Second Quarter 2020 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.