Allot Ltd (ALLT) 2009 Q3 法說會逐字稿

Welcome to the Allot Communications third quarter 2009 results conference call.

My name is Sarah, and I will 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'm now handing the call over to Jay Kalish, Executive Director of Investor Relations, to begin today's conference.

Thank you.

Thank you very much, Sarah.

And thank you all for joining us today.

During the call we will discuss Allot's financial results for the third quarter of 2009.

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

Rami Hadar, as well as Mr.

Doron Arazi, our Chief Financial Officer.

On the call Rami will comment on the results and recent success that Allot has seen in the mobile market, as well as some comments on the net neutrality debate.

Doron will then follow with an analysis of the quarter's 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 in May 2009.

Also please note that Doron will be attending the Needham conference tomorrow in New York, and he will be meeting with investors in Boston on Friday.

There are still a few slots open on both days.

You can be in touch with me directly if you wish to schedule to meet with Doron.

I would now like to 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 another good quarter for Allot with revenues continuing to grow and reaching $10.8 million.

We also continued to narrow our quarterly loss as we are moving closer to profitability.

I am particularly pleased when I look at the reasons behind our continued success and consistent growth over the past quarters.

As previously discussed, our belief is that the mobile market represents the next large opportunity for Allot, and our goal remains to continue our penetration into Tier 1 service providers.

From our results it is clear that we are succeeding on both of these fronts.

During the quarter revenues included large orders from 11 service providers, two of which were from new accounts.

Our book-to-bill ratio was again over 1 as large orders are starting to provide more visibility on our business going forward.

As you remember, last quarter Allot announced $5 million in orders from a Tier 1 mobile operator.

Since that the announcement we executed successfully as the prime contractor on phase one of the implementation, and therefore revenues from this customer will exceed 10% during this quarter.

As a result of our successful initial deployment we received additional significant orders from this customer, reaching a total of $12.6 million, most of which represents revenues which will be recognized over the next few quarters.

Beyond the mobile space we continue to offer a wide array of solutions that cover markets ranging from large enterprise to small, medium, and large service providers.

During the quarter we received commercial orders for our two new product offerings.

The Service Gateway Sigma represents our next-generation service gateway which offers our large customers increased throughput as well as the ability to integrate a wide range of revenue-generating services on a single platform.

The AC-5000, which is geared more for the large enterprise and small service providers, offers 10-gigabit-per-second traffic management in a compact design.

It enables customers to gain deeper knowledge of applications running under a network, which enhances their ability to properly manage traffic during peak congestion hours while increasing quality of experience for enterprise and small service provider users.

I believe that larger enterprise customers will begin to migrate to 10 gigabits per second as service providers began to migrate last year due to significant increase in traffic over their network.

The debate around net neutrality has begun to heat up again as a result of recent FCC statements.

I want to take a moment to weigh in on the issue by introducing a new term to the debate -- net reality.

What is net reality?

The Internet in reality is not neutral, and it is not free.

The Internet infrastructure was built by commercial companies which have every right to be profitable as long as the needs of Internet users are met.

However, without a commercial incentive, service providers would not invest in developing, expanding, and upgrading their networks.

That's reality.

With the ever increasing number of bandwidth-hungry applications and exponential proliferation of next-generation end-user mobile devices, demand for bandwidth will always exceed supply.

That's also net reality.

In order to ensure fair access to all the network has to be managed.

We have customers who when operating at full capacity find that 80% of their network is being used by less than 10% of their subscribers.

Our products can help service providers create fairness between users.

Further it makes sense to give priority to applications which are time-sensitive.

If for example, operators cannot optimize voice-over-IP traffic over peer-to-peer traffic in times of congestion, the voice-over-IP quality will be so degraded that it becomes unusable.

The business model being offered by mobile networks where every service, ringtone, or even bandwidth is charged back to the subscriber is an indication of where the general service provider markets will be heading.

Many service providers around the world have successfully implemented field services offerings as a solution to both optimizing their own infrastructure and providing the subscribers choice.

This idea makes sense.

If we take that idea one step further, we can give subscribers choices on how they use and pay for the -- for Internet access, what sort of applications they really want to access, a premium voice-over-IP package, a video package that guarantees the quality of video stream, a dedicated gaming package that makes sure that actions don't slow down or the network doesn't.

