Allot Ltd (ALLT) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Allot Communications first-quarter 2008 earnings results conference call.

My name is your John and I'm your conference coordinator.

For the duration of the call, you will be on listen only.

However, at the end of the call, you will have the opportunity to ask questions.

(OPERATOR INSTRUCTIONS)

I will now hand you over to [Mickie Sahar] to introduce today's call.

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

During this call, we will discuss Allot's financial results for the first quarter of 2008.

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

Rami Hadar, as well as Mr.

Doron Arazi, Chief Financial Officer.

On the call, Doron will then walk you through the financial results, after which Rami will provide an overall strategic update, including a review of our progress on the roadmap we discussed last quarter and Allot's growth drivers for the year.

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 annual report on 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 Doron.

Thank you, Mickie, 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 expenses related to a law suit, amortization of intangible assets that were acquired from Esphion, and an impairment charge with respect to certain Auction Rate 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 first-quarter results.

Revenues for the first quarter totaled $8.3 million, a slight decline from the fourth quarter's $8.7 million result and similar to the revenue reported in the first quarter of 2007.

On a geographical basis, revenues for the first quarter broke down as follows -- EMEA 37%; America, 32%; and APAC 31%, in line with the levels we have seen in previous quarters.

Out of the total revenues during the quarter, product comprised 72% and services 28%.

For the long-term, we assume that services will be in the range of 20% to 25% of quarterly revenues.

Gross margins for the first quarter were 75%, similar to the last quarter level.

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

That said, as was stated in the past, gross margins may be temporarily pressure in the near-term as the Service Gateway-Omega becomes a more significant portion of our sales.

This is expected until the product will be produced in larger quantities and some cost-cutting measures are achieved.

Net R&D expenses in the first quarter totaled $3 million, higher than the fourth quarter level of $2.4 million and were 37% and 28% of revenues, respectively.

The increase in the expense level is mainly attributed to the Esphion acquisition and the continued weakness of the U.S.

dollar relative to the Israeli shekel.

The level of spending is in line with our model.

Sales and marketing expenses totaled $4.9 million in the first quarter, similar to the previous quarter, 60% and 56% of revenues, respectively.

The decrease in commissions relative to the previous quarter was partially offset by the continued weakness of the U.S.

dollar relative to the Israeli shekel, Euro and other Asian currencies.

G&A expenses totaled $1.3 million in the first quarter; was a slight decrease from the $1.4 million level of the previous quarter, 15% and 15% of revenues, respectively.

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

As a result of all this, our operating loss for the first quarter was $3 million as compared to our $2.2 million loss in the fourth quarter.

The continued weakness of the U.S.

dollar compared to the first-quarter had an adverse effect on our operating expenses of approximately $400,000.

Financial and other income for the first quarter was $1.1 million, similar to the income level of the fourth quarter, despite the decline in the interest rate, primarily due to revaluation of assets denominated in currencies other than U.S.

dollars.

Our net loss for the first quarter totaled $1.9 million, or $0.09 a share, as compared with a net loss of $1.4 million, or $0.06 per share, for the fourth quarter.

For this year, we continue to believe in the market opportunities and we continue to invest in R&D and our Tier 1 sales force.

On the balance sheet side, total cash, cash equivalents and marketable securities totaled $63.2 million, a decline from $70.8 million at the end of last quarter.

The decrease in this item is mainly attributable to the $3.9 million related to the Esphion acquisition, which closed in January, and additional $2.2 million devaluation of certain Auction Rate Securities, which I described in detail last quarter.

Accounts receivables totaled $6.1 million at the end of the quarter, similar to the end of the fourth quarter.

Our days sales outstanding rose slightly to 67 days from 64 days in the fourth quarter.

This is in line with the 70-day range I discussed last quarter as the target level for 2008.

Deferred revenues at the end of the quarter amounted to $5.4 million, of which $3.9 million were short-term, similar to the deferred revenue at the end of the fourth quarter.

That concludes my remarks and now I turn the call over to Rami.

Thank you, Doron.

And I would also like to welcome everyone who has joined us on the call today.

The results of the quarter are pretty much in line with our expectations, given the traditional first-quarter seasonality.

I wanted to take a few minutes to focus on four significant achievements during the quarter and show how these achievements set the tone for our growth strategy in 2008 and beyond.

