Allot Ltd (ALLT) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Allot Communications third quarter 2008 financial results conference call, hosted by Mr.

Jay Kalish.

(Operator Instructions)

I am now handing you over to Jay Kalish to begin today's conference.

Thanks, Matti, and thank you all for joining us today.

During this call we will discuss Allot's financial results for the third 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, Rami will provide his perspective on the quarter and on business drivers going forward and then Doron will provide some color on the financial results.

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 US Securities and Exchange Commission on June 27, 2008.

One housekeeping note -- I will visiting the New York and Boston areas next week.

Anyone who would like to meet with me to receive additional information on Allot, please be in touch via e-mail.

I will now turn the call over to Rami.

Thank you, Jay.

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

Allot's $9.8 million in revenue during third quarter was a record for us.

What makes this achievement even more impressive is that we reached this stage level against a challenging macroeconomic environment.

We continued our success in penetrating the mobile market by winning yet another Tier 1 mobile operator this quarter.

This is in addition to the two Tier 1 mobile operators we announce earlier this year.

These carriers, which are not only at the beginning of the deployment program are using our pilot gateway to meet rapidly increasing data traffic which is being driven by the growing popularity of media-rich data enabled handsets such as iPhone and mobile broadband data into the [magic] laptop.

I discussed this trend last quarter and this is one which continues in this quarter.

Our sales this quarter included 11 large deals with service providers throughout the world.

Of these, five represented new customers and six were expansions of existing Allot customers.

Our growth was further filled by the growing acceptance and install base of our service gateway Omega platform.

The long anticipated migration of medium to large service providers percent DPI continues and by now a growing portion of our service provider funnel is requiring true 10 gig products.

This quarter we saw further evidence of the acceptance of our service gateway vision of delivering value-added services on top of DPI.

We achieved the first commercial deployment of video caching as a value-added service alongside our service gateway Omega into Tier 1 ISP in APAC.

We see value-added services as a significant medium to long-term growth driver for us and we are pleased to see some of our customers beginning to buy into this vision.

I would like to take a few minutes to share our full strategy in light of the current macroeconomic trends.

We've been focusing on the mobile market, which appears to be less affected by the current economic downturn.

Our observation is that mobile data is growing at a rapid pace and is less affected by the economic downturn.

Since the delivery of broadband data over wireless network, both fixed and mobile, is significantly more expensive than wireline, Allot is looking for ways to optimize the network as well as ways to drive additional revenue from the subscribers in the future.

I look for the ready position acceptance and early leader in this high-growth market as we demonstrated with our three recent Tier 1 rings in this base and look to expand our footprint in this market over the midterm.

We have found that returning to our fundamental value proposition of network optimization has resonated well with existing and potential customers in the current economic climate.

In the current environment, service providers are looking for ways to optimize their existing broadband network which would allow them to delay cost key balance expansion.

Our loss network optimization solutions are especially designed to enable customers to meet this challenge.

As an added attraction, the return on investment is fairly quick, which makes the loss value proposition even better in the current market.

We took a number of cost-setting measures during the second quarter which we'll begin to realize during this quarter.

We were able to significantly reduce the operating expenditure during the quarter while not affecting operations.

We are keeping a very close watch on the OpEx line and making sure that our expense level is in line with the current market realities.

We strongly believe in the long-term opportunities in this market and we will continue to invest [coming] our leadership position.

So summarize, it was a good quarter, but at the same time, we're keeping a close watch on our budget and our target markets reacting to the macroeconomic challenges.

The measures we have taken both on a go-to-market strategy and financials position us well for meeting these challenges and to be a stronger company moving forward.

I would now like to turn -- to hand over the call to Doron for a quick financial overview.

Thanks, Rami.

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

Our biggest cut in non-GAAP numbers, which primarily exclude the expensing of stock options required by FAS 123(R), certain legal expenses and impairment charges related to further devaluation of our ARS portfolio, which I will explain at length in a few minutes.

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

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

Revenues for the third quarter reached a record $9.8 million, up 3% from the second quarter of $9.5 million results and a 40% increase in the revenues reported in the third quarter of 2007.

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

EMEA, 39%, Americas, 31%, and APAC, 30%.