If the operator offers these services at a price that suits you, great.

If not there is bound to be an operator which will meet your budget.

That's competition, that's supply and demand, that's also net reality.

From Allot's point of view whether or not we believe in net neutrality or net reality, what Allot offers are propositions that appear to be consistent with recent FCC statements.

Enabling service providers to manage traffic and create fairness amongst users at time of congestion, appears to be consistent with FCC's vision of fairness, and is clearly allowed.

In addition, our service gateway concept enables our customers to offer experience-enhancing applications such as parental control, video-caching, and anti-virus protection.

These are application-neutral, and they'd be offered on an opt-in, opt-out basis, giving subscribers the choice of whether or not to subscribe to these services and pay the related premiums.

Again, these are not controversial services, and seem to be agreeable to all sides of this debate.

To sum up, we are pleased with the results of the third quarter, and more importantly, the continued growth and execution on the plan we laid out to you over the past few [quarters].

We are proud of our continued success with the new Tier 1 mobile customer as we work closely to deepen the relationship by deploying in different parts of their network.

I would like to thank our dedicated employees who have helped Allot make the strategic leap and enabled us to successfully pursue large customers worldwide.

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

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 which had a significant impact on our GAAP results for the quarter.

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

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

Revenue for the quarter reached 8.

-- $10.8 million, up 10% over the $9.8 million in revenues reported in the third quarter of 2008, and an 8% increase from the $10 million reported in the second quarter.

On a geographical basis, revenues for the third quarter broke down as follows -- EMEA, 58%; APAC 22%; and Americas 20%.

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

Gross margins for the third quarter were 73%, in line with the second quarter level.

As I mentioned last quarter, and as we anticipated, operating expenses were up this quarter primarily due to increasing sales expenses.

The increase is due to both increased commissions and travel expenses as well as added personnel in order to support the increasing sales activity resulting from our large mobile operator win and increasing number of opportunities in the market in general.

We also expect an additional slight increase in our operating expenses in Q4.

As a result of all of this we continue to reduce our operating loss, which continued to decline during the quarter to $463,000, 17% lower than the $560,000 operating loss reported in the second period.

In addition it is the first quarter in the last two years in which we generated a real positive EBITDA.

Financial and other income net for the third quarter was $297,000, similar to the second quarter level of $312,000.

However, it is still hard to predict a trend for this line given the fluctuations we are seeing in the mark-to-market and in currency exchange rates.

As of September 30, 2009, total cash, cash equivalents, deposits, and marketable securities declined to $52.8 million, of which $39 million were cash, cash equivalents, and short-term deposits.

Cash yields in operating activities went up to approximately $400,000 primarily due to the semi-annual royalty payment to the Office of the Chief Scientist.

As discussed last quarter, we expect that cash blend will continue over the next couple of quarters as a result of favorable payment terms given to our new large mobile operator and other large customers, as well as the further increase in our inventory.

As you saw in the press release, during the third quarter external valuations showed a net decrease in value of certain auction rate securities in the Company's portfolio with one specific security being devalued to less than 20% of its par value, primarily due to a downgrade announced by certain rating agencies, anticipating high probability to default on the principal and future interest payment terms.

As a result, Allot recognized an impairment charge of $1.4 million in its statement of operation on a GAAP basis, in respect of ARS, the devaluation of which is considered "other than temporary," and an unrealized net loss of $200,000 to the comprehensive income in shareholder's equity, leaving the Company with a total book value of $13.8 million in ARS at the end of the quarter.

To date all ARS continue to be current on their respective interest payments.

Accounts receivable totaled $8 million at the end of the quarter.

Our DSO was 66 days.

As I mentioned last quarter, we expect our DSO level to increase due to the payment terms that we are providing customers as part of larger deals and especially with regard to the orders received from the recently won mobile operator.

With respect to inventories, we have seen an increase over the past few quarters.

This is due primarily to several factors.

First, by targeting the higher-end market our new products are more expensive.

Some of the critical components of our new products require longer lead times.

As a result we need to have these in our inventory to meet customer orders and supply schedules which in many cases are quite short.

