Allot Ltd (ALLT) 2008 Q4 法說會逐字稿

Welcome to the Allot Communications' fourth quarter and year-end 2008 earnings result conference call hosted by Jay Kalish.

My name is Liz, and I'll be your coordinator for today's conference.

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'll now hand over to Jay to begin today's conference.

Thank you very much, Liz.

And thank you all for joining us today.

During this call, we will discuss Allot's financial results for the fourth quarter and full year 2008.

With us today on the call, our Vice President and CEO, Rami Hadar, as well as Mr.

Doron Arazi, Chief Financial Officer.

On the call, Rami will comment on the results and certain growth drivers that we are seeing in Allot's business, and Doron will then follow with some of the financial highlights.

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.

Also please note that the Doron will be visiting New York and Boston areas next week.

If anyone would like to meet with him to receive additional information on Allot, please be in touch with Doron via e-mail.

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

Thank you, Jay.

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

We are encouraged by our results for the fourth quarter with revenues coming in at $9.6 million, which we achieved in the face of challenging market condition.

Fourth quarter revenues grew 10% over last year's fourth quarter.

And our annual revenues of $37.1 million represent 14% growth over 2007.

In addition, during the fourth quarter, we had a book-to-bill ratio of over 1, giving us a head start towards meeting our next quarter target.

As I discussed in the past, during the year we took steps to reduce our operating expenses to keep them in line with current market realities.

We saw some of these effects measured in the fourth quarter operating expenses, and the rest is expected during 2009.

Essentially, our target is to lower breakeven point to the $10.5 million quarterly revenue range.

As I described at length during our previous conference call, the mobile market continues to be one of our main growth engines towards going forward.

During 2008, Allot added five Tier 1 mobile operators to its growing customer list, four of which have more than 10 million subscribers.

In total, we now have 50 mobile operators as Allot customers further strengthening our leadership position in this growing market.

During the quarter, we continued to expand and diversify our growing list of service provider customers.

We closed 12 large service provider deals, six of which were with new service providers, and six were expansion deals with existing customers.

These deals are diversified across DSL, cable, and mobile networks.

We continue to see significant orders from our current customer base.

One of the main reasons for this is the accelerated upgrading of networks from 1 gig to 10 gig capacity, which is required to meet the ever-increasing data traffic, particularly over-the-top video and peer to peer traffic.

Our service gateway, Omega, is already in its firth quarter of commercial deployment, making it the widest commercially deployed true 10 gig product in the industry.

We continue to see a healthy pipeline of opportunities.

Although at this point, it is difficult to anticipate the timing and closing deals due to the current world recession.

The pipeline is due to Allot's value proposition, which resonates well with our customer base.

We offer a number of unique advantages to our customers.

First we enable them to meet short-term broadband by optimizing the network.

This allows them to push out costly CapEx build-out while not compromising on quality of experience of the subscribers.

With operators currently running harder networks, the likelihood for congestion is much greater.

As a result, the need for network optimization is more critical than ever.

Second, we enable our customers to implement smart billing and smart quota management systems.

Our subscriber management platform allows operators to track bandwidth usage by subscriber and by application.

This allows operators to develop tailored billing plans for individual subscribers based under particular bandwidth and application preferences.

Third, operators are increasingly interested in the service gateway proposition, which provides a central point in the network to launch value-added services.

We have already deployed services geared towards security, video cashing, and Voice-over-IP quality monitoring with several of our customers, and are seeing increased interest in deploying of these services going forward.

If I look out into 2009, while it's still difficult to offer projections for the year, I can say that we see the following trends as potential growth drivers for the year.

First, Internet bandwidths will continue to grow, and therefore operators will continue to migrate from 1 gig to 10 gig and beyond.

This is a trend we are seeing both with current and potential customers.

This may also increase the average deal size for Allot.

Second, we are planning to launch a series of new products in 2009 to meet the ever-increasing demand for broadband services, both on mobile and fixed networks.

This week we announced a member -- a new member of the service gateway family.

The Service Gateway Sigma offers 40 gigabit per second performance, enhanced mobile features such as subscriber scalability, improved 3GPP conformance, and integration of value-added services onto its ATCA platform.

Third, Allot aims to penetrate more deeply into carrier networks, particularly with our subscriber management platform, and its powerful capabilities, as well as with introducing value-added services into service provider networks.

Our aim is to continue to increase both average deal size, as well as customer loyalty.