First, we were pleased to announce the addition of two Tier 1 mobile operators, one in Europe and one in APAC.

We see the mobile market as a future growth market.

Currently, mobile networks are not carrying the huge amount of data that we are seeing in wireline networks.

That said, our mobile customers are telling us that they are seeing accelerating growth in data traffic on their networks.

Many of our customers start offering flat-rate data packages to their subscribers, but are finding that this is a suboptimal way to run their networks.

By incorporating our newly-released subscriber management and quota management overall DPI solutions, our customers can introduce more sophisticated billing packages and thereby increase revenue.

While mobile is a small portion of our sales at this time, we believe that our early entry gives us a good head start in this virtually untapped market and positions us well for the future opportunity.

The second achievement is the continued addition of large ISPs to our growing customer list.

Our large customers during the quarter were again from across the globe, as we either added or continued to work with major operators in Europe, APAC and America.

During the quarter we again did not have a significant customer concentration, with no customer amounting to more than 10% of revenues.

The third major accomplishment for the quarter was the continued acceptance of the Service Gateway-Omega by new and existing large customers.

We are pleased to announce the deployment of the system at several major operators during the quarter, and are encouraged by the developing pipeline at both Tier 1 and Tier 2 operators.

The Service Gateway is a technology and feature leader in the DPI market on many different levels.

Its true 10-gigabit-per-second performance delivers 10 gigabit-full-duplex or 20-gigabit-per-second throughput over [four times] 10-gig ports.

Its standard ATCA chassis enables our customers to have a future-proof system.

It's fully upgradable for increased needs for speed and features in the future, as opposed to closed solutions which are prevalent in the market today.

Its open architecture enables us to offer integrated value-added services on a single platform.

We expect that the Service Gateway will be a major factor in Allot's sales growth in 2008 and beyond.

The fourth accomplishment is the completion of Esphion acquisition.

The integration of R&D teams remain on track as planned.

As we discussed in the past, Esphion provides Allot with the ability to offer customers denial-of-service attack protection.

This is one of the features that our customers have been requesting lately, which results from our vision of using DPI technology to offer additional value-added services to subscribers.

We expect to offer a unified solution which will offer both the denial service attack detection and mitigation by the third quarter.

We anticipate that an integrated solution with this feature also as blade on the Service Gateway will be available towards the end of the year.

Last year, I discussed with you a vision of expanding the scope of DPI beyond integrating an entire range of value-added services overall Service Gateway.

During Q1, we started to build the fruits of this strategy, as some of our service provider customers included just such features.

Through partnerships, we were able to offer voiceover IP quality monitoring, Web-caching and peer-to-peer caching.

We believe that this is only the beginning of a trend of integrating value-added services with DPI, and we are well positioned to capitalize on these growing opportunities going forward.

Looking to the second quarter, based on growing pipeline for the Service Gateway, we expect sequential growth for that quarter.

We will now take your questions.

Operator, please.

Thank you (OPERATOR INSTRUCTIONS) Cobb Sadler of Deutsche Bank.

Okay, thanks a lot.

Just quickly on the guidance, you guided to quarter-on-quarter growth.

Should we look at that as onetime in nature or do you think there may be continued sequential growth as the new product rolls out?

You notice we are not giving at this time yearly guidance.

We are taking things a step at a time, and think that we -- we feel confident enough to share with the market we step up and do it.

Right now, we are confident enough that we will have sequential growth into Q2.

And as Q2 develops and we feel more confident on sharing with the market more news, we will do so.

So right now we are sharing things that we are absolutely confident in.

Okay, great.

And then more of a broad question on net neutrality.

Have you in North America, any updates how your carriers are looking at it?

Are they waiting on some sort of definitive answer or just -- can you give us a little bit about the dynamic there?

I guess it is a bit of a good news/bad news.

We are seeing certain service providers, mainly in the U.S., kind of stalling decisions, kind of looking to the whole noise around net neutrality to settle down.

Having said that, I think we are at a point where actually no decision is also a bad decision.

It seems that now things are heating up in FCC, starting to make comments.

Certain service providers have been dealing with the FCC.

And we are seeing customers kind of starting to sense where the FCC might give a specific guidance to operators.

And we are now working with certain strategic operators to think about day beyond, how we help them in subscriber management under potential new guidance, if any would come.