Last but not least, a significant portion of this inventory was already shipped to customer sites, and in some cases it's even operational.

But since -- not -- since -- sorry, but since not all the terms for recognizing revenues were met it still remains part of our inventory.

That said, with the transition to our newer solutions we will be taking a close look at inventory levels over the next few quarters.

Similar to the second quarter deferred revenues at the end of the quarter amounted to $7.3 million, of which $5.2 million were short-term.

That concludes my remarks.

And we will now open the call for questions.

Thank you.

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

Please go ahead.

Hey Rami and Doron, congrats on the ongoing execution.

Can you provide just a little bit more color on how you see the outlook for the Company into 2010?

It seems like you guys have pretty good orders to work from as far as the revenue, but if you can provide a little bit more color on the expected growth, and also on the pipeline that you have right now.

Yes, hi Daniel, and thank you for your comments.

So we remain with our strategy not to provide specific guidance moving forward.

Nevertheless, having said that, I think one can deduct that the increased orders we received from the significant Tier 1 mobile operator is quite large compared to single-digit million dollar deals we've done in the past.

You can also understand from the text that at large we haven't recognized large portions of these orders.

So obviously these turn into backlog into Q4 and into our next year.

This is a complicated project, and which will be done and delivered by phases.

So I expect only portions of this to be recognized in Q4.

Therefore, compared to the past, we do see -- our visibility is increasing, one, because of this account and the significant orders.

The other were in the past, for better or for worse our sales cycles and deals were more short-term oriented -- deals with smaller service providers and certainly enterprise tend to be three- to six-month deals.

Once you get the purchase orders you supply immediately, which is great.

But nevertheless you don't get a long-term visibility.

As we move to more and more service providers, and some of them are becoming larger, we do now see a better funnel on long-term deals, both ones that are under execution and also ones that have been -- we have been working on for the past, say, six to nine months, and I hope that will mature during Q4 and first part of next year.

Okay.

And then on the Sigma platform, you mentioned that you had one win there.

Can you give us a little bit more color on the traction with that product, what are the prospects with getting more customers underway, and also on the acceptance of the AC-5000?

Yes.

So the Sigma became -- started really ramping up in Q2.

In Q3 we got our first commercial orders, not yet a meaningful part of our revenues, it's still the Service Gateway Omega.

But the nice thing about the service gateway platform is that Sigma has actually very graceful migrations, so some of our customers that ordered the Omega have ordered upgrade packages into the Sigma.

Definitely we are directing all of our new customers towards the Sigma.

So all of our ongoing trials today, the vast majority are really based on Sigma trials.

So I expect that in Q4 all the service gateway deals will be already Sigma deals.

And again the importance is that we are offering all of our customers who already purchased Omega products a graceful migration.

As to the AC-5000, this is basically the same fundamental technology which is in the Sigma product, and is in the AC-10000 product.

It's now in a very small compact base, AC-5000.

We've created that version of our technology to address what we believe is the high-end enterprise market.

As some of these large universities and governments are now starting to upgrade to 10 gigabits, we thought it will be good to have a low-entry cost -- low-cost entry point to the 10-gig space.

We already have seen shipments, although we haven't yet taken our revenue recognition on the AC-5000.

That will happen in, if all goes well, in Q4.

Okay, that's fair.

And can you provide us with a little bit more color on the dynamics that you're seeing because of net neutrality?

Has this slowed down some decision-making in North America, elsewhere?

What do you think this -- how do you think this issue will play out over the course of the next several quarters?

Well, in North America, I would split it into two parts, let's say, the fixed side and the mobile side.

Obviously on the fixed side we have the cable operators that in the past have moved forward with similar DPI technology.

I think now most of them are waiting to see the end of the FCC discussions on this topic.

There -- the DSL-based, copper- or fiber-based operators, I don't think they will be moving with network-management or application-management devices anytime soon.

What I hope to see is the mobile operators move forward.

There it's not even clear if net neutrality is even relevant to mobile operators.

Competition there is very clear, and available in every major market you can find there are three or four mobile alternatives to access the Internet.

So I believe that we are -- that we will be able to go after certain Tier 1 mobile operators in the US in the coming quarters, as they move forward.

