Allot Ltd (ALLT) 2009 Q1 法說會逐字稿

Thank you, and welcome to the Allot Communications' first quarter 2009 earnings result conference call.

My name is Liz, and I'll be your operator for the call.

Throughout the conference 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 handover to Jay Kalish to begin today's call.

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 first quarter of 2009.

With us on today's call, our Vice President and CEO, Mr.

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 US Securities and Exchange Commission last week on May 7, 2009.

Also please note that Allot will be attending two upcoming conferences.

Doron will be attending Barclays Worldwide Wireless and Wireline Conference in New York on May 27th and 28th.

And will be in Boston on the 26th for investor meeting.

In addition, Rami will be attending RBC's 2009 Technology, Media and Communications Conference in San Francisco on June 9th.

If anyone wishes to meet with management during these trips, please be in touch with me directly.

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

Thank you, Jay.

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

We are pleased with our top-line results for the quarter with revenues of $9.4 million representing year-over-year growth of 13%.

Our operational loss declined significantly to $800,000 partially due to efficiency measures we took in 2008.

Our book-to-bill ratio remains over 1 as we continue to build backlogs.

And we are encouraged by the sales funnel we have seen today.

That said, current market conditions could affect timing in some of these potential sales.

As we anticipated, a big part of our success during the quarter resulted from increased sales of the Service Gateway platform to both wireline and wireless customers.

While most of our sales to date was for more traditional network management and optimization services, during this quarter we saw an increase of revenue contribution from value-added services.

By working with third parties we are enabling our customers to generate incremental revenues from their existing network by offering new and innovative types of services to their subscribers.

We are pleased with the continued market acceptance of the Service Gateway, which enables our customers to both optimize and monetize the network.

Since its commercial launch Service Gateway has achieved great penetration into 17 large mobile and 6 service providers.

The recently announced partnership with HP further strengthened our position in the mobile market, and has already resulted in a joint mobile Tier 1 deployment.

The partnership enables us to deliver an end-to-end solution that includes both our Service Gateway integrated with HP's real-time charging and policy decision solution, bringing together best-of-breed components for mobile service providers.

During the quarter, we introduced two new products into the market.

The AC-10000 is the most robust offering of our NetEnforcer line of products and offers both carriers and high-end enterprises a cost-effective solution that provides true 10 gigabit per second performance.

This product already began to generate revenues during the first quarter.

In addition, we introduced the Service Gateway Sigma, the next generation platform in this line.

The new platform contains two major enhancements.

First, throughput has now been increased to 40 gigabits per second, enabling our customers to efficiently meet the ever increasing demand for bandwidth.

New platform also improved the ability to integrate value-added services directly within the system allowing operators to include multiple services on a single platform.

Large projects made up the bulk of the quarter's revenue.

We recognized revenues from 12 large service provider deals, 5 of which were with new customers.

Recently for the first time Allot was chosen as a system integrator for two large projects, taking responsibility to delivering total end-to-end solutions.

While it is too early to call this a trend, it certainly is encouraging sign and has always been a part of our long-term strategy to evolve into a solution provider.

During the last quarter conference call I mentioned three trends that we are seeing as potential growth drivers for 2009.

First, Internet bandwidth consumption continues to grow, and as a result we are seeing an increased migration from 1 gig to 10 gig to meet this demand.

Second, we already introduced two new products to meet the demands on both wireline and mobile networks as I mentioned earlier.

With regards to these two points, initial sales of our AC-10000 has been mainly through Tier 2 medium-sized service providers which are looking for 10 gig performance.

And third, with increase in large projects, opportunities to provide total solutions, and the funnel we have seen for value-added services, we believe that we are positioned to meet our goal of penetrating more deeply into carrier networks.

While we are encouraged by the progress we are making in the increased sales pipeline, we are still cautious in our outlook for the year as the macroeconomic environment may still factor into our results in the coming quarters.

In addition, we may still experience lumpiness in our business on the top line.

That said, we are pleased with the opportunity that we are seeing and more optimistic about the long-term prospects of the network optimization market sales.

I would now like to handover the call to Doron.

Thanks Rami.

Let me take a few minutes to review 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), and certain impairment charges related to further devaluation of our auction rate securities portfolio.

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 first quarter results.

