Allot Ltd (ALLT) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to your Allot Communications fourth-quarter and year-end 2007 earnings results call.

My name is Rebecca, and I will be your coordinator for today's conference.

For the duration of the call, you will be on listen-only, and at the end of the call there will be an opportunity to ask questions.

(OPERATOR INSTRUCTIONS)

I will now hand you over to your host, Jay Kalish, to begin today's conference.

Thank you very much and thank you all for joining us today.

During this call, we will discuss the last financial results for the fourth-quarter and full-year 2007.

With us today on the call are Allot's President and CEO, Mr.

Rami Hadar, as well as Mr.

Doron Arazi, our Chief Financial Officer.

On the call, Doron will walk you through the financial results, after which Rami will provide an overall strategic update, including a review of some of the major milestones in 2007 and how Allot plans to build on these 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 judgments based on currently available information.

I direct your attention to the risk factors contained in today's press release and in the annual report on Form 20-F filed by Allot with the U.S.

Securities and Exchange Commission in 2007.

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

Thank you, Jay, and good morning, everyone.

Let me take a few minutes to analyze the results we published earlier today.

I will be discussing non-GAAP numbers, which exclude the expensing of stock options required by FAS 123(R), certain legal fees related to a lawsuit filed against the Company at the beginning of 2007, and an impairment charge with respect to certain [optional line] securities.

We provided reconciliation between the GAAP and non-GAAP numbers in a table accompanying the press release that was issued earlier today.

Now let's take a look at the fourth-quarter results.

Revenues for the fourth quarter totaled $8.7 million, a 25% increase from the third quarter's $7 million results, and a 9% decline from the $9.6 million revenues reported in the fourth quarter of 2006.

On a geographical basis, revenues for the fourth quarter broke down as follows.

EMEA 41%, America 29%, and APAC 30%, in line with the levels we have seen in previous quarters.

Out of total revenues during the quarter, products comprised 77% and services 23%.

For the long-term we are assuming that the services will be around 20% of quarterly revenues.

Gross margin for the fourth quarter was 75%, higher than 74% level in the third quarter, due primarily to increase in revenues.

We continue to believe that our long-term model for gross margin will be around 75%.

Net R&D expenses in the fourth quarter totaled $2.4 million, slightly higher than the third-quarter level of $2.2 million, and were 28% and 32% of revenues respectively.

The level of spending is in line with our model, as we continue to support activities related to developing the next generation of the Service Gateway.

We anticipate that these expenses will increase in 2008, mainly due to two factors.

One is the Esphion acquisition, and the second is the impact of the continued weakness of the U.S.

dollar against the Israeli shekel, which also impacted our fourth-quarter results.

Currently, the dollar is at its lowest point against the shekel in 10 years.

As most of our R&D and G&A expenses and to a lesser extent, some forward sales and marketing expenses are in shekels, the weakening dollar continues to have a negative impact on operating results.

Sales and marketing expenses totaled $4.9 million in the fourth quarter, as compared with $4.2 million in the third quarter, 56% and 61% of revenues respectively.

The increase in dollar terms is due primarily to higher commissions paid during the quarter as a result of increased sales.

G&A expenses totaled $1.4 million in the fourth quarter, as compared with $1.2 million in the third quarter; 16% and 18% of revenues respectively.

The G&A expenses again reflect soft compliance activity and additional professional services expenses.

We anticipate that the fourth-quarter G&A expense level is indicative for the expense level for 2008.

As a result of all this, our operating loss for the fourth quarter was $2.2 million as compared with $2.5 million loss in the third quarter.

Our net loss for the fourth quarter totaled $1.4 million or $0.06 per share, as compared with net loss of $1.7 million or $0.08 per share for the third quarter.

For 2008, we believe in the market opportunities and we continue to invest in R&D and continued building of our tier-1 salesforce.

At the same time, we currently anticipate that there will be operational improvement in the second half of the year, and combined with increased sales we believe that our results will improve towards the end of 2008.

On the balance sheet side, total cash, cash equivalents, and marketable securities totaled $70.8 million, a decline of $77.8 million at the end of last quarter.

The decrease in this item is mainly attributable to a $4.9 million devaluation of certain action rate securities.

Let me take a minute to go into this issue.

As of the end of the year, $40.3 million of our portfolio was invested in offshore and securities being rated AAA or AA on the purchase date.

