Allot Ltd (ALLT) 2007 Q2 法說會逐字稿

Thank you for standing by, and welcome to the Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [OPERATOR INSTRUCTIONS]. I must advise you that this conference is being recorded today Wednesday, the 8th of August, 2007.

I would now like to hand the conference over to your speaker today, Jay Kalish, Executive Investor Relations Director for Allot Communications. Please go ahead, sir.

Thank you very much, Gemma. Thank you all for joining us today. During the call, we will discuss Allot's financial results for the second quarter of 2007. With us on today's call are Allot's President and CEO, Mr. Rami Hadar, as well as Mr. Adi Sapir, our Chief Financial Officer, as well as Doron Arazi, our incoming Chief Financial Officer.

On the call, Rami will first provide highlights of our second quarter performance. Adi will then walk you through the financial results, and then Rami will review our progress on our new service gateway and potential market opportunities for Allot going forward.

Before we begin, let me remind you that certain statements made on the call today may be considered forward-looking statements, which reflect management's best judgment based on currently available information. I direct your attention to the risk factors contained in today's press release, and in the Form 20-F filed by Allot with the U.S. Securities and Exchange Commission on June 28, 2007.

I would now like to turn the call over to Rami.

Thank you, Jay and welcome to the call. We were a bit disappointed with our top line performance this quarter, which came in a bit below our current expectations. But we believe that we are starting to see the results of our recent action which have resulted in resumed growth. At same time it was also an exciting quarter for Allot, as we continue to position the company to capitalize on the Tier 1 and Tier 2 opportunities.

From an operational standpoint, we have made important headway. Our focus therefore is to expedite the 10G Service Gateway program, are on track on the same side we continue to expand our worldwide customer base.

We are also pleased to see that channel sales in America has begun to improve during the quarter. The announcement of our new Service Gateway has created a strong interest both with Tier 1 target as well with some of our current Tier 2 customers.

I will elaborate on these issues in a few minutes. I would first like to hand the call over to Adi to review the financial results of the quarter. Adi, please go ahead.

Thank you Rami. Good morning, everyone. Let me take a few minutes to analyze the result we published earlier today. I will be discussing the non-GAAP numbers, which exclude the expensing of stock option required by FAS 123[R] and certain legal fees related to lawsuits recently filed against the company.

We've provided a reconciliation between the GAAP and the non-GAAP numbers in the tables accompanying the press release we issued earlier today. Now let's take a look at the second quarter results.

Revenues for the second quarter totaled $8.6 million, a 4% increase from the first quarter $8.3 million result, and a 6% increase over the $8.2 million revenues reported in the second quarter of 2006.

On a geographical basis, revenue for the second quarter broke down as follows, EMEA, 37%; Americas 33%, and APAC, 30%. Out of total revenues during the quarter, products comprised 79% and services 21%. Gross margin for the second quarter remained at similar level to the previous quarter. This continues to remain in line with our long-term model for gross margins of between 75% to 78%

Net R&D expenses in the second quarter totaled $2.1 million, as compared to the $2.4 million in the first quarter and were 25% and 29% of revenues respectively. Most of the decline in the quarter was due to a one-time provision related to severance expenses which was incurred during the first quarter. R&D expenses are expected to increase slightly in the dollar term throughout 2007.

Telemarketing expenses totaled $4.6 million in the second quarter, as compared with [$4.1] million in the third quarter, 53% and 49% of revenue respectively. The increased expenses are due to additional personnel and an increase in signals ratio and end marketing activities. Going forward, we expect sales and marketing expenses to increase slightly in dollar terms throughout 2007.

G&A expenses totaled $1.2 million in the second quarter as compared with $900,000 in the first quarter; 14% and 11% of revenue, respectively. The increased G&A expenses was due primarily to [self] compliance activity and additional professional [services] expenses.

Going forward we expect the G&A expenses to remain at similar dollar levels throughout 2007. As a result of all of this, our operating loss for the second quarter was $1.3 million as compared with $1.1 million loss in the first quarter. Our net loss for the second quarter totaled $299,000 or $0.01 per share as compared with net loss for the first quarter of $112,000.

On the balance sheet side, total cash, cash equivalent, and marketable securities totaled $78.5 million, a decline from $80.5 million at end of the last quarter. The decline in cash was related to an increase in trade receivable, as a result of back-ended nature of the quarter. And investments in CapEx meant for R&D primarily for service debt reported.

Trade receivable was $9 million at the end of the quarter, resulted in 95 days sale outstanding. Although the general payment terms and collection level remains similar to the previous quarter, the loud increase in DSO was also due to very a back ended nature of the quarter.