Certainly all of their counterparts in Europe and Asia-Pacific are moving forward with our technology.

So in short, cable has moved in the [past].

I think they will wait and see to see how the FCC clears up on the topic.

Fiber and copper, don't think they'll be interested anytime soon, at least not the Tier 1s.

We are seeing some traction in Tier 2s and 3s.

And the mobile, I certainly hope to move forward.

Okay.

And then just last one for me, on the value-added services side, can you quantify the traction so far, and how should we think about it about 2010?

And also just relating to that, the growth prospects with the Tier 1 operator.

It seems like it's almost triple the initial order by now.

Should we expect -- is there more expansion potential with that carrier?

(Technical difficulty).

Ladies and gentlemen, thank you for your patience.

Your call will continue shortly.

Ladies and gentlemen, our main feed in now back with us.

Daniel, we'll continue with your question, thank you.

Thank you, just to repeat it for Rami and Doron, if you can give us a bit more perspective on the potential with the Tier 1 operator, can we see additional orders from that one?

And then also on the prospects in the value-added services segment, the traction so far, and how should we think about it going into 2010.

Thank you.

Yes, so starting from the latter, Daniel, regarding this customer, we definitely see a potential to grow, both in terms of geography, and also in terms of deepening value propositions, and enhanced features.

That said, obviously further orders will be dependent on our execution, and their internal needs and budgets.

I don't expect us to continue to triple these numbers, but I do hope that they will grow in the coming quarters.

Regarding value-added services, I think the jury is still out, and so far revenue from value-added services has not exceeded 10% in any one of the quarters.

We see the deals coming, but we haven't seen growth yet.

The main test is coming now as the Service Gateway Sigma has become available.

And for the first time these value-added services can be offered integrated into the device.

We have started several trials, but we've yet to see commercial traction.

I hope it will be a growth engine into 2010, but we need to see the proof here.

Okay, thank you.

Good luck.

Thank you, Daniel.

The next question comes from the line of Marc Silk from C.

Silk and Sons.

Please go ahead.

Hi Rami and Doron, thanks for taking my questions.

On your Tier 1 providers, are 100% of them mobile operators, or could you give me a breakdown?

In the recent 18 months we announced five or six on Tier 1 customers.

Out of them, the majority were mobile operators.

I think one in Asia-Pac was a fixed-line operator.

So are they all mobile?

No, but the majority are mobile operators, yes.

We do have in our installed base, if you remember back in 2006, we actually had a very large Tier 1 operator, which was cable.

But right now the main traction is with Tier 1 mobile operators.

Okay.

And can you update us or comment on your relationship with Hewlett Packard?

Yes, we have recognized a product synergy between our products where HP is installed in some of our customers with their BSS and OSS solutions.

Also they are -- have a technology that reads on what we call a PCRF device.

We have worked out a technical integration between our products and our SMP platform and their solution.

And in the past six months we've pursued several joint customers together.

We do have joint deployments, which we have won separately, and now are pursuing several customers together.

We've yet to win one in a joint account.

Okay.

And my last question is net neutrality.

One of the comments that I read, they keep saying about prohibiting broadband providers from favoring or discriminating against certain kinds of Internet traffic.

So I know with network management, what you're trying to do is manage the network.

But if you're prioritizing a peer-to-peer or something that needs to be done immediately, is that considered discriminating even though you're helping everybody?

Well, the FCC is still -- though they made some general statements about how they see net neutrality -- and I think there's two or three rules that were provided, it still remains a high level.

What I -- it is -- my personal interpretation is that playing flat without any reason to discriminate between applications is -- will be prohibited, at least if the FCC has its -- their way, but there were a couple important caveats.

First, they immediately recognized, even in the high level comments, that during congestion period not taking action is hugely under-optimized.

So I believe that they will see -- they will spell out exactly what is allowed during congestion periods, whether it's a prioritizing amongst users, amongst applications, or even just creating fairness of use during time of congestion.

And these are things that our technology can definitely implement.

Beyond that, what I mentioned on the script, we are adding additional value-added services on to our platform such as the ability to deny access to illegal websites or parental control, video-caching.

All of these are application-neutral in a way.