Out of total revenues during the quarter, products comprised 74% and services 26%.

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

Gross margins for the second quarter were 74%, similar to the previous quarters.

Net R&D expenses in the third quarter totaled $2.8 million, down from $3 million in the second quarter and were 29% and 32% of revenues respectively.

Sales and marketing expenses totaled $4.6 million in the third quarter, significantly lower than the $5.3 million in the previous quarter, 47% and 56% of revenues respectively.

Much of the decrease was due to a non-recurring expense of approximately $300,000 in the second quarter and the cost-cutting measures that we put into place during the second quarter.

G&A expenses totaled $1.3 million in the third quarter, slightly less than the $1.4 million level of the previous quarter, 13% and 14% of revenues respectively.

As a result of all this, our operating growth for the third quarter was $1.5 million, significantly lower than the $2.7 million loss reported in the second quarter.

Financial and other loss net for the third quarter was $17,000 as compared with the income of $800,000 in the second quarter.

This decrease was primarily due to the drastic decline of the euro against the US dollar.

This total alone contributed over $0.02 to our net loss per share.

Our net loss for the second quarter -- sorry, for the third quarter totaled $1.6 million or $0.07 per share, an improvement over the $1.9 million loss or $0.09 per share reported for the second quarter.

On the balance sheet side, I want to take a few minutes to explain the ARS situation.

During the third quarter, we were seeing contradicting trends regarding the ARS market.

While some of the ARS issuers decided to redeem their bonds, other sides for ARS suffered from further downgrade and devaluation as a result of the credit market's further deterioration, primarily towards the end of the third quarter.

However, it is also important to note that our entire ARS portfolio continues to be current on its interest payments.

During the third quarter, we succeeded in monetizing $5.8 million from certain areas at full par value while another we reported an additional impairment charge of $6.8 million on a GAAP basis.

However, subsequent to the third quarter, due to a buyback settlement with one of our brokers, we monetized an additional $6.6 million of ARS at full par value.

As a result, we currently expect to report a gain of $5.3 million in the fourth quarter on a GAAP basis, which has partially offset the impairment charges we have recorded so far.

While we are pleased with the recent ARS monetizations, we continue to explore every alternative of monetizing the balance of our ARS portfolio.

As of September 30, total cash, cash equivalents, deposits and marketable securities totaled $54.4 million.

However, if we include the ARS monetization during the fourth quarter, this item totaled $69.7 million.

During the quarter, we had another positive sign of the improvement in our performance as the total cash burn was approximately $800,000 of which a substantial portion was attributable to capital expenditures.

Accounts receivables totaled $6.4 million at the end of the quarter.

Our DSO was 59 days, a gain in line with the 60 to 70-day range I have discussed as the target level for 2008.

Deferred revenues at the end of the quarter amounted to $5.8 million of which $4.2 million were short term.

This represented a slight decline from $5.9 million at the end of the second quarter.

To summarize, the improvement in our cost structure, together with the recent monetization of certain ARS, put us in a better financial position to meet the challenging macroeconomic environment.

That concludes my remark and we will now open the call for questions.

Matti, please, we're ready for questions.

I do apologize.

(Operator Instructions) And we have a question from the line of Daniel Meron from RBC Capital.

Please go ahead.

Hi, Rami and D and Jay.

Just wanted to ask about 2009.

As we look forward, you obviously mentioned that you're prepared for that, but how should we think about the trending in the next quarter and beyond?

And I do apologize if you already discussed this as I just joined the call.

Thanks.

Yes, thanks, Daniel.

Looking -- basically, the measures we are taking to get ready for 2009 were discussed on my talk.

We are trying to see what segments of the markets will be less affected, given the credit crunch in the macroeconomic situation.

After a lot of organization, we feel that mobile will be less affected -- given the growth in mobile data and the need to optimize these networks as the data continues to grow.

And going to 2009, we'll further refocus our strategy into that year.

Also we've found that our entrusted value proposition of metro customization and finding ways for [similar ways] to push out, costly CapEx and bandwidth expansion, but while using Allot's equipment is back in favor.

Other than that, we're taking each quarter at the time.