Deferred revenues at the end of the quarter amounted to $6.5 million, of which $4.8 million were shortened. It represents a $500,000 increase over the previous quarter. This led to probably to increase services sold but not recognized during the quarter.

Finally, I will be leaving Allot at the end of this month after almost 10 years. I am proud to have been part of the team that took the company from a small stock, up to a public company. I believe the company is in good hands with Doron Arazi assuming the CFO position, and wish him and the company much luck going forward.

Now, that concludes my remark, and I will turn back to Rami.

Thank you, Adi. Despite the slight weakness in the quarters result, I feel confident that we are continuing to execute on our carrier focused strategy. During the quarter, we continued penetrating Q2 carriers worldwide and received 12 large orders, six of which was new counts, including cable, DSL, and enterprise customer.

Although we recently announced the addition of customers such Vodafone Iceland, a multiplayer service provider offering mobile phones, fixed internet and data services. Cablemas, the second largest cable provider in Mexico, and Telefonica Del Sur, a regional provider of internet based multimedia and communication services in Chile to our growing client list. We are also [starting] to see increased interest in our DPI solutions in the wireless market.

Mobile wireless providers are seeing rapid [growth] of data traffic over the networks, and therefore are experiencing need similar to six broadband providers. During the quarter, we achieved initial commercial penetration in to a major wireless carrier.

Moving forward, our focus on this market will depend on the continued growth rates of data traffic over wireless networks. We also saw a pickup in sales from some of our channel partners particularly in the Americas, which grew 17% over the first quarter. We believe that this is another encouraging sign for us going forward. The announcement of service gateway in June has filled up significant interest not only among our current customer base, but also with carriers worldwide.

The platform changes the paradigm for DPI which goes from a defensive cost saving technology to a product that enables carriers to generate revenues from personal services as well as value-added services.

Since the announcement, we have already scheduled a number of large carriers for trial. With development plans on track and trials scheduled in September, we hope this would translate into initial orders from the product towards the end of this year.

Additionally, some of our larger customers have expressed interest in deploying the service gateway as the market accelerates migration from 1 gigabit per second interfaces to 10 gigabit per second interfaces. While this may delay purchasing decisions by several of our customers, we believe that this is a good sign for the long term.

We anticipate that the products would be generally available and begin to generate revenues as early as the fourth quarter of this year. Finally, I want to thank Adi Sapir who is leaving us at the end of this month, for his devotion and dedication to Allot over the past 10 years.

He played a major role in the success of our [public] offering and we want to wish him much success in his next venture. We appreciate his diligence in making a smooth transition for Doron Arazi, our new CFO. Doron comes to us from Verint, where we was significant -- where had a significant experience in managing the entire financial operation of the Israel subsidiary, from financial reporting all the way through M&A and related activities.

I would like to ask Doron to take a few minutes and introduce himself to you.

Thank you Rami for the introduction. I'm excited about joining the Allot team and helping manage the financial end of the young and growing company. I look forward to the challenge of billing out a financial infrastructure to support what I hope will be a significant growth over the coming years. I also look forward to meeting with the financial community over the coming quarters.

We will now take your question, operator please.

[OPERATOR INSTRUCTIONS]. And your first question from Daniel Meron. Please go ahead.

Thanks. This is Daniel Meron with RBC. Rami, can you give us a little bit of color on what gives you the confidence that you will have those orders towards the back half of the year? Do you already have the orders or is it just an indication that you have from -- and then trying to gauge the level of revenue from the pipeline? Thank you.

Yeah, hi Daniel. The first thing, as you've heard you'll know that traditionally in our industry, in our sector, and specifically to Allot to have a very strong gain on fourth quarter. What we are seeing is, as I said it in my remarks, there's quite a large pent up demand for sg20 products or 10G products. In general, this is an outcome of expedited migrations from 1 gigabit per second interfaces to 10 gigabits per second interfaces. So we feel there is a pent up demand building for the sg20 product. And yes this is backed up by specific tracking of large customers as they gear up to make a commercial decision that we expect to materialize them as soon as in Q4.

Okay. And maybe Adi, can you give us a sense on how we should think about the third quarter. Is it going to be another transitional quarter, and are we going to start seeing much more achievable growth in the fourth quarter heading in to 2008?

Hi, Daniel. As we've said last quarter, we are not going to provide any guidance on quarterly basis. However, you are much right by saying that the year will be much back-ended throughout the fourth quarter.

