Allot Ltd (ALLT) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Allot Communications 2009 Q2 results conference call.

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

For the duration of this 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 over to your host, Jay Kalish, to begin today's call.

Thank you.

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 second quarter of 2009.

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 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 in the second quarter of 2009.

Also please note that Allot will be attending the Kaufman Brothers Technology Conference in New York in early September.

Management will be available for meetings in New York and some of the other areas at that time.

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

I will now turn the call over to Rami.

Thank you, Jay.

I would like to welcome all who have joined us today on the call.

It was a record quarter for Allot with revenues breaking the $10 million level for the first time in our history.

We continued to move to the breakeven point as our quarterly loss again decreased and our cash position remained strong.

Our most significant achievement continues to be our growing penetration into the mobile market.

We were pleased to announce our selection as a supplier to one of the world's leading Tier 1 global mobile carriers.

The initial $5 million orders represent deployments in several countries and will cover 60 million mobile subscribers.

Our selection was driven not only by our Service Gateway product leadership, which incorporates many features optimized for the mobile market, but also by Allot's ability to execute on the deployment and support of this complex project in a record time, and in the highest quality as the prime contractor.

While these first orders are very exciting, we feel that there are two areas of further growth into this account.

The first is the expansion into other countries and territories, which will facilitate the same -- the sale of more Service Gateway products.

The second is the growth of active mobile data users.

Currently our revenues in a given account are correlated to the amount of bandwidth managed by our Service Gateway products together with the software license of our subscriber management platform, which is related to the number of simultaneous active data users.

In this strategic account we are currently seeing an average 5% users are active at any given moment, which is similar to numbers we are seeing in other mobile accounts.

We believe that this number will grow significantly with the proliferation of data-enabled end-user devices.

This will also drive our software license revenues and increased bandwidth requirements as well.

Subject to accounting considerations, we expect to recognize the bulk of the revenues on these orders during the second half of this year.

During the quarter revenues included large orders from 15 service providers, six of which was from new accounts.

One of these deals included a large mobile customer upgrading its network from 1 gig to 10 gig, a trend that I've discussed with you in the past.

Our book-to-bill ratio was again over 1, solidifying the positive trends in our business.

We have seen the initial acceptance of the Service Gateway Sigma, the second generation of our industry-leading platform for network management.

The Sigma is a significant step forward for this product.

It has total throughput of 40 gigabits per second, top of its class in the current market.

In addition, Service Gateway will now support value-added services on a single open and integrated platform, fulfilling our vision for the Service Gateway when we unveiled the concept two years ago.

In line with this, I've spoken over the past few quarters about our vision that the Service Gateway product will be the chosen element in a service provider network to integrate other technologies implementing value-added services to the network.

Well, during the quarter, our vision has started to materialize.

We had two large sales related to incorporation of value-added services, one for Voice-over-IP quality measurement with a large fixed carrier in Eastern Europe, and the other for video and peer-to-peer caching solutions for a large fixed carrier in APAC.

Due to the fact that our -- that we incorporated and resold third-party products in our solution, these deals slightly impacted our gross margin.

As you all saw during the quarter we released a very revealing study about the nature of data services over mobile networks.

The conclusions that we presented were quite dramatic.

Global mobile data bandwidth usage increased significantly during the second quarter of 2009 with a jump of approximately 30%.

However, the actual percentage of subscribers using mobile data in parallel, or what we call active users, is still in the single digits, leaving significant growth opportunities for Allot going forward, as I mentioned above.

HTTP browsing is the number one application both globally and in each of the individual regions, although its growth rate is slower than that of 3 million HTTP downloads.

HTTP streaming, including sites such as YouTube, Hulu, MySpace, MSN Spaces is the fastest growing application with a rise of 58%.

The single largest factor leading to cell congestion is peer-to-peer, which accounts for 42% of bandwidth utilization in the top 5% of sales.

This is double the peer-to-peer bandwidth utilization in the average sale, which is 21%.

What is most noticeable from the data gathered in the report is that subscribers are treating their mobile networks just like their fixed networks.

This is particularly true for heavy data users who seem to expect the same level of service from the Internet irrespective of their access method.

As a result, mobile broadband networks face the same challenges as fixed networks, increasing bandwidth demands and subsequent congestion, bandwidth-hungry applications negatively impacting subscriber quality of experience, and the ability of a few subscribers to monopolize bandwidth resources.

In the mobile network these problems are more dramatic by the nature of mobile architecture as the cells themselves can become the primary areas of congestion.

At the same time, the access architecture on these networks is more expensive than in fixed-line networks.

We believe that these factors have led to our success in this market, which in our opinion is only at the beginning of the deployment phase.