As a result of the deterioration in the U.S.

financial market, these securities have recently suffered for lack of liquidity.

At this time, all securities in all portfolio continue to pay interest in accordance with their original terms.

However, since at this point of time it is difficult to determine when these securities will become liquid and what the current value is, based on initial third-party indications we have devalued these securities by $4.9 million and classified them as long-term assets.

With regard to $6.6 million of this portfolio, based on the initial indications we received, the decline seems to be other than temporary.

Hence, we have recorded a $3.7 million impairment charge in our statement of operations.

We believe that the cash and cash equivalents and the short-term investments are sufficient for our operations, and that the current lack of liquidity of the securities I spoke about before will not have a material impact on the Company's liquidity, cash flow, or its ability to fund its operations.

Before I analyze our accounts receivable and deferred revenue trends, I would like to mention that we have changed the method of classifying these items.

Under the new method, accounts receivable represents only revenues that were recognized but not paid as of balance sheet date, and deferred revenues represent the portion of deferred revenue that has been paid as of balance sheet date.

We believe that such a presentation better reflects our accounts receivable statements.

Accounts receivable totaled $6.6 million at the end of the quarter as compared with $4.8 million at the end of the third quarter.

The primary reason for the increase was the increase in revenues as compared to Q3 2007.

Our days sales outstanding increased to 69 days frown 62 days in third quarter.

The increase was due primarily to the continued back-ended nature of the business.

We will probably be around the 70 days level during 2008.

Deferred revenues at the end of the quarter amounted to $5.9 million, of which $3.8 million were full-term.

This number has been increasing during 2007, and a portion of the Q4 figure is attributable to a collection related to the tier-1 deal we announced in CALA earlier in 2007.

That concludes my remarks, and now I urn the call to Rami.

Thanks, Doron, and I would also like to welcome everyone who has joined us today on the call.

While 2007 was a transition year for Allot, we believe that during the year we have put the building blocks in place to future growth.

Let me take a few minutes to review some of our accomplishments in Q4 and during the whole of 2007.

We were encouraged with our fourth-quarter revenue, which were in line with our revised guidance which we gave at the end of the third quarter.

We had several major achievements during the quarter.

First and foremost, we rolled out our Service Gateway Omega on time and have already begun commercial deployment.

Not only is the Service Gateway delivering true telco-grade open platform supporting two 10G lines, but as we have discussed in the past, it is changing the way our customers are looking at DPI.

The platform enables service providers to use the information they have gathered from the DPI engine to offer revenue-generating services to those subscribers.

This is an addition to the cost savings that DPI enables on the OpEx and CapEx sides.

We are seeing a healthy sales pipeline developing for the Service Gateway offering and believe it will contribute to significant revenues in 2008.

One of the key applications that our customers indicated they wished to see integrated with DPI are security capabilities.

The ability to identify network attacks, as well as infected subscribers, has a significant impact on their ability to guarantee quality of service and reduce the costs associated with such attacks.

Our acquisition of Esphion, another achievement during this quarter, is intended to solve this pressing need.

While Esphion is a small company, we already have joint installations with several major operators in Asia-Pacific regions.

We anticipate incorporating Esphion's proven technology as a blade in our Service Gateway later this year, thereby offering a one-box integrated solution.

During 2007, we were pleased to add three tier-1 customers to our global customer list, including two mobile carriers, one in EMEA and one in APAC.

We believe that demand for the mobile market is only beginning.

While currently in this market, bandwidth demand is relatively low compared to wireline broadband network, it is growing rapidly, accelerated by the deployment of large-scale Wi-Fi and WiMAX networks.

We are pleased to be well-positioned in this market early in the implementation cycle.

During the third quarter, we announced a major wireline operator win in the CALA region.

This is an interesting project for Allot, which is an area of managed services.

With our broad product offering, we were able to offer solutions for all parts of the network, dealing with both the operators' network and the enterprise side of such type of projects.

When I compare 2007 to 2006, one of the big differences is that we had one large customer deployment in 2006 responsible for almost 20% of our revenues.

During 2007, we built up a strong and diverse customer base among tier-1 and tier-2 operators, and are not dependent on any single customer.

From a geographical standpoint, our sales are balanced among the three regions, Americas, EMEA, and APAC.

We are proud of our geographical reach and believe it offers solid growth opportunities going forward.

We are particularly pleased with the resumed growth in the America regions as a result of the efforts of Vin and his restructured sales team.