Okay, thanks Adi. And looking at -- in to 2008, what kind of trends should we look at? Is this when you think that you will finally have those major Tier 1 carrier wins? Also how -- what is the number of carriers that you are traveling with if you can just give us an update there?

We assume, I think we are pretty much on track. We've always been stating that we expect our decisions to be made in 2007 and commercial revenues in 2008. We are -- if anything we are seeing even an increasing interest and pro-activeness from Tier 1 carriers worldwide to deploy deep packet inspection technology. And we do feel that we will see some decisions come in this year and commercial deployments, next year.

Okay, I'll jump into the queue again. Thank you.

Thank you, Daniel.

Your next question is from Inder Singh. Please go ahead.

Yeah, hi this is Inder with Lehman Brothers. Thanks for the question. I wanted to just ask you about the demand you are seeing [described] on both the wireless side, and then it sounds like on the wire line side may be there are some deferrals in terms of decisions until you go from 1 gig to 10 gig. Can you talk about the wireless demand? Is that for the 1 gig product obviously at this point and do you expect that, that demand will continue? Or are those customers also likely to start looking at the 10 gig product?

Yes. Good question. So, in terms of the wireless market it's kind of caught us by surprise, and as well we have been watching it and we set it to potentially upside for us, as far as back as a year ago. The specific in commercially deploying into a major wireless provider I mentioned in my note is for AC-2500 product. And as you anticipated that although the data traffic there is growing very rapidly. I quoted one of the CPOs of major mobile product saying that traffic is almost doubling every six months. Right now we can handle a lot of [win] traffic with only one of our AC-2500 which scales to 5 gigabit per second throughput. So while this is a very interesting market for us and a huge potential, we need to see significant growth and better need to drive our own revenue in a significant way.

I think what you said is pretty consistent with what we heard from John Chambers last night on Cisco as well. He said that network traffic should continue growing in the 200% to 300% annual range. When you look at your service gateway that's coming out, can you tell us a little bit about the selling cycle that you expect to see there? How long do you expect some of the trials potentially to take? And then what sort of revenue recognition cycle might you have? Is it something that you will have to wait for customer acceptance on or will you be able to recognize revenue earlier?

I would say that the customers, the potential customers for the sg20 products would be split into two. The one that we anticipated all along that this is definitely a product being targeted for Tier 1 and Tier 1 carrier. And as part of that strategy, we obviously anticipated along the lines of how we expected the market to mature that decisions will be made this year and commercial deployments next year. What is a bit new to us throughout as the year develops, is that, some of our existing customers the larger portion of our Tier 2 customers already are interested in the 10g product. Some of them are expediting their transition from 1Gig to 10 G. So, while Tier 1 have the regular 12 to 24 months on safe cycle, we are well into it with some of these Tier 1. On the Tier 2, the sale cycle I would expect to be similar to the AC-2500 and AC-1000. These are cycles which are anywhere between let's say 3 to 12 months.

Some of this interest is actually from our existing customers. Some of this interest is actually from potential customers that started their evaluation process with 1 Gig, and now inviting our potential vendors to come back with 10Gig. This leads me to believe that the sales cycles would not be something starting from scratch, but a naturally evolution of the sales process already started with 1 Gig products.

And then just last question. We've see some of your other competitors, well perhaps they weren't competitors in the past. But Alcatel-Lucent and others starting to talk about the need for DPI as part of their solutions as well. It doesn't look like they have a solution ready yet? How would you describe your competitive advantage on the market? You talked about some of these carriers are asking for bids from vendors assuming that it's you and others as well. Tell us about the dynamic there, especially with the service gateway, what sort of advantage will you have in the marketplace?

Okay. First, not wanting to miss the point, the fact that this industry didn't have a name two years ago, and now everybody knows the deep packet inspection space, and obviously this is now inciting the interest of the larger vendors, it's very exciting to us. So, no competition when there is no market. So, this is a healthy reaction where the first movers are the smaller companies, and then are followed by one or two years, the larger vendors take interest.

Having said that, to develop a Layer-7 deep packet inspection product, one of the main elements, the core technology since the name itself our ability to be able to identify applications worldwide is something that one doesn't just generate in several quarters of R&D. Behind its very dedicated hardware platforms that do this in [real] time in 10 Gigabits per second. And on top of it's a very complicated software which typically will take a large company anywhere between two to three years. There is this (inaudible) data base of signatures of deep packet inspection know-how that one needs to develop. The fact that our losses in this space for the past nine years, and we have that database and every quarter we update that with tens of news signatures, I think is the major value to market.