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

Thanks, Rami.

Let me take a few minutes to provide some additional color on the results we published earlier today.

I will be discussing non-GAAP numbers, which primarily exclude the expensing of stock options required by FAS 123(R), certain impairment charges related to further devaluation of our ARS portfolio, and certain legal expenses.

We provided the reconciliation between the GAAP and non-GAAP numbers in a table accompanying the press release.

Now, let's take a look at the fourth quarter and full year results.

Revenues for the fourth quarter reached $9.6 million, up 10% from the revenues reported in the fourth quarter of 2007, and a 2% decrease from the third quarter $9.8 million result.

On a geographical basis, revenues for the fourth quarter broke down as follows, EMEA 37%, APAC 36%, and Americas 27%.

For the year, revenues totaled $37.1 million, up 14% from $32.5 million we reported in 2007.

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

Gross margin for the fourth quarter was 75%, slightly higher than the previous quarter's margins.

Our continuous efficiency measures together with the erosion of some of the currencies we used, primarily the Israeli shekel, has resulted in a further decline of approximately $400,000 or 5% in our operating expenses for the fourth quarter.

We continue to look into our expense level, and take measures we think are necessary to better align our expenses with the current market condition.

As a result, we currently expect to see a further decline in our operating expenses throughout 2009, which we believe will reduce our breakeven point to the $10.5 million range, as Rami mentioned earlier.

As a result of all of this, we continued to reduce our operating loss which totaled $1.2 million for the fourth quarter, 20% lower than the $1.5 million loss reported in the third quarter.

Financial and other income net for the fourth quarter was $223,000 compared to a loss of $17,000 in the third quarter.

The improvement in this item is primarily attributable to a substantial decrease in exchange rate losses.

As of December 31st, total cash, cash equivalent, deposits, and marketable securities increased to $57.5 million, of which $42.1 million are short term.

During the quarter, we generated cash from operations, net of capital expenditures of approximately $600,000.

For the year 2008, total cash burns, excluding the acquisition of Esphion, came to approximately $1.7 million.

On the ARS side, during the fourth quarter, we monetized $6.6 million of certain optional securities at full par value.

This monetization resulted in a capital gain of $5.3 million on a GAAP basis.

However, certain ARS were further devalued during the fourth quarter, and caused an additional impairment charge of $2.8 million on a GAAP basis.

As a result of all of this, our remaining ARS investment as of December 31, 2008, are valued at $15.3 million.

Accounts receivable totaled $6.2 million at the end of this quarter.

Our DSO was 58 days, again in line with the 60 to 70-day range I have discussed as the target level for '08.

Deferred revenues at the end of the quarter amounted to $6.8 million, of which $4.5 million were short term.

This represented an increase of $1 million from the $5.8 million at the end of the third quarter, and was a substantial contributor to the improvement in our cash condition in the fourth quarter.

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

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

Thank you.

(Operator Instructions) Okay, your first question comes from Daniel Meron.

Please go ahead.

Thank you.

Hi, Rami and Doron.

Few questions.

First of all, if you can give us a little bit more sense on the extent of the weakness you expect.

Obviously, you're looking to lower the breakeven point.

So it doesn't seem like that $10.5 million is that far ahead.

But can you give us a little bit more color on the extent that you're looking for in the first quarter, and how you think 2009 is shaping up although we all know the backdrop -- the economic backdrop is pretty weak?

Thank you.

Yes, hi, Daniel.

Thank you for the question.

The two areas where -- this is still a relatively new -- I mean, we've seen macroeconomic conditions get worse in Q4.

We are now in the beginning of Q1.

So we're still trying to measure what's affecting us and what's not.

All in all, we're pretty happy with what we came out in Q4.

And with a book-to-bill of 1.1, there could be no effect.

But nevertheless what I'm seeing is -- if you remember, Allot's business has still some enterprise elements in it.

And this is very preliminary, but I'm sensing that IP spending is probably getting hurt more than service provider in spending.

But again this is very early in the process.

The second element is we are seeing a healthy funnel.

We are seeing actually better than previous years.

But we are seeing pricing pressure high -- let's say tougher than we have seen before.

My sense is probably part of it is service provider trying to go out and spend the CapEx they need.

I mean, it's not like people are disconnecting from the Internet.

So they need to go out and buy gear like the one Allot is providing.