To sum up, it was a good quarter for Allot with record revenues, narrowing quarterly loss and continued improvement in our general execution.

The new Tier 1 wins cements our place as the leader in the mobile space, so we have been building on our success for the past year.

Our new Sigma 40-gigabit-per-second platform maintains our technological leadership in our target market.

We believe that our value proposition of optimizing and monetizing networks resonates well with customers across the wireline and wireless service providers.

We feel well-positioned to assist our customers to meet the significant challenges facing the network in the coming years.

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

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 the impact of valuation changes in our ARS portfolio.

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

Now let me walk you through the results for the quarter.

Revenues for the quarter reached $10 million, up 6% over the $9.5 million in revenues reported in the second quarter of 2008, and a 7% increase from the $9.4 million reported in the first quarter.

On a geographical basis revenue for the second quarter broke down as follows -- EMEA, 46%; APAC, 29%; and Americas, 25%.

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

Gross margin for the second quarter was 73%, slightly off the pervious quarter's margin.

This is primarily due to the value-added services project which Rami discussed earlier.

We continue to keep a close look at our operating expenses, which went up slightly primarily due to non-recurring expenses which resulted from consolidation of our US offices.

Looking ahead, we may see an increase in expenses going forward if we gear up to meet our obligations under the new large orders which Rami discussed earlier.

As a result of all of this, we continued to reduce our operating loss, which totaled approximately $600,000 for the second quarter, 25% lower than the $800,000 operating loss reported in the first quarter.

Financial and other income net for the second quarter was $312,000 compared to income of $51,000 in the first quarter.

The increase in this line was primarily due to the strength of the euro against the dollar during the quarter.

It is hard to predict a trend for this line given the fluctuations we are seeing in the mark -- market.

As of June 30, 2009, total cash, cash equivalent, deposits and marketable securities increased to $54.8 million of which $39.4 million are cash, cash equivalents, and short-term deposits.

During the quarter we significantly cut our use of cash from operations from approximately $1.7 million in Q1 to around zero.

As stated in Q1's call, we expect an increase in our working capital that will be driven by better credit terms we are offering to our customers, and increased inventories.

This expectation is partially based on the payment terms we recently agreed upon regarding the $5 million orders.

As a result, we anticipate further usage of cash for funding the increase of our working capital in the near term.

As you saw in the press release, during the second quarter external valuations showed an increase in value of certain auction rate securities in the Company's portfolio.

As a result, the Company recorded an unrealized net gain of $1.2 million to other comprehensive income in its shareholders' equity, leaving the Company with a total of $15.4 million in auction rate securities at the end of the quarter.

Accounts receivables totaled $8.1 million at the end of the quarter.

Our DSO was 73 days, a bit higher than the range that we had anticipated.

One of the main reasons for the high DSO is payment terms that we are providing customers as part of the larger deals we are now booking.

We expect that our recent Tier 1 win will contribute to a further increase in our DSO due to its payment terms.

Deferred revenues at the end of the quarter amounted to $7.2 million of which $5 million were short term.

This represented an increase of $200,000 from the $7 million at the end of the first quarter.

To summarize, it was a good quarter for Allot.

We reached record revenues, kept our cost structure in alignment, and reduced our cash burn.

We continue to be encouraged by the number of large projects that we have booked as we projected during the past few quarters.

That concludes my remarks.

And we will now open the call for questions.

Okay.

Thank you.

(Operator Instructions) Your first question comes from the line of Daniel Meron from RBC Capital Markets.

Please go ahead.

Hey, Rami and Doron.

Congrats on the strong execution.

Rami, I may have missed it earlier, but can you provide us a little bit more color on the prospects that you have with additional mobile carriers, and then also discuss prospects in the wireline business as well.

Right.

So on the mobile side, as we said, we have an increasing growing funnel, not just with this very large account for us where we hope to see expansion, but also within other deals.

I'm not going to get into quantified numbers on the funnel since it's not a well-defined parameter.

But again we're seeing a very healthy funnel for a -- for mobile deals.

I would say that probably half of our service provider funnels are mobile related, both new accounts, and also expansions, which is even more important for us.

As I mentioned on my script, every new mobile account, the revenue that we get from existing mobile accounts is really correlated to the bandwidth we are managing.

Now, the bandwidth we are managing seems to be growing very rapidly these days.

Either it's because new subscribers are coming aboard, either because -- and we saw a great example this quarter, one of our other very large Tier 1 mobile accounts that we announced last year just upgraded their [TGSM] backbone from 1-gig to 10-gig interfaces, and had to go back and replace all of our elements from 1-gig products to 10-gig products.

So again, very strong funnel on the mobile side.