The second element is revolution. As we and some of our existing competitors migrate from 1 Gig to 10 Gig, this is really a revolutionary state. We are seeing already some of our larger competitor may be falling behind in this transition, and it's even more difficult I think for newcomers. And lastly, I would expect naturally some of these larger players to try to integrate DPI into their existing product. This is even a more tough undertaking given the limitation of space and power to specific blades. I think coming up with 10 gig blades, and existing partners will even be more than a challenge.

Thank You.

Your next question comes from Glenn Anderson. Please go ahead.

Hi guys. Thanks for taking my call. Adi sorry to see you go, but good luck with your next venture. Question on -- in terms of the U.S., the America's performance this quarter, where was the return in strength, was it a recovery from the same area of weakness that you experienced in the pervious quarter, the low-end products or are you seeing more high-end sales in that market?

Okay. First a word of caution, as we always stated in the past, saying that this is a young industry. We are relatively a young company, and we are experiencing, as you all have seen lumpiness in how we grow the business. So, I want to caution how much of analysis and I would say lessons that we take every time a certain region of ours goes up and down. I'm happy that this quarter, it's up. But having said that as we announced end of last year we have the new General Manager and VP of Sales for the Americas, Vin Costello. He is new blood in the system, is very excited, very talented person with years of experience. And I think some of the improvements in the results we are seeing already in Q2, it's coming from his experience, his management style, and also changes in personnel, he is introducing to the U.S. team.

Got it, got it. Okay, so in terms of the -- so the recovery is structural then, it was driven by the fact that you rebuilt that team, which is a positive. And, in terms of the mix though, is mix shifting or are you seeing less and less of the sort of more enterprise focus sales and more carrier sales, has that shift continued or the rebound has that been driven by more enterprise sales? I guess that was the really the core of the question.

I don't have the breakdown for the Americas exactly in front of me, but I would say that we are not seeing any immediate shift in ratios in the Americas. But looking forward, obviously with Vin's background with some Tier 1 carriers, I would definitely expect from him to elevate our presence and our ability to win Tier 1 accounts in the U.S.

Got it, got it. The other question is the -- obviously the Tier 1 -- interest from Tier 1 carriers is positive, I understand it takes time for those deals to close. The dollar markets you addressed, the smaller carriers, the enterprises, those are also growth markets. What does it take -- what activities are you -- what are you doing to try to reenergize growth with those customers, because it seems that there is some lost momentum there. So, what -- how are you addressing the problem of weakness in those areas?

So, if we analyze let's say the non-Tier 1s and analyze the Tier 2s and enterprise, if I understand your question correctly, I would say that on Tier 2 service providers or any one of our small to medium size service providers, we have seen a continuous and nice growth. We mentioned that even in our Q1 discussions. That has slowed down a little bit in Q2, and my analysis again after watching our three months of how the market is reacting, my main observation is that some of these potential AC-2500 or 1 gigabit per second customers are delaying our decisions, waiting for 10G solutions. Obviously our mitigation there as we said in the beginning of the year, when invested -- increased our investment in R&D is to expedite our 10G offering.

As for the enterprise market, that's a bit tricky out there. We are solely a small player. We focus on a very vertical portion of the enterprise market, and that is the large enterprise. These enterprises that are acting as their own are private ISPs catering to their employees or students in case of university. That market has new technologies coming in, new players, it's a very dynamic market. The way we are trying to sustain our growth is really investing in our partners, in our sales channels, which are some of the results obviously from the first quarter being very closer to them, investing a little bit more in marketing activities as you say to reenergize growth in that segment.

Got it, got it. On that note, has -- have you seen any early signs of momentum from the partnership with Juniper?

Well, we've just announced the partnership. We have introduced in the market a very interesting joint solution, where our product walks parallel with their SBX product. This is not only a commercial sales partnership. I am not going to get into the technical details, but it's really our NetEnforcer's walking parallel with their SBX. There's a lot of benefits from that combination to the carriers. And what we are doing right now as we speak is, going out and pitching out the combined solution to some of their best customers and some of our best customers.

Got it, got it. Okay, guys. Thanks.

Thank you.

[OPERATOR INSTRUCTIONS]. There are no further questions at this time. Please continue.

We'd like to thank you all for joining us today. We are quite excited about the progress we've made, and we look forward to meeting with you individually and speaking with you at our next teleconference to advise you of our progress. Thanks for joining us.

Thank you.

That does conclude the conference for today. Thank you for participating, and you may disconnect.