But I'm sensing that they're taking a little bit more time to close, and being a little more in -- tougher on closing condition.

Okay, thanks.

And then what do you think are the odds of winning more larger scale deals down the road, be it in landline or in cable or in mobile gear?

Also if you can just give us little bit color on the geographic dynamics that you're seeing right now in the market.

Let me start with the latter.

Geographical wise, as you can see from the percentage breakdown we provide, this quarter Asia-Pacific has grown on a relative basis, probably an absolute basis as well versus a slight decline in the Americas, specifically in the US.

It seems that the US was hit first, say, by the economy and probably more severely.

In Asia-Pacific, our business is pretty much as usual.

So that's on the geography -- from geography basis.

In terms of chances for a -- for larger deals, we haven't seen any $10 million deals in our space for quite a long time.

What we are doing to increase the average size of our deal is really this -- going deeper in on the strategy, by coming in with the service gateway, and on top of the classical functions of [VPI], i.e.

application, subscriber management to come in with value-added services, with our propositions like quota management, integration helped us in the past quarter.

We are getting to more a project-oriented deals, improve and increase our average bill size, not by orders of magnitude, by -- certainly by tenth of a percent and we plan to continue that strategy, that going deeper strategy into service providers.

Okay, thank you all.

You are the [source] for others.

Thank you.

Thank you, Daniel.

Thank you for your question.

Your next question comes from Stephen Silk.

Please go ahead.

Good morning.

I'd like to start with the auction rate securities.

So the $15 million of long term, what is the face value of those at this point?

The face value is actually close to $28 million.

$28 million?

Yes.

So they've been devalued by about 50%?

Excellent.

Could you break down what are -- first of all, are they all -- continuing to paying interest?

So far we got interest from all of them.

Okay.

And could you break down which are guaranteed like student loan, and which are perhaps not guaranteed?

Some of them -- there is a portion of them which is guaranteed by insurance companies, but it's not all of them.

Okay.

Could you tell us how much is the gap, could we figure how much the guarantees are?

I can't comment on this question.

Okay.

So let me go further.

Over the circumstances of you being able to monetize the ones that you did, what's the likelihood that you'll have that opportunity with some of $15 million that's left?

What we have seen -- what I have seen recently is that there are -- there is a secondary market that is evolving recently, where experts in the specific industry of this auction rate securities issuers are actually showing some interest in buying these securities.

I don't think that at this point of time the prices, the quotes they are giving are something that should be seriously considered.

But we are looking into that, and we are not losing any opportunity to explore different options of monetization of the optional securities that we still have.

Okay.

And considering the amount of expenses that you are looking to get down to versus your current revenue, your cash -- your current cash and marketable securities of $42 million is sufficient to go for quite a while even without any return of the auction rate securities?

You are correct.

Okay.

So along those lines, I think I have to ask my annual question.

Considering the price of the stock being about $1.60 or almost $1 below your total cash and equivalents, why not be aggressive in perhaps repurchasing stock if you continue to burn -- well, you didn't even burn this quarter, but if you continue to be almost flat?

Why not take advantage of that for the shareholders that are in for the long term?

Steve, thank you for the question, and I will take it on behalf of Doron.

I can't comment specially about the Company's plans.

Obviously, at the Board level we have discussed the various options.

But two points that I would raise -- I mean, obviously there is a very well-known reason why to do such action.

On the other end, one, we really don't know how long and how deep this economic downturn will last.

And yes, we had a good -- pretty good quarter in terms of cash flow.

But we are still losing money in operations, and a big part of the plus on the cash side came from very good collections on behalf of the financial team.

So until we really get back to above breakeven, we will be still consuming cash into our next year.

And again, no one really knows how long this economy and downturn will last, and have we seen the bottom of it.

The second element, on the upside, as we are seeing -- we are seeing now more and more stream of companies with very interesting technologies.

Some of them complementary to our own proposition totally on a service gateway that are typically more private companies that (inaudible) to run out of cash.

And we think, well, there might be some very interesting deals for us to augment our loss and on the long run generate shareholder's value with the cash we have.

All right.

Just one comment on that would be, until I think the Company can become profitable, I don't know that you should be looking for acquisitions that would again be dilutive or that you would have to nurture along to get to profitability.

I would understand, certainly, something that could be accretive, a company that's perhaps profitable or breakeven.

But that's just my opinion.

Steve, let me -- although it's not a question, let me agree with you, maybe I have misstated.