We are looking at our progress into Q4, but it's much too early to discuss any of our financial indication of our -- of what's going to happen in 2009.

We're also watching other players that are in our market and we think that they have limited visibility.

So, it's going to take -- it's going to be a quarter at a time at this point, Daniel.

Are you still expecting -- do you expect sequential growth into fourth quarter or roughly the same performance like this quarter?

Still working the numbers, looking at how the quarter is developing.

It would have been natural for us to expect growth into Q4, being very encouraged by Q3.

Q3 is usually a slow quarter for Allot.

If you noticed our numbers last year, Q3 was the lowest and Q4 was one of the strongest.

In general, are not being affected by market trends.

They -- I would say, I would be expecting growth.

At this point, I'm being cautious and not making any specific comments.

Okay.

Thank you.

I'll hop back into the que.

Thank you, Daniel.

Thank you.

And next, we have a question from the line of Stephen Silk from C.

Silk and Sons.

Please go ahead.

So, with the expenses that you're looking to cut and the decrease that we've seen quarter over quarter and hopefully that will continue, what level of revenue would you be looking at to be profitable?

At this point of time, with the level of expenses in our Q3, we still believe that our breakeven point will be approximately at around $11 million to $12 million.

And then could you talk about the new Tier 1 operator -- three in the year?

Could you just give us a trend of what you expect or what you've seen as far as revenue that you've already recorded and the potential revenue and how you might see that ramp?

Yes, it's very hard to give you a quantified answer, Stephen.

What I can say is that the latest one we announced at Q3, we have, obviously, it's in our booking numbers and we have started to deliver the equipment.

We are now in deployment space.

But actually, we haven't recognized any revenue of that specific deal in Q3, so it's really, obviously, subject to our execution and customer satisfaction returning to our -- is now backlog and returning to revenue in the coming quarter.

Otherwise, there's not much more insight I can provide you.

Naturally, these Tier 1 are deals said to be in the hundreds of thousands or single digit million dollar cycles of deals.

As I said in my talk, these deals are only the beginning, at least in how I analyze the flow in phase.

I mean, to give you an example, one of these major operators, we basically have one of the countries -- one of many countries this operator [ran on] and we have penetrated that country.

By the way, one of the more important countries that is being owned by the operator, we are now working to expand that into other countries because it was a major [upside] from a geographical expansion.

And also in terms of growth.

Customers are telling me that their broadband data is -- I've heard anything from three times per year to 30 times per year.

And that, of course, is a revenue and a growth opportunity for us as well.

Should we look at it as you start early deployment, it's not a trial, but a trial basis to see and approve the return on their investment and that's how you will move forward because it will come back to you quicker as the value -- Allot value is proven?

I would say it's more than that.

In these three Tier 1 operators we discussed, in each and every case, we're pretty much covering the broadband data of a full country.

So the growth is basically -- so the equipment is commercial walking and it [excludes] the three cases which are already in production to the customers' satisfaction from value-added and return on investment.

Having said that, again, it won't come from one.

Obviously, our revenue is coordinated to various demands.

That we grow on one scale.

And the other is the geographical expansion, which either could be moving into other countries or, as the specific operator opens up new hubs in that specific country, which also is -- it happened to us in [platview].

And then maybe this is a question of semantics, but one of the highlights was that you concluded 11 large deals with service providers.

Does that mean that the implementation has been concluded or the deals have been signed and the implementation is beginning?

In all cases, the deal has been signed and a valid binding purchase order was received.

The implementation and the revenue uptake on these deals is mixed.

Some of these deals deployment has happened, but acceptance has now been returning to backlog and again in coming quarters.

And some were quick.

It happened early on in the quarter -- were deployed and revenue was taken.

So, it's pretty much all over the place.

Okay.

And I just want to jump over to the auction rate security so I can understand a little bit more.

So, on the long-term assets at the end of the quarter, you had $18.1 million.

And that was after a write-down of some of the securities.

So, what would the par value be of those securities?

The par value of those securities was close to $28 million.

So, we actually recorded $10 million devaluation on these securities.

So the -- it was $28 million was the par value?

Yes.

In total, we have recorded a devaluation of $10 million over these securities.

Okay.