Revenues for the first quarter reached $9.4 million, up 13% over the $8.3 million in revenues reported in the first quarter of 2008, and down slightly from the $9.6 million reported in the fourth quarter of last year.

On a geographical basis, revenues for the first quarter broke down as follows; EMEA 38%, APAC 37%, and Americas 25%.

Out of total revenues during the quarter, products comprised 70% and services 30%.

Gross margin for the first quarter was 74%, similar to the previous quarter's margin.

Please note that as larger projects increase, gross margins may decline slightly primarily due to additional cost we may incur in managing and executing these projects.

As we anticipated, during the quarter we saw the results of the efficiency measures that we put in place last year.

This along with appreciation of the US dollar against the Israeli shekel resulted in a further decline of approximately $640,000 or 8% in our operating expenses for the first quarter.

As a result of all of this, we continue to reduce our operating loss which totaled approximately $800,000 for the first quarter, 33% lower than the $1.2 million operating loss reported in the fourth quarter.

Financial and other income net for the first quarter was $51,000 compared to income of $223,000 in the fourth quarter.

The decline in this item is primarily attributable to a decline in interest rates and weakness in the euro against the US dollar primarily on account receivables balance.

As of March 31, total cash, cash equivalent, deposits and marketable securities decreased $54.1 million of which $39.9 million are cash, cash equivalent, and short term deposits.

During the quarter we used cash from operations of approximately $1.7 million.

This cash consumption was a bit higher than our expectations primarily due to collection from several customers that lead into the first days of April.

If winning large projects, as Rami mentioned, becomes a trend, it is likely that our working capital will increase.

That increase may result in a certain increase in our cash consumption level in the short term.

As you saw in the press release, during the first quarter, certain auction rate securities were further devalued, while others appreciated.

As a result, we've called in an additional impairment charge of $1.6 million in respect of certain auction rate securities, the devaluation of which is considered other than temporary, and an unrealized gain of $400,000 to the other comprehensive income in our shareholders' equity in respect of appreciated auction rate securities, leaving us with a total of $14.2 million in auction rate securities at the end of the quarter.

Accounts receivables totaled $6.6 million at the end of the quarter.

Our DSO was 63 days, again in line with the 60- to 70-day range we see as the target level for 2009.

Deferred revenues at the end of the quarter amounted to $7 million of which $4.8 million were short term.

This represented an increase of $200,000 for the $6.8 million at the end of the fourth quarter.

To summarize, ring the first quarter we saw the results of our improved cost structure.

We expect this cost structure to keep us in a strong financial position to meet the challenging macroeconomic environment.

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

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Hello, Jay, you may now continue.

Okay.

I'm sorry, we had a technical problem here.

If there are questions please don't -- (off mike).

Jay, are you wanting to go now to questions?

That's right.

Thank you.

(Operator Instructions) Okay.

We have the first question from Daniel Meron.

Would you like to take that?

Yes, please.

Please go ahead, Daniel.

Thank you.

Hi Rami, Doron, and Jay.

Congrats on the good quarter.

On -- my first question relates to the lower seasonality this quarter that we've seen.

How much of that -- and may have missed it earlier, but how much of that was related to revenue recognition from the prior quarter where revenue was light and where there is some overflow from prior quarter to this quarter?

Daniel, I think that the major point that we were making (technical difficulty) is that our book-to-bill ratio was over 1.

So basically, due to account issues there are some slide from fourth quarter to the first quarter, but all in all what we have seen is that the situation is relatively healthy, they -- as far as macroeconomic environment.

Okay.

And then can you provide us with a little bit more details on regional trends?

It seems like overall it was pretty stable.

So overall, I don't think we're seeing very great fluctuations.

Nevertheless, its interesting it's kind of following macroeconomic solutions, so Americas may be a on a decline.

Usually they're doing more around 30%.

This quarter they did 25%.

Europe which does usually 40%, this quarter did 37%.

And APAC kind of compensated for the first two.

So there was no particular change in the pace of business of one exerting versus the other, or specific needs with dynamics?

No, I would say that if anything is more influenced than others -- you've seen the results.

But nevertheless, we are feeling that between enterprise and carrier's enterprise is a little bit more slower (inaudible) than carrier's.

But we haven't seen any influence on the carrier side and their needs.

Okay.

Under wireline versus wireless, how do you see the dynamics of purchases?