From our point of view, the perfect candidate we are looking at are companies that are past a technology product stage, have got into a $5 million, $10 million revenue stream, and you are right, at least will not be dilutive in our operation.

Okay.

My next question is probably semantical.

One of the highlights that you say is, during the quarter you concluded 12 large deals.

Does that mean that you finished them and got revenue, or that means that you closed them and will be looking to start deploying for those?

The deals we cancelled -- 12 is the only deals that we closed and generated revenues.

There are other deals which came into our bookings, but were not counted in these 12.

Okay.

And then could you just give us like a timeline as far as revenue generation from the Tier 1 mobile operators?

Is that something that starts scaling slowly and then can accelerate?

And of the five that you signed, how are those progressing?

What type of revenue did they add during 2008 and what's the potential for 2009 going forward?

So, overall if I look at the five we closed, two or three of them already came back with expansions throughout the year.

But these deals tend to be in, let's say, low single digit million dollar deals, $1 million, $2 million, $3 million deals.

Obviously, that's great, but nevertheless we want to get them to the $5 million, $10 million range.

We believe that with our product strategy of going deeper into the networks, subscriber management, quota management, value-added services, we can get there.

I mean, we signed some of the world's largest service providers as customers, and now it's really our challenge to make them meaningful contributions to our revenue.

And this is Doron here.

I would like to add another aspect to that.

Usually the transactions with the Tier 1 are a bit more complex than the regular transactions, and that may create some accounting challenges down the road.

So it's not necessarily that once we have closed the deal and even have started the delivery part that we will be able to recognize revenues due to the accounting rules in the US.

That's fine.

That's even better to see the potentials coming down the line.

What -- you only list revenue on one line.

Do you have maintenance and service and some recurring revenue that you can count on every year, beyond sales of hardware?

We -- I think, if I understand your question correctly, I've mentioned in the brief that our revenues were comprised as follows, 72% were products, while 28% were services.

We get very nice stream of revenues from renewal of maintenance contract and that is something that we see.

It's steady and it's even growing year-over-year.

Well, that was the basis of my question.

I would assume as you sign on more people that service revenue will grow, and it's an amount that you'll know that you have each year.

I don't assume people would drop off once they've deployed your product.

That's correct, Stephen, an absolute level that stream of revenue is growing.

Basically out of every deal, a certain percentage is assigned to maintenance and services, for example, protocol upgrades and so on, and that is done in annually license basis, and then a customer comes back to the next year to renew.

We are working constantly on improving our renewal hit ratio and obviously every new deal has that element as well.

So the answer, this is an important stream for us.

Usually the gross margins there are even higher and in the sales cycle to renew a service is typically very easy.

And -- go ahead.

Steve, let me give a chance to maybe others to ask and then if you want we can always circle back to you.

Very good.

Okay, thank you.

Thank you.

Your next question comes from Stephen Silk -- sorry, [Tom Alkin], please go ahead.

Hi, guys.

A few questions on my side.

Could you comment on your expectations for cash burns going into 2009?

I think that the result in terms of cash burn of 2008, they were very good, but I think that to some extent they were unique.

I expect that we will continue in following our cash flow very closely, and we will be able to maintain the same or even a bit higher.

Maybe it will be a bit higher, the level of cash burn in '09.

But I don't think it will be dramatically higher.

Okay.

Fair enough.

And regarding your funnel or your pipeline of deals, you guys have been doing pretty well with mobile operators this year.

Could you characterize the pipeline and is it still more mobile than, say, I don't know DSL or cable?

Let's put it this way, we are not becoming the DPI, mobile company.

We are putting it out this year, 2008, our study was to really open up this new segment almost from zero [floor] and we have managed to do that.

But as you have noticed on my script, I mentioned that in parallel -- in general just this quarter we closed 12 large service provider deals, and roughly a third of them are mobile and two-thirds are fixed, maybe DSL cables in other categories.

So the reason for that, this is a mobile, because it's new and it's growing, but it is in parallel and should not be ignored that we keep selling into DSL and cable as well.

And that reflects on our funnel going forward.

We have projects in mobile, cable, and DSL going forward.

Okay.

And what's -- what was the mobile versus [wire line] breakdown this year or this quarter, if you can provide this?

And also for, say, enterprise versus service providers?

Sorry Tom, these are two parameters we do not give out.

I can tell you that on service providers I mentioned here only the large deals, but there is many others won.