Subscribers can opt in or opt out depending if they want to sign up for the service or not.

And I don't think -- and FCC hasn't made any comments on not allowing these to happen.

But still out there is -- at the end of the day net neutrality is really about the big issue, if service providers will be able to get into revenue-sharing arrangements with content and application providers.

Because if they are allowed to prioritize, because it's their networks at the end of the day, then it opens up a whole new potential revenue stream for network providers to share revenues with service providers.

That's really what the debate is about, and that's not yet been clear.

Okay.

And then my last question is, obviously these smart phones are taking many nations by storm, with China, and I think now South Korea, offering the iPhone and now Motorola's DROID coming out.

Could you say there is a correlation the more these smart phones get more and more ubiquitous, that's just going to help these -- all these DPI companies like yourselves?

Definitely, these guys are our best friends, because not only -- with each and every one of these next-generation phones it spells out a new subscriber for broadband services, and more importantly it gives -- enables the subscriber to consume data bandwidth in order of magnitude higher than the old-generation phones.

Imagine how easier it is now to surf the Internet with an iPhone versus a phone you had two years ago.

So definitely these guys are driving -- are the main factor to driving increased demand in bandwidth over mobile networks which is the number one growth factor for us.

And this is only just the beginning.

In the networks we have deployed, the penetration numbers right now are -- for mobile active subscribers to be simultaneously aligned, we are seeing 1%, or 2%, or 3% of total subscribers.

So it's beginning, and we hope to see a continued exponential growth in this category.

Well, congratulations on a good quarter.

And it's exciting that you're headed in the right direction.

Thank you, Marc.

(Operator Instructions) We have a question from the line of William Morrison from Stifel, Nicolaus & Co.

Please go ahead.

Hi, gentlemen.

Can you hear me?

Good morning.

Yes.

Hi.

Good.

I have three questions.

First question is, what percentage of your revenues were service providers versus enterprise in the quarter?

I think that the service provider portion wound up to around -- about 70%.

70%?

About 70%.

Okay, thanks.

And number two is, could you give us more of -- more color on your visibility, could you delineate your backlog versus deferred revenue and the inventory shipped but not yet billed?

And part of that question is based on your ability to execute, where would those rev rec issues fall, would they be in the inventory, or in the backlog, or deferred revenue, or how is that breakdown?

I cannot give you quantified numbers, but I can talk about trends.

I think that the significant portion is referring to terms and conditions that should be met in order to recognize revenues.

And there is still different portions that relate to orders that were already shipped, but there are some further operational stuff we need to go through before we can get the acceptance of the customers.

So it's mixed.

I cannot provide the -- or quantify the mixture.

But we -- actually we have both factors impacting our ability to recognize revenues at the end of the day.

Okay.

Would those be in the inventory, or in deferred revenue, or in the general backlog?

No, basically -- it depends, if we already purchased the inventory and [sold it], it will be part of our inventory.

In most cases you won't see that in the deferred revenues unless there is a situation in which we got paid in advance.

Because our deferred revenues are only showing the portion of revenues that were recognized but weren't collected.

So I would say that in most cases you will see that in the inventory.

In the deferred revenues you will usually see the portion of maintenance that got collected in advance.

Okay.

And in those -- the software deliverables that cause revenue recognition upon shipment, are those for value-added services or just like the general deep packet inspection engine?

Basically, at this -- for this year we are subject to -- our accounting is subject to SOP 97-2.

Our solutions are a mixture of software and hardware.

And there is a significant software also in our traditional DPI capabilities, not only the value-added services.

So the impact of this software on recognizing revenues is still significant.

Okay.

And the last question, what percentage of your visibility is due to the 10-gig upgrade by existing customers versus your funnel for new Tier 1 mobile operators?

(Technical difficulty) how to exactly quantify, but certainly I would say if you look at our traction on the Service Gateway Omega, the first 10-gig generation product which we have been deploying for the past two years, I would say that right now if you look at our large project funnel about a quarter of these opportunities are really existing customers looking to upgrade.

In general, every quarter is -- there is a large portion of existing customers coming back to us to buy from us, whether it's extended services, whether it's new products because of geography expansion, or whether it's product upgrades, for example from Omega to Sigma.