Who do you think is more inclined to purchase these days versus the other, and what's driving the purchase decision?

Wireless is certainly on the rise.

We've seen that phenomenon throughout 2008, and I think it's going to continue into 2009.

It seems that with all of the topics we discuss, the growth data networks, the usage of data is really pushing mobile operators to need to deploy network intelligence and optimization devices and we're seeing very fast growth in our funnel.

We're seeing relatively fast processes and decision making on the mobile side, and I certainly hope that will continue into all -- 2009.

And from the wireline side?

Wireline side, pretty much things as usual.

Every now and then we have the wireline operator coming back.

And either it's the need for upgrade from 1 gig to 10 gig, which I'm seeing as accelerating and self-propagating, not only from Tier 1 operators, but also Tier 2s and Tier 3s.

And even high-end universities are adopting to 10 gig.

And also Tier 1s who are now talking more and more about Service Gateway and value-added services.

But that's the phenomenon we have seen for the past 10, 12 months.

The -- I would say the mobile is really accelerating.

Okay, and then last one from me before I yield the floor.

Can you provide us with a little bit more thoughts about how we should think about the balance of the year?

You did mention that your book-to-bill was higher than 1.

Should we expect some typical seasonality next quarter?

Will we some orders picking up from here?

How -- to what extent you're seeing the impact of the economic weakness on your results in general?

Thanks.

So in terms of seasonality, I would say that if you look at 2008, as we become more and more service provider oriented and more and more -- now it's project oriented, it seems that the traditional seasonality effect in Allot's numbers is starting to take less an effect.

If you look at 2008 Q3 was our strongest quarter which traditionally was actually one of the two weakest quarters.

Q1 is also traditional weak quarter.

And I think this is coming in slowly up, fairly strong.

So, as I said, obviously we are still not giving out our projections, but we started off 2009 in the right way.

I hope we can continue do so.

But again, do you think that -- I'm not sure we've seen the end of the macro economy effects.

I'm cautious about giving any specific outlook.

Okay, thank you.

Good luck.

Thank you, Daniel.

Thank you.

The next question comes from [Ruben Gauss].

Please go ahead.

Good morning.

First question, just a follow up from the previous question.

What -- why the wireless carriers are more motivated to use DPI versus the wireline which would be more data travel -- still much more data traveled through wireline networks versus wireless.

So why are you emphasizing the wireline networks -- I'm sorry, wireless networks?

Okay.

You want to ask the second question, and we'll answer both?

Yes, the second question is in terms of competitive landscape, what do you see, both from the peer players like yourself and more vendors, like more vendors of the general equipment for the networks?

Okay.

So regarding our emphasize of wireless, in terms of the facts they -- we are seeing wireless as a segment that is growing rapidly in our numbers.

If you analyze why that is, what we are observing, that data traffic on mobile and wireless network is growing very, very rapidly.

You remember that Allot is really dealing with data or Internet-bound traffic, not the voice part of these networks.

And data traffic is growing very rapidly.

When we talked to some of our customers, and if read some market analysts, hearing numbers that reach 3x to 10x growth of data traffic year-over-year.

So that growth in traffic is causing congestion on mobile networks and thus the need for intelligent layer-7 devices that identify applications, identify users, and are able to optimize network performance.

So that's the underlying reason on growth of wireless in our strategy and numbers.

Regarding pure play versus larger system integrators, not all large system integrators who are playing in our space are announcing their separate numbers.

So it's hard to quantify exactly how they are doing.

Nevertheless, I'm looking at our sales and our independent competitors who do publish numbers, and our experience in major RFPs, I think right now this space, because it's such a unique and highly vertical space, we are seeing the independent players dominate the network intelligent place.

Announcements about trying to embed network intelligence through DPI technologies in routers, so far I have not seen any commercialization or anything that affects our win-to-lose ratio.

And whom do you see the most?

That was also part of the question.

You mentioned from independents or from the more major vendors, whom do you see the most in RFPs, and actually the reward -- you're losing a lot of RFPs or just that is -- it's very slow as in the communication industry now in the coming RFPs told the deal.

So in terms of actually names, the competitive landscape here, this is not a very large scape.

On the independent side, I would mention Sandvine, public Canadian companies, you see -- you can see the numbers.