So we really don't keep count of exactly how many service providers there are in a quarter or a year, and play around with (inaudible).

We are in the service provider business, we're selling to all three major categories, mobile, DSL and cable.

And I think that is how you should be tracking our performance.

We give a lot of emphasis to mobile again this year because it was a new category and required focus and strategy.

Okay, fair enough.

Last one for me is regarding 10% customers that you have, anyone through the year or the quarter, or --?

No, no we don't.

Okay, great, thanks.

I will leave the floor.

Thank you very much, Tom.

Thanks.

Okay.

Thank you for your question.

We currently have no questions coming through.

(Operator Instructions) We have a question from Stephen Silk.

Please go ahead.

Yes, I just like to follow up on two things.

The announcement of the 40 gig that you are going to be showing, what kind of inquiry or demand do you see for that?

Quite a lot.

This is really a product geared towards the very top Tier 1 of our customers, and it has three essential highlights.

One, obviously, 40 gig throughput and the ability to really support up to eight 10 gig interfaces.

So basically throughput and scalability, which is really important to the top high end of the service provider market.

The second element is it has new mobile features incorporated into the product.

And its release, for example, enhance subscribers scalability, more conforming to mobile standard and so on.

And the third element is that this -- the Sigma compared to the Omega now has better capabilities to integrate internally value-added services compared to the Omega products.

And these are products --- these products are ready to be shipped?

Right now it is ready for trials, and will be ready to commercial shipments later on in the quarter.

Okay.

And then just talk -- the last two prior announcements that you're teaming up with Camiant, and other strategic partnerships, could you just give us some details of your thinking about that?

Yes, this is basically part of our going deeper into carrier's network.

Camiant's products, they are policy servers.

They manage quality on a more end-to-end basis, and this is the foundation to offer a -- for example, field services on an end-to-end basis.

We want it to become a more integral part of large carriers and networks.

In many of them, we have seen Camiant as policy server solution.

They are not the only game in town, but -- and will probably team up with others.

But it's essentially our way to become more integrated into carriers and network which, one, hopefully will create a larger bill sizes, and long-term customer loyalty.

Okay.

So is that a situation where Camiant would bring you in on deals, or you will bring in Camiant on deals, or it's just -- it's mutual?

It's actually mutual, and this is how it's happening today, certain deals of Camiant will pull us in, and certain ones that we will call them in.

Very good, thank you very much.

Thank you, Stephen.

Thank you.

Your next question comes from Daniel Meron.

Please go ahead.

Thank you.

Rami, can you provide us with a little bit of update on the competitive landscape that you see these days?

Thanks.

For competitive landscape, let's see, we have seen a -- the US in a slow market coming about with a little bit of pulse looking at Sandvine numbers.

They got a nice boost from I think what is Comcast doing some patching to their solution to comply with net neutrality issues with FCC.

I don't know if that's going to be sustainable or not, but there is some pulse.

I actually hope that the net neutrality debate in US will come to some kind of a reasonable conclusion, and we can all move on.

That will be good for Sandvine, but will also be very good for Allot.

For example, measures like, for commercial ones savings that service providers must be open with the customers on the traffic-shaping techniques is very reasonable.

For example, doing our traffic shaping only when there is congestion in the network is the one that feels reasonable.

So, I think, we will see Sandvine getting some backwinds if that moves on, and definitely Allot plans to play in that game as well.

From product point of view, we haven't seen much from Sandvine but seeing very relatively larger R&D expenses.

I am assuming that we will see some products out there in -- during 2009.

CISCO, which has been late to the 10 gigabit per second game, is playing catch up.

I think we do have some kind of a better level product out there.

Not yet in full speed.

So as they get to 10 gig throughput, we already made the next step into 20 gigabit or 40 gigabit throughput.

For [server], they're making a lot of noise, but frankly we're not running into them in too many deals.

It's still mainly between Cisco and Sandvine and ourselves.

Okay.

Very good, thank you.

Thank you.

Okay, thank you.

We have no further questions.

So I will hand back to Jay to wrap up today's conference.

Thank you again for joining us today.

As I mentioned at the beginning of the call, Doron will be in the New York and Boston areas next week.

Anyone that would like to meet with him, please be in touch with Doron directly here at Allot.

We look forward to see you again on future calls.

Thank you.

Thank you for joining today's conference.

You may now replace your handset.