Okay.

So they've been stalling for a while and probably not getting any worse, and maybe some end to it at some point in the future.

Exactly.

I think hopefully we are getting to the end of this thing.

And the uncertainty does not exactly help.

And we are seeing customers start to plan for the day after.

Great.

I don't think you break it out, but could you talk about the North American enterprise business?

Is that -- if you could tell us how big that is now and what did you see in the quarter there?

We haven't quantitatively broken that out.

As we've said in the past, sometimes the definition is not a precise -- I mean, is a large university catering to 20,000 students and faculty, is that a service provider or an enterprise?

I would say no major movement there.

It continues to be part of our business; it is very nice in a complementing way.

I remind you that a perfect combination of our capabilities here, both in enterprise and large enterprise and service provider, was a winning factor for the ability to win some major Tier 1 deal last year in Q3, which was really a managed services deal.

A Tier 1 service provider catering to their top enterprise customers, using our products, both at the Edge and at the Core.

So to answer your question, no shift in model.

They are part of our business and we stay there.

Okay.

And then the RFP landscape, has that ticked up any?

I guess you don't track -- you can't tell us the number of RFPs that you are engaged in.

But with the 10-gig product, that is probably ticking up, I would imagine.

Yes, we are, as I mentioned in the script, we are seeing a growing funnel for 10-gig product, specifically reading on our SG-Omega product.

These types of acquisitions, even if we're talking single-digit units, usually are deals in the hundreds of thousands of single digit million, and most of these deals are instigated by an RFP.

So we are seeing some growth in RFPs, and the main contribution is actually, let's say, medium-sized service providers that are coming in and issuing RFPs for a 10-gig product.

Okay.

On the Auction Rate Securities, can you tell us what level you've written those down to -- or you may not have that in front of you.

I'm wondering where they could go versus where they are valued at currently, kind of what the real liquid cash value may be.

Hi.

This is Doron.

Basically, the amount we have as of March is $33 million, after de-evaluating approximately $7 million.

So the original amount was approximately $40 million.

We still have cash available, liquid, of around $30 million, that from our perspective is sufficient to handle our business.

We are working with all the relevant people -- entities to try and to end of the day liquidate these ARS.

Currently, we are leaning on the trends in this financial markets.

We are not sure what direction is going in the coming quarter.

We are actually small fish in an ocean.

And we pretty much lean on devaluations we get from third party.

I hope that we have finished with the impairment charges, but I cannot assure that; it is just my own personal view.

Okay.

And then last question.

On the cost structure, on a non-GAAP basis, you are losing a little bit on a per-share basis.

What is the strategy there?

Is it just grow the top line and the profitability?

I would say that it is mainly growing the top line, but we still look at our expenses very carefully and try to activate some efficiencies wherever we can.

Okay.

Great.

So no guidance on EPS and just we'll have to track the top-line margins?

Yes, also please bear in mind that the fluctuation of the exchange rate of the U.S.

dollar against the other currencies, mainly the U.S.

dollar/shekel, but also the Euro and Asian currencies, is something that we can't control but to a limit.

And that also affects our numbers.

Okay, great.

Thanks a lot.

I'll be listening in.

Stephen Silk of C.

Silk & Sons.

Good morning.

On the Auction Rate Securities, what type of securities -- do you know what is underlying the securities?

Can you repeat your question please.

I'm not sure I heard it.

The securities that you have -- the Auction Rate Securities, do you know what they have collateralized with?

Are they municipals --?

There are actually three types of securities.

We know what they are collateralized with.

Some of them are, I would say, are better, some of them are worse.

And we are following on them closely.

And are they all still paying interest or some have not been paying interest?

All of the Auction Rate Securities are still paying interest.

Okay, so we should take a look at the expense -- the line for the expense as your income net of what you write down was?

Is that what I'm looking -- the financial and other income expense --?

Basically, if you look at the Table 2, Table 2 reflects the numbers on a pro forma basis.

So there you can see the financial and other income adjustment.

And based on that, you can analyze and see what the financial and other income on a pro forma basis is.

Could you talk about the sales cycle for the Omega product?

Is it lengthening because of perhaps the net neutrality that the previous caller talked about, economic delays?

What are you seeing out there as far as how long it is taking in that sales cycle?