You can get the feeling that every quarter we announce the amount of larger deals that we have won, typically they're anywhere between 10 to 15 deals, and out of them we outline how many of these are new deals.

This quarter it was about 11 large deals, out of them two are existing customers.

Typically it's more a 1-to-3 ratio, meaning a third of all the new deals we win are with new customers, and two-thirds are with old customers.

Bottom line is I expect that, let's say, in the next 12 months at least half of our Omega customers will upgrade to the Sigma, because it offers greater scalability in bandwidth, and because if they want to implement our value-added services in an integrated fashion they need the Sigma.

Beautiful, thank you very much.

Thank you, William.

Our next question comes from the line of Jonathan Kreizman from Oscar Gruss.

Please go ahead.

Hi guys.

Hi, Jonathan.

Hi, Jonathan.

Hi.

Could you please talk about how you see the Starent acquisition by Cisco, and where if at all you previously saw this company in terms of competition?

And then, more generally on competition, what the landscape is looking like with the DPI gradually gaining base.

Very well.

In general, starting from the end, we haven't seen any major shifts in the landscape in the past -- since the last one or two quarters.

Regarding Starent and Cisco, we've always seen vendors with router products state plans to embed DPI in their routers.

So far we haven't seen anyone coming anywhere closer to the capabilities of a pure-play DPI.

This is not just -- not only us, but compared to all pure-play DPIs.

DPI, at the end of the day, is not a feature.

It's a product.

It has management platform.

It has very resource computational hungry engines inside, it has redundancy elements.

It's a product, and not a feature.

And therefore we haven't seen any one of these router vendors really offer a meaningful DPI solution.

Some of them offer a same level DPI.

But most of the accounts now, the RFPs we are seeing call for independent best-of-breed DPI solutions.

Out of this group Starent was certainly vocal about their intentions to embed DPI.

Again, we haven't seen anything that would threaten our position to a customer who wants a pure-play solution.

On the contrary, we actually have several joint deployments where we are fitting in a mobile carrier network alongside, or even right after, Starent GGSN.

That said, the -- this is a very serious company with execution capabilities.

They do want to go after this market.

Whether Cisco will expedite this ambition or not is yet to be seen.

Cisco had acquired a pure-play DPI player three or four years ago, and the results are mixed at best.

Okay, then following up on router vendors, could you talk about the nature of the partnerships you have with Tier 1 router vendors?

What exactly is behind these partnerships?

Yes, no changes there.

We do not work on an exclusive basis with any one of the Tier 1 system integrators, or large telecom vendors, but more or less we pretty much work with everyone in specific geographies or countries on a per-opportunity basis.

So -- and that will remain our policy for now.

We like the fact that we are free to choose.

Sometimes we would step up and be the prime if we -- like the last time we convinced a Tier 1 to believe in our execution.

But we always look -- are open to partnerships.

I see.

Okay, thanks, that's all for me.

Good luck.

Thank you, Jonathan

Our next question comes from the line of [Phil Dawkins from Dolphin Joless].

Please go ahead.

Hello folks.

I am quite new to your story, but I've got one question, and maybe a follow-up.

Could you all explain to me the nature of the aggressiveness of this current Tier 1 operator?

Are they playing catch-up or assuming a leadership position in relation to your other Tier 1 customers?

Well, I will certainly not characterize this as playing catch-up because definitely we are -- although we got five to six (inaudible) Tier 1 mobile operators in other markets, I think the vast majority of mobile operators have yet to adapt to our Service Gateway solution.

So they're certainly in the early adopters of our technology from the point of view of Tier 1 mobile operators worldwide, not the first one, but definitely in a good place.

Actually in a way they are using our technology and its ability to manage not only applications, but subscribers, what we call our subscriber management platform, that actually are quite advanced compared to other deployments we have seen in the past.

This is part of the reason why these are meaningfully large revenues compared to past wins we had.

So definitely advanced, definitely one of the first early adopters, but not the very first.

So if I understand you correctly, your other Tier 1 customers are potential customers to play the catch-up game to this more aggressive Tier 1 customer?

Yes, the big differentiator -- customers can use our products in various levels of sophistication.