We see them in Latin Americas, somewhat in Europe, and I would say totally they are a player on the independent side.

And from the large players we see Cisco's food there -- acquisition of P-Cube three years ago.

So these are the two major players in our space.

And you --

Next question.

Thank you very much.

Thank you.

Okay.

We have no further questions that are on line for the moment.

(Operator Instructions) And we have a question coming from the line of Greg Weaver, please go ahead.

Hi.

Of the $600,000 or so in sequential operating expense savings, what percent of that is due to the shekel depreciation?

It's approximately a third of the decline.

One third and the other $400,000 is due to cost cuts?

Yes.

Okay, thank you.

And could you help us understand why it is a good thing to be an integrator on these jobs.

It would seem that would change your business model a little bit in terms of pass through and margin and the use of working capital.

Can you help us understand that?

Yes, in my mind -- I mean, there is the marginal benefits of additional revenues that you add to the system integrator, but what's more important for me, and it's part of Allot's strategy, to deepen its penetration into carrier's networks.

If we are the front-end to this solution, in front of the customer, we have -- we achieved greater customer understanding, greater loyalty, and greater stickiness in long run, and puts us in a position to be able to be proactive and offer value-added solutions to these customers.

So essentially being closer and in more tight relationship with our customers.

What impact will that have on your margins?

You alluded to that in your prepared remarks, but can you give us a better sense of what that might do?

Well, I'm not sure that is directly related to our margins.

In terms of being a system integrator the element that is commercial is the fact that on top of selling equipments we sell also professional services.

That is typically an item that has healthy gross margins.

But that doesn't change the gross margin picture by much.

On the financial aspect I would let -- I'm not sure there is one, I would let Doron answer that.

There might be a slight decrease in gross margins because of the fact that from accounting perspective when you are taking a project and you do some significant customization or modification, part of your R&D team is actually dedicated to doing specific work.

R&D work dedicated for a specific project, and that usually is classified as part of our gross profit or part of our COGS rather than part of our R&D expenses.

So this is one of the issues that may fly impact our gross margin.

Okay, and lastly -- thank you for that.

Lastly, could you talk a little about the DPI climate in general?

It seems like things have fallen out here a little bit.

And maybe also talk about some of these large government initiatives that are out there, either to control Internet access or to monitor what people are doing?

Yes, well first thing, I'd like to maybe set our definitions straight.

DPI is a very broad term, deep packet inspections, and it's a very broad term to any type of technology that looks into Internet packets, IP packets, beyond just headers.

Different companies can use it for different ideas, anything from security, ad insertion, and network optimization, and so on, and so on.

So we are positioning Allot not as a DPI company, but really as a service gateway company or a network intelligence company amongst other things, using deep packet inspection technology.

In terms of positioning, by all means, our technology does not affect privacy in no way or manner.

We do not look in content, we do not generate any reports relating to specific user's content consumption in anyway or so on, or profiling.

What we do do is enable service providers to better understand how the network is being used, what applications in general are running over the network.

User's behaviors in terms of traffic patterns, when to provide more bandwidth, when to provide less bandwidth.

In short, things that could be useful to a service provider to monitor the quality of experience of their subscribers.

But in no means it remotely touches on subscriber or users profiling.

In terms of this, the recent trend of, where we used same policy, which in short states that when networks are congested, and no matter what you do network will be congestions, very much like highways, then to let users or packets route randomly does not make any sense.

I mean, not all applications are sensitive in the same way to delays and network congestion.

Thus it makes sense to do it in a smarter and intelligent way, and this is where we come in.

I think regulators around the world and specifically FCC and the (inaudible) cable operators in the US have come to realize that once it's done in an open and fair manner with subscribers, once it's done only when needed, during times of congestion, and once it's done in a fair and open manner it's a win-win situation for everyone.

And we're trying to see that as a trend to be accepted worldwide.

Okay, thank you Rami.

Thank you.

Okay.

We have no further questions.

I'll now hand the call back to Jay to conclude today's call.

We thank you all for joining us today.

We look forward to updating you in the future.

As I mentioned earlier, we will be -- management will be attending two conferences over the next few weeks.

If you'd like to meet with either Rami Hadar, or with Doron Arazi, please be in touch with me directly.

Thanks, and have a nice day.

Thank you for attending today's conference.

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