In terms of net neutrality, as I said to address Cobb's question, if we are seeing any delays caused, it is primarily in North America and nowhere else.

It really is a nonissue outside North America.

In terms of sales cycle, obviously there's always a correlation between the size of the deal and the size of the service provider and their process from defining a need until they actually go ahead and issue a purchase order.

So if you compare to our 1-gig product in an average of last year we had, the sales cycle around an SG-Omega is somewhat longer.

To give you a quantitative feel, on a medium-sized the provider that is buying, let's say.

several Service Gateway-Omega, a typical sales cycle could be anywhere between three to nine months.

Can you talk about -- on a rollout with your Tier 1 customers in the Omega, do they roll out a small amount for trials and then the home run, as it were, is down the line?

Or how do you proceed as far as new-customer Tier 1 accounts and how they are going to be rolling out?

In general, it can come in many forms and shapes.

For example, the Tier 1 accounts that we had in 2006 and the one we won in Q3 2007 was pretty much a fairly quick rollout.

Alternatively, the two service providers we announced recently in the mobile space actually took our systems into only to one country.

These are multinational service providers; they took systems only to one of the countries where they are operating.

And obviously, we look for an upside to expand into their other properties in other countries.

So that would be more gradual rollout, probably over a duration of 12 to 18 months.

Okay.

Two, three quarters back you talked about the Tier 2 operators that were delaying new purchases until the Omega was ready, which I think kind of surprised you that they were looking to upgrade to the higher capacity.

How has that proceeded as far as turning that into sales?

This is exactly what is happening -- the contribution of the SG-Omega to our sales this quarter was attributed partly to the two Tier 1s, but also partly to Tier 2 customers, existing and new, coming in and upgrading their system.

And when I look at my funnel for the rest of the year for SG-Omega, it is again a combination of Tier 1s.

But a lot of two, three unit deals are from medium-sized ISPs upgrading from 1-gig to 10-gig.

So this is happening first.

And going back to your first question, it is now how we execute and drive these customers to make decisions.

But the funnel is there.

On the question about the RFPs, are you seeing more RFPs from new customers or is it RFPs from existing customers?

What does your pipeline look like on that?

It's a combination.

Many times with an existing customer, if you are well-positioned and if it's not too big of a large deal, they would maybe even refrain from issuing an RFP.

And if you are in good position with the customer, they will just go ahead with you.

And that has happened to us with SG-Omega actually last quarter.

In terms of -- we are seeing constant appearance of Tier 1 in our field, but where we are seeing on growth is actually RFPs from Tier 2s seeking 10-gig products.

Okay.

What are your quarterly legal expenses?

Could you give us a little bit more clarity on what you perceive to be the time until something is taken care of?

Can you explain your question, please?

The legal expenses, how much are they quarterly, and then can you give us some light on how it is proceeding?

The legal expenses are a relatively small portion of our G&A; I don't think they are so material, if I understood your question.

I think that is all I have.

Thank you very much.

Thank you, Steve.

Cobb Sadler.

Kind of long line from the previous question.

On the two Tier 1 deals, I guess is the best way to ask it, who shows up at the mobile operators, how did you win, is this the only thing with pricing or customers?

Is it just kind of -- was it more of a solution sale or are your customers just taking what -- I guess, do they appreciate your functionality, is probably the best way to say it?

Yes, you almost asked and answered them, Cobb.

We -- yes, usually competition doesn't show up on these Tier 1 mobile deals.

Maybe sometimes only three out of the four players will show up, or two out of the four players will show up.

But basically these attract attention.

They have sometimes even more important, relative to the size of the deal, we go into very strategic points in the carrier network, whether it is fixed or wireline.

So these obviously do get a lot of attention.

And my observation is that especially Tier 1s first go on functionality.

They evaluate all the RFP answers, they cal in one or two of the best options, they test them.

So they basically zero in on the product they like best, based on functionality and features.

And then there is a commercial sale.

But in most cases, the win is functionality.

And then video and high-speed data 3G services, 3G iPhone and so on.

Is there any more urgency on the part of your customers, particularly the mobile customers, to buy a DPI type product based on these new services really just now ramping or just now materially ramping?