They can start just by monitoring their network, understanding applications and subscriber behavior, generate various types of reports, understand better how the network is being used, but not take any action based on this knowledge.

Most of them take the next step and decide that in times of congestion they want to manage their network proactively, and then whether it's based on application preferences -- for example favoring real-time sensitive applications over others -- will set rules of priority in times of congestion.

Others, the next step in sophistication is those who want to create either fairness or revenue -- or new revenue streams by introducing quota-based usage.

So demand is so huge that the networks can't keep up.

Even if one upgrades to HSPA Plus or LTE then one gets two or four-times improvements in bandwidth.

We are talking about data growth of 3X to 10X per year.

So they have to do something with this overall demand, and the next step would be actually offering quota-based plans.

So up until certain amounts are used per month that we are actually able to count on a per-user or a per-application basis, you get one cycle of payment platform.

And then if you exceed that then either you choose to be downgraded in the priority or pay more and continue to consume.

So that's for example a more sophisticated usage of our platform.

And if I understood your comments earlier, in respect to a pure-play DPI product provider, you all virtually don't have any competition.

No, I'm sorry if that was understood.

We definitely have competition.

Our space is not very large.

There are three or four players out there.

I mentioned Cisco with their acquisition of a pure-play company three or four years ago.

What I did say is that we haven't seen any meaningful change in the landscape in the past two or three quarters.

And why would you say that you have not seen any change in the last few quarters?

Is that because of the outlook of growth for DPI or because of technological reasons?

Why is that?

No, it's because the players -- the statement refers to those who are actively playing as pure-play DPI providers.

The players today are the players we have seen 12 months ago.

We haven't seen anybody enter or anybody exit.

Obviously we are witnessing various product announcements, but that's more natural course of business.

Okay, thank you.

The next question --

Thank you very much.

The next question comes from the line of [Tom Ehrlich] from RBC Capital Markets.

Please go ahead.

Hi, Rami and Doron.

Congrats on the execution this quarter.

Most of my questions have been answered.

Just some housekeeping questions here.

First of all, regarding gross margins, you managed to maintain gross margins this quarter which is quite nice considering the new products kicking in.

What should we expect going forward in terms of the new Sigma ramp-up impacting or not the gross margins, and on the other hand offset by increased software components?

So I think we -- well, we already discussed that in Q2 conference call.

At this point of time what we anticipate is that the gross margins will be kept or slightly go down.

And this is because of the fact that on the one hand we have -- the hardware part is becoming more significant.

But if you bear in mind that there's the significant software that we're selling with this hardware, especially with our subscribers management platform and hopefully with the value-added services in 2010, the conclusion for now is that we will be able to maintain these gross margins.

There might be a slight decline.

Okay, very well.

Another question here regards your backlog.

Obviously, very impressive.

I think it's the fourth consecutive quarter you guys had book-to-bills over 1.

Could you give us a sense on the conversion rates from the backlog into revenues that you expect for the current backlog that you have of orders?

Is it something that could go over, I don't know, half a year, a year?

How should we think of that?

So in terms of backlog you have to bear in mind that we have, I would say, two major types of backlog.

One is the services.

The maintenance part that is growing at the installed base is actually growing.

And that would spread beyond a year because in some cases we have deals for three years in advance.

The other part is with the -- is the product part which, as you have concluded, grew in the last couple of quarters.

I think that due to our execution issues, operational stuff, milestones defined by the customer, we will be able to recognize these revenues over several quarters.

You need to bear in mind that there is an acceptance test that we need to go through.

It's not just ship and recognize.

And this is why we think that it will spread out through a couple of quarters.

Great, thanks for the data points, and good luck going forward.

Thank you, Tom.

We currently have no questions in the queue.

(Operator Instructions) We have no questions coming through.

So I'll now hand back over to your host for any concluding comments.

Thank you.

Thank you very much for joining us today.

As I stated at the top of the call, Doron will be going to New York to be attending the Needham conference tomorrow.

He'll also be available to meet investors in Boston on Friday.

Anyone who would like to meet with him certainly could be in touch with me directly.

Thanks for joining us today, and we look forward to meeting with you in the future.

Thank you for attending today's conference.

You may replace your handset.