During the year, we realigned our sales team and started to build a dedicated tier-1 salesforce in our key territories.

This allows our salesforce to have this focused approach to the various segments of our sales targets.

We are already beginning to see preliminary results from this realignment.

Finally, we believe that the Service Gateway furthers our vision of expanding the scope of DPI from a cost-saving technology to a revenue-generating enabler.

There has been significant interest in our vision of Value Added Services, which was the main driver behind the Service Gateway design.

The new product has had good reception so far, and we continue to build a healthy pipeline forward.

As far as the future of DPI, if peer-to-peer applications were the initial drivers in this market, over-the-top video or WebTV will probably be the main driver going forward.

Analysts are currently projecting that this type of video traffic will increase 50% to 80% per year for the next five years.

This will place a tremendous burden on networks, and the challenge of ensuring quality of service for video is indeed daunting.

We are seeing a steady of rise in video traffic over networks in which we are deployed.

We have already invested significant resources to meet our customers' demand to identify and manage video traffic.

In summary, 2007 was a transition year with more or less flat growth.

I believe that we are starting 2008 from a stronger launching point.

Our customer base is well-diversified over territories.

Our main service provides our customers a healthy combination of cable, DSL, mobile, and satellite operators, and we have no dependency on a single large customer representing more than 10% of our revenues.

We will now take your questions.

Operator, please.

(OPERATOR INSTRUCTIONS) Inder Singh.

Thanks very much for taking my question.

As I attend 3GSM here in Barcelona, pretty much every carrier or vendor that you speak with is mentioning DPI as one of their key requirements from the carrier side and one of their planned offerings or current offerings from the vendor side.

Most of the larger vendors seem to be talking about integrating it in some way.

Obviously, your standalone solution has higher performance metrics.

Can you tell us how you have been winning some of the wins that you have announced recently in Europe and Asia, and then how are you finding the competition, especially given that now your product is out there, it seems to be out there at the time when carriers want it, and yet everyone has tried to jump on the bandwagon?

Can you talk about the competitive dynamic you are seeing and whether features or price -- what is more important in the sale that you're making at this point?

Okay.

Thank you, Inder, and actually I am also speaking from 3GSM in Barcelona as well, so a point well-made.

In general, I would say that there has been some use of deep packet inspection technology around mobile networks for quite a while, maybe one or two years ago.

But DPI is a very broad technology -- technology term.

So far we've seen some limited deployments, many related to our content base charging, but very shallow, very superficial.

The next wave of DPI deployment is really following the tracks of the fixed operators.

The more we see 3G out there, the more we see data traffic growing over these mobile networks -- and what I am hearing from various mobile operators is anything between 2 times to 3 times growth per year -- they're starting to incur the same needs and the same challenges as their fixed counterparts, whether it is cable or DSL.

So thus the need, whether it is being able to manage application, whether it is the need to manage subscribers, or the combination thereto.

These are the kind of applications that only a pure play DPI player like us and whoever is our competitor can offer.

So it's a whole new paradigm of DPI for mobile networks right now; whether it is dealing with congestion, whether it is needing to guarantee certain quality of service for certain application, and moving forward with our Service Gateway incorporating value-added services.

The one thing is that while deployments are well underway with fixed networks, mobile given the relative low bandwidth is just now starting, but could be on the mid to long-term a huge opportunity growth.

Can you just comment on the competition that you do see in the business that you are in?

Is it Sandvine, is it Ellacoya?

Is it some of the Alcatel-Lucents?

Who do you run into the most these days?

It seems like everybody is getting into this market.

Right now, it is just beginning, but if we are seeing competition it is the usual focus, DPI are players, the names you mentioned are examples.

The DPIs that the operators are talking about now are in line with the products that are offered by the pure-play DPI vendors, so basically the same competition, to answer directly your question.

Then just lastly, price is not a big driver at this point, in your view?

I mean, I am thinking about your market expansion possibilities here, in terms of getting the profitability level higher and the ability to sustain those margins going forward.

Good point in that definitely right now, the units we do have in place are very likely loaded.

To give you a ballpark, our AC 2500 product which scales up to 2.5G full duplex or 5G throughput on several of these use fairly large networks, many times it will be only partially loaded, even though it's sitting behind very large networks.

This is why it is important for us, one, to continue to see bandwidths continue to rise in this exponential mode, which is the case, and reaffirmed by my meetings here.