Yes -- it's not (inaudible) large numbers, but to be able to announce two Tier 1 deals and those to be mobile customers, although our strategy continues to be infrastructure-agnostic.

Our product set DP and IP, infinite network, and therefore we are sitting behind cable mobile optics via sales satellite, any type of broadband access technology.

Having said that, all of a sudden you get two consecutive Tier 1 deals.

I do see, as I mentioned in the script, what our customers are sharing with us, that data traffic is growing very rapidly on their networks.

I've heard numbers between two to three times per year.

I think with the release of new Edge devices, both mobile and nomadic, the ones being attached to portable computers, drive that data growth.

And they are now encountering the same exact challenges and needs of the broadband providers three years ago.

They want to enhance quality of experience.

So far, most of them are offering a flat-rate data usage.

And that is nice, but when that's taking a big portion of your network, and they say a bit over the air is a very expensive bit, they want to make sure that they are optimizing the way they bill the customer and maximize his quality of experience.

So our solution alongside sometime video caching solution seems to be gaining at a lot of interest.

Okay.

And any of these two deals, the two wireless deals, were they through your Juniper relationship or through any of your other relationships or just direct sale?

No, direct sales.

In some cases, there might be one of our local partners in a certain country helping from cultural languages through them locally.

But these deals are with a lot of very direct involvement, both during the presale cycle and the postsale cycle.

Okay.

And then I guess on the acquisition front, I guess, as a target or a buyer, is there any activity there?

Have you been approached or are your approaching other niche companies to expand your portfolio or just building out your current customer base?

Yes, we are constantly on the lookout.

Obviously, we are given the resources.

If we would consider to do another Esphion-like acquisition, we need to find the company exactly the right stage and with the right valuation we can afford.

Having said that, enabling DPI to move into value-added services is key to our revision and strategy.

We will go about this in three ways.

One is internal development, and we are doing that.

Second is opportunistic -- do make an acquisition if we feel that technology is key enough to bring in-house.

For example, with security, which we saw almost, let's say 80 -- 70% to 80% of the RFPs out there demanded security functionality.

And third, is through third-party teaming.

In the next major telco show NXTcomm, we will actually be showing at our booth several solution partners to the SG-Omega.

Okay.

Sounds great.

Thanks a lot.

Thank you.

We currently have no further questions in queue.

(OPERATOR INSTRUCTIONS)

There is one question we cannot respond on the [sorter], so please allow it.

Okay, thank you.

Daniel Meron from RBC.

Thank you.

I missed the first part of the conference call, but if you didn't address that, can you give us a sense on what is the impact of the recent consolidation in the market between Arbor and between Ellacoya, and then also between Blue Coat and Packeteer, all of this obviously happening in the last few months.

I know you referred to Arbor and Ellacoya on the previous conference call, but how do you see the Blue Coat and Packeteer in this context?

And how you are aligned in this context.

Thank you.

Thank you, Daniel.

So on the first one, just maybe for our new listeners, it is an interesting combination, what has happened in the industry, and the [reinformation] of our direction.

We went out in Q1 and acquired Esphion as a network security solution, which augments our DPI strategy.

And then a few weeks later, actually, we've seen one of our competitors merge with one of the larger players in the network security.

So we are seeing here an interesting move and a countermove of DPI marrying into our network security, which we felt all along was very natural, and maybe could signal the beginning of a trend here.

So, again very natural expansion, exactly reinforcement of our vision and strategy that DPI will grow into an enabling technology for value-added services.

In terms of how that is in the market, what we are seeing, obviously from the sideline, is that Ellacoya and Arbor are now busy trying to integrate, and we see the execution of that.

In terms of Blue Coat and Packeteer, frankly we are still studying that.

There are rumors going on about what is going to happen to Packeteer's product.

We are looking at that very carefully.

Obviously, we are trying to study where we could -- if there is any open initiatives there to fulfill them.

Frankly, most of our roadmap and strategic focus is on service provider market.

So we are not out there, really engaged with understanding the Blue Coat/ Packeteer; just going on in our business in the enterprise market.

Okay.

Thank you.

Thank you.

There are no further questions, so I'll hand you back your host to wrap up today's call.

Thank you very much for joining us today.

We look forward to speaking with you and meeting with you during the quarter.

Thank you very much.

Ladies and gentlemen, the call is now finished.

You may hang up your phones.