And subsequently -- so you took the charge at $6 million, but subsequently the $5 million that you got back -- or the money that you got back and the adjustment will occur in the fourth quarter.

Is that correct?

Yes.

Okay.

So you'll have a one-time gain of that.

So, what would be the par value of the securities as of today?

So, let me elaborate on this.

The par value of the securities effort today is the number I mentioned before.

It's close to $28 million.

This is reflected in the balance sheet on the long-term asset category.

The amount of the error that was actually bought back during the fourth quarter was classified as short term.

So, what you see on the long term is much less.

Okay.

Now I understand that they are still paying interest, but could you tell me what type of securities -- are there government -- or like student loan type of securities that have some guarantee to them or are they something less liquid than that?

We have actually two types of securities included.

Some of them have some kind of insurance coverage and some of them don't have such coverage.

Could you break out the $28 million and how much is insured?

I think that if you take it, approximately half of it is probably insured.

Okay.

And of the uninsured, were any of those repurchased or, I mean, what kind of the securities have -- were you able to exchange with the broker?

The ones that we were able to exchange with the brokers were actually CDOs.

This was, I would say, the worst type of stuff that we had.

And that was exchanged with the broker and we actually got a full par value back.

Okay.

And can you see any trend of discontinuing to be able to monetize these or what's your thought on that?

I -- my experience since this crisis, which is already over a year now, is that many surprises happen and I really came to be what will happen within a month or so.

So, I think that we need to wait and see and -- how this market evolves, how the credit risk factor is being -- behaving in the near future.

And based on that, we'll be able to better assess the chances that we will get some or all of our money back.

I certainly hope it's soon so we don't have to ask these silly questions on the -- and can concentrate on the business at hand.

All right.

Well, good luck going forward.

Thank you.

Thank you, Stephen.

Thanks, Stephen.

Thank you, ladies and gentlemen.

(Operator Instructions) And the next question comes from the line of [Balt Sosnoski] from SRC Capital Management.

Please go ahead.

Thanks for taking my call.

To follow up on the prior question on the ARS portfolio, I just wanted to clarify one issue.

At the end of the quarter, you had $19.4 million in the ARS portfolio.

Then you've said you monetized $6.6 million.

Does that come out of the $19.4 million or maybe sounds like it comes out of the short-term investments?

So in other words, does the $19.4 million, is it now less $6.6 million down to $12.8 million or is that -- or is it still $19.4 million as of today?

As of today, the amount of the ARS we had after devaluation is $18.2 million.

So that -- so $18.2 million is not as of 9-30.

It's as of approximately today.

Yes.

But it was classified on the balance sheet of the long-term while the additional $1.2 million was classified as short-term.

And for this $1.2 million after devaluation, we received the $6.5 million or $6.6 million payback in Q4.

Okay.

Great.

Thank you.

And then on the -- congratulations on $9.8 million of revenues this quarter.

That's impressive in this environment.

Last quarter you said that you expected second half revenue to be approximately the same as first half revenue.

And if I'm doing my math right, that would be about $17.7 million in revenues.

Since you just did $9.8 million in revenues, that would imply revenues in Q4 of approximately $7.9 million.

Given that you just did $9.8 million in revenues in Q3, should we expect revenues to decline in Q4 or is there a decent chance that you could at least do the same amount of revenues this quarter as you did in the September quarter?

Yes, good question.

At this time, I'm still at the point where I believe in our Q4 numbers even though it's early in the quarter for us.

I've made that statement with a lot of confidence under different microeconomic conditions.

But again, at this time, I still remain confident in my statement.

As the quarter develops and we are looking for every indication to see how macroeconomic is affecting us and, if anything that changes, obviously, I will share that with you.

If you look at loss history, as I said to Daniel on Q4, in most of the cases, if not all of the cases, was always stronger than Q3 and that's my operating assumption at this given time.

Okay Great.

Thank you.

Thank you.

We have no further questions coming through so I will hand back to your host to wrap up today's conference.

Thank you.

Thank you, everyone, for joining us today.

I look forward to speaking and meeting with you over the next few months.

And if you have any questions about Allot, please be in touch with me directly.

Thanks for [meeting] here.

Thank you for joining today's conference.

You may now replace your handsets.