On the fixed side, I would position between small- to medium-sized service providers versus very large ones.

On the small- to medium-sized service providers this has been Allot's same core market for the past couple of years.

The funnel is steady with a slight increase.

Every quarter we share the amount of large deals with service providers.

For us a large deal is anything above 100,000, and we talked about 15 accounts, roughly half new, half existing, which is actually a little bit higher than our average going rate.

So that's on the Tier 2; Tier 3, again ongoing, and maybe a slight increase.

On the Tier 1 fixed, what we are now coming to realize is that in order for Allot to open up again the fixed-line market, whether it's cable or DSL, value-added services are key.

Just having a product based on deep packet inspection technology is not enough.

And you have seen both our announcements and announcements from competition; it's very rare and scarce with fixed (inaudible) operators.

Nevertheless, like I mentioned on my script today, the way we found to open up fixed carriers is value-added services.

And the two very large accounts I mentioned, this was initial penetrations into very large fixed operators who are enabled by value-added services.

The funnel there is just beginning.

But as we now are coming out with the Service Gateway Sigma, I hope to see it as a growth opportunity for 2010.

Okay.

And since you brought up the product cycle, can you give us a little bit more color on where we are with the traction of the Omega?

It seems like you guys are already executing or shipping quite a bit of that product.

And what are the prospects for the Omega?

Is it going to be more of a landline kind of a solution, or could it also target the mobile carriers as well down the road?

So starting from the latter part of your question, certainly the Omega is very popular with the mobile carriers as well.

The Omega, although -- has 20-gigabit-per-second capacity, it does have 1-gig interfaces.

So actually roughly half of our mobile customers are using the Omega product today, including the recent Tier 1 win.

What's exciting about the Sigma, and which is more relevant to those customers who, one, need more bandwidth, the Sigma is now enabling to go from 20-gig to 40-gig throughput, that's one.

And the second one is our vision of a integrated service gateway.

The Omega was able to support value-added services, but really on an external basis, handing off traffic to an external device.

With the Sigma, for the first time we now can incorporate third-party value-added services that are integrated into the Sigma chassis which is really what the services providers are really excited about.

Okay.

And then last one from me before I yield the floor.

As we look into the back half of the year, can you give us a little bit more of color on what you're thinking on the outlook as far as the numbers, and how these good wins and momentum is going to be translated into your earnings?

Okay.

As you know, Daniel, we are not giving out outlooks at this time.

Again, with all the excitement, we feel that the market is young and growing, and it could be lumpy.

Nevertheless -- I've shared with you growth factors then for Allot, one is the mobile, the second is the transition from 1 gig to 10 gig.

We are showing growth, both quarter-over-quarter and year-over-year, even earlier in the year, despite macroeconomy.

So I hope to continue that trend.

Also I will -- I point you to the fact that most of the orders we shared with the market related to this Tier 1 account has not been recognized in Q2, and will be backlog going into the latter part of the year.

Okay, very good.

Good luck.

Thank you.

Thank you, Daniel.

Thank you for your question.

(Operator Instructions) We have a question now from the line of Howard Sterling from Hudson Securities.

Please go ahead.

Morning, good afternoon, guys.

Really nice quarter.

And you don't have to say it, but I'll say it, but it feels like the beginning of a trend.

Thank you.

Maybe you said it, but I didn't get it.

Do you find that the carriers, starting with the mobile carriers are using this just to look at the numbers, or are they actually changing bandwidth allocations based on what they see?

Is it an analytic tool mostly, or is it actually being used for adjustments?

It's definitely not just an analytic tool.

Although monitoring is a very important value proposition for them, almost all of our service provider customers eventually move into the management piece, whether it's based on applications, or subscribers, or a combination thereof.

So definitely all of them are moving beyond just monitoring.

Okay, that's -- I think that's really important, because that gives them a tangible value add.

Absolutely.

Our product is not sold cheaply.

And, as you can see, we have a healthy gross margin.

And to justify that into a greater -- great return of investment for our customers, we definitely need to use our product to manage our bandwidth and resources.

One is to prioritize between applications, the classical example is between the real-time delay-sensitive applications which will get higher priority, and non-real-time applications that in time of congestion should yield to real-time sensitive applications.

And with our new subscriber management platform, they can do it now based on subscribers and applications.

For example, giving certain gamers a very good gaming experience, or what's becoming to be very popular in the mobile space, moving away from flat rate billing, which is congesting the networks, to really what we call a quota management.

Almost like prepaid in voice where users get a certain amount of traffic that they buy upfront, certain --100 megabytes and so on.

We track it based on the user and application.

And once that threshold is crossed, we generate a message to our charging servers, and the subscriber can either buy more bandwidth, change priority, whatever the case may be.