And the second is incremental revenues for us, but also for our customers, and that is to incorporate value- added services.

Thank you.

Maybe I'll catch up with you here in Barcelona.

I appreciate it.

Love to do that, Inder.

Take care.

Glen Anderson.

Hi, guys.

Thanks for taking my call.

A couple questions.

First of all, the set of tier-1 deals that you have been pursuing, there was sort of the set of seven, and I guess I wanted to understand where those decision processes are.

Have any of those moved -- has there been a change in the timeline of the decision process with respect to those?

Then I have a follow-up.

Okay, so out of the six or seven processes that we have been involved with for 2007, as we expected, some of them came to conclusion.

Not much turning to actually strong revenues, but some did.

Our share of that is the three operators I mentioned, two on the mobile side and one, a fixed one, in the CALA region.

Okay, so the two mobile ones were of that sort of set of seven.

Correct, and some are continuing but slipping into 2008.

Okay, very good.

Second question with respect to the competitive environment, Ellacoya's merger with Arbor creates a bigger player.

Sandvine is now a bigger player.

You guys are now sort of the small guy in the market.

Do you see a need to develop your partnerships to be able to compete longer-term, or how are you responding to the changes in the competitive environment that are going on?

So first, regardless of the changes in our competition and the consolidation we are seeing, we are constantly working to expand our partnership and our basis.

Early on this year, we discussed our partnership with Juniper, mainly their SDX policy server device.

That's in place and we are pursuing customers jointly together.

Occasionally, not on an exclusive basis, but we are working with the top large system integrators in a region (inaudible), our basis of that's in place, and we are constantly striving to expand that, both with tier-1 and with tier-2 type of partners and system integrators.

Having said that, looking at the competition, the meaningful movement is between Arbor and Ellacoya.

In a way, it is interesting to see the validation of how deep packet inspection is expanding beyond just a means of optimizing networks and saving on CapEx and OpEx, which really as we envision moving into Value Added Services.

Our step to acquire Esphion and immediately add denial of service capabilities on our solution, in a way was countered by the merger between Arbor and Ellacoya; basically two private companies merging together and trying to do the same.

The competitive difference I would point out is our anticipation that the strength of folding Value Added Services in one single platform is really embedded in our Service Gateway approach.

I believe that it will take some time for the competition to catch up on this approach, although I'm hearing that both from customer feedback and also from indirect competition that definitely everybody sees that as the right way to go.

We now need to move quickly and execute and enjoy this product advantage we have just created.

Okay, very good.

Thanks, guys.

Daniel Meron.

A quick question here.

If you can just give us a little bit more color on the guidance side.

I missed the first side of the discussion, but can you give us a little more sense on what you expect in the first quarter, how should we think about the advancements throughout 2008, in light of the slower decision-making?

Then also operationally, where do you think your cash goes here, from $71 million this quarter?

I will let the latter question to Doron.

On the first in guidance, at this time, Daniel, we're taking a cautious approach and not sharing guidance with the street.

We'd like to get a little bit more traction into 2008, see the funnel that we have built for the SG-Omega product materialize before we gain more confidence to share numbers with the street.

We have been wrong in the past.

I'd like not to do that again, even at the expense of disappointing you a little bit.

So I hope again to gain confidence in a few quarters and be able to share guidance with the street again.

In terms of cash, Doron, do you want to comment?

Yes, basically summarizing 2007 and putting all the extraordinary issues aside, we have actually consumed around $5.5 million of cash from operations.

I believe that the situation in 2008 is going to get better as we go forward and grow our revenues.

Okay, and how should the forex headwind and lower interest income impact you guys?

Basically with regard to the foreign exchange, yes, it has an impact on our numbers and it is definitely going to have an impact on our 2008 operational results.

In terms of cash and the interest going down, that is also being taken into account, but as we intend to look over our expenses carefully, we believe that towards the end of the year our operational expenses are going to be more and more efficient, and by that improve also our cash flow.

Okay, thank you very much.

Good luck going forward.

(OPERATOR INSTRUCTIONS) We currently have no questions coming through, so I'll hand back to your host.

Thank you very much for joining us today.

We look forward to meeting with you.

We will be attending the Oppenheimer Investment Conference in New York on Wednesday, February 27th, and we hope to be in touch with the community in the coming quarters.

Ladies and gentlemen, thank you for attending this afternoon's conference.

You may now replace your handsets.