Got it.

Thank you and congratulations.

That's quite interesting.

Thank you, Howard.

Thank you.

(Operator Instructions) We have a question now from the line of [Tom Ehrlich] from RBC Capital.

Please go ahead.

Hey guys, congratulations on the good execution this quarter.

My question regards prospects for a operational breakeven point.

Could you give us a sense on when do you expect it?

Could it be that next quarter, or are we still talking somewhere towards the end of the year?

And how should we think of cash flows as we move closer to breakeven?

Thanks.

Okay, so in terms of breakeven, our expectation is -- to breakeven is around $11 million quarterly revenues.

Since we're not providing any guidance in terms of this number, we cannot comment on when it is going to happen.

But as mentioned by Rami, you can see the trends and probably do your own estimation.

In terms of cash flow, I mentioned that on the script.

There is a situation in which our AR is increasing due to the longer payment terms we are providing with our customers.

And there is some increase in our inventory in order to meet timelines and lead times that are required by Tier 1 operators.

That usually drives an increase in cash consumption.

So what we anticipate is that in the coming quarters we will probably consume more cash, but I hope that within a couple of quarters we will be able to show a positive cash flow.

Great.

That's very helpful.

Last question here regards gross margins.

Obviously if you continue to integrate more value-added services and introduce the Sigma, we may expect some gross margin to be eroded.

Have -- do you think we've hit bottom here, or do you think there is further erosion ahead?

How should we think of that going forward?

Thanks.

First, I think that in terms of -- the bottom line is that I think that there will be a fluctuation in the gross margin.

But I don't think it's going to be a significant one.

You mentioned the Sigma.

I think that with the Sigma, at least comparing to this quarter, I think that Sigma will (inaudible) improve our gross margin from specific value-added services transactions, because of the fact that this is going to be something that is integrated into the Sigma, like a [blade].

And that will probably help our gross margin compared to the deals Rami discussed earlier on the call.

On the other hand, we need to take into account, and that was also mentioned on the first quarter call, that once you move into project-oriented business models you usually provide with further services from customization and so on and so forth, and that may also impact our gross margin in a way.

So I'm going back to the first sentence, and that is the bottom line.

We don't think, at least at this point of time, that our gross margins are going to be reduced dramatically, but there could be a further slight decline.

Okay.

That's very helpful.

And last one regards partners.

Could you give us some color on how work with partners, for example HP or others, have been progressing?

And do you have prospects for new partners going forward?

Yes.

So let's start with the existing one.

Our HP partnership is moving along, not at the speed that I would be -- that I'm happy about, but nevertheless we are starting now to see a joint funnel between us and HP.

It's not only about re-sale, but also HP has the complementary products, policy [charging] servers and the joint proposition is very attractive to service providers.

So -- and now after several months of announcing the relationship I'm now finally starting to see a funnel growth.

So hopefully, we'll have a first win before the end of the year.

Besides HP, we have a couple of other partnerships here and there.

In the past, we've worked with probably most of the large OEM system integrators, but not on an exclusive or global basis.

We continue to pursue these relationships.

We have had enough discussions.

Obviously our success in the mobile phase has attracted some of them to open discussions with us.

But in parallel, we are mastering our own destiny, and with this large Tier 1 mobile, we have stepped up to [belaying] direct.

And so far I think the customer is very satisfied.

And we intend to continue proving ourselves as a worthy company to deal directly with the world's largest fixed and mobile operators.

Great, that's helpful.

And regarding competition, anything new on the competitive landscape from other players say, Cisco or Sandvine or any others?

Nothing major.

You've seen the press releases.

Procera seems to be finding its legs more amongst enterprise, university markets which is an important market for us as well and we compete with them in certain markets.

I think our win rate against Cisco is -- continues to be good and actually even improving with our new line of products.

So all in all I think on a relative basis, with a very aggressive execution plan and exciting products, we in the past 12 months have come out with the AC-10000 for cost-effective 10-gig solution.

The Omega, first to market with a 10-gig product.

And now with the Sigma I think we are well-positioned to continue our momentum against the competition.

But one never should -- one should treat their competition with respect.

Sure.

Thanks a lot, and good luck going forward.

Thank you, Tom.

Good to see things going your way.

Bye.

Thanks

Thank you.

We have no further questions coming through.

So I shall hand back to your host, Jay Kalish, to conclude today's call.

Thank you all for joining us today.

As I mentioned at the start of the call, management will be in New York, beginning of September, around the Kaufman Brothers Conference.

Anyone wishing to meet with management at the time, please be in touch with us directly.

Thanks for joining us.

We look forward to hosting you on future calls.

Thank you for attending today's conference.

You may now replace your handset.