Allot Ltd (ALLT) 2009 Q4 法說會逐字稿

Thank you all for joining us today.

During this call, we will discuss Allot's financial results for the fourth quarter and full year 2009.

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

Rami Hadar, as well as Mr.

Doron Arazi, Chief Financial Officer.

On the call, Rami will provide his perspective on the results and his views on the year 2010, and 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'd direct your attention to the risk factors continued 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 May 7, 2009.

Also, please note that Rami will be attending the Mobile World Congress in Barcelona next week, and he will be in New York and Boston during the week of February 22.

If you would like to schedule a meeting with Rami during this time, 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 thank you all for participating in today's call.

2009 was a good year for Allot.

During the fourth quarter, we saw revenues increase to $11.5m, with our annual revenues reaching $41.8m.

Just as important, during the fourth quarter we reached breakeven results on a non-GAAP basis.

At the beginning of the year, I stated that we wanted to continue sequential growth throughout 2009 and to reach the breakeven point by the end of the year.

I am pleased that we were able to achieve both goals.

Our book-to-bill ratio for the quarter was again over 1.

Our strongest region was EMEA, which represented 64% of our revenues, followed by A-Pac with 18% and Americas with 18% as well.

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

Our fourth quarter was strong in terms of top line revenue and profitability and in terms of bookings, with contributions not only from the mobile market but also from fixed operators.

To break it down a bit further, we received five large orders from mobile operators, two from DSL or ISPs and two from cable operators.

One of our global tier one mobile customers, which began deploying our equipment in 2008, recently completed an entire network upgrade from 1 gigabit per second to 10 gigabit per second, using our AC-10000 device.

In 2009, total orders from our global mobile tier one customer reached over $17m, out of which $6.4m or 15% of Allot's total revenues were recognized this year.

We believe that the first stage of this project is in advanced stages of successful implementation and we are already seeing expansion orders from new geographies, bandwidth upgrades and additional subscribers.

Our ability to manage a large and complex deployment has opened up new opportunities in the fast-growing mobile market.

Beyond the mobile space, we continued to offer wider range solutions that cover markets ranging from small, medium and large fixed service providers to large enterprise.

On the operational side, we completed the transformation of our product lineup with two recent exciting announcements.

First, we announced the release of the AC-1400 and AC-3000, which specifically target the tier two and three and large enterprise markets.

These new offerings are designed to enable our customers to optimize network efficiency by maximizing ROI on existing infrastructure, improving policy enforcement and enhancing user experience, while offering a cost-effective entry point.

As I have said previously, optimized network efficiency is critical because of the dramatic and continuous rise in data traffic, particularly in time-sensitive applications such as over-the-top video.

Second, we are also seeing significant interest in the service gateway Sigma, our second-generation service gateway that incorporates value-added services within its open platform.

Recent tests by the Tolly Group, the industry's premier independent testing and strategic consulting organization, proved that a single fully loaded version of our newest release of the SG-Sigma can deliver throughput of over 75 gigabits per second with less than 16 microsecond latency.

We can also scale performance up to 360 gigabits per second with a clustered configuration of the SG-Sigma platform.

In plain English, we are now delivering the most advanced platforms for Layer 7 traffic management that enable our customers to meet the challenge of coping with ever-increasing amount of data traffic over their networks.

We're seeing significant demand for the Sigma not only from new customers, but are in the process of upgrading currently installed Omega platform.

We're also seeing growing interest in our subscriber management platform, the SMP, which represented a significant portion of our sales during the fourth quarter.

Feedback from our customers is very positive regarding this new solution.

As several customers have told me, some of the SMP functionality can be handled in other points of the network.

The uniqueness of the SMP, when deployed with the service gateway, is that it combines application awareness, subscriber awareness and network awareness at a single point in the network, with real-time management and response capability.

This makes the service gateway the natural place to launch revenue-generating value-added services.

The platform scales to support solutions up to 30m subscribers.

The growth in SMP sales demonstrates our ability to provide more comprehensive solutions to our large service provider customers.

Beyond the incremental revenue opportunity, we increase customer loyalty by tight integration into mission-critical policy and billing platforms.

To summarize, taking into account our strong bookings during the quarter, continued orders from our global tier one operator account, our visibility into new large deals and with the continued trends of growth in mobile data traffic, I believe Allot is well positioned for a growth year in 2010.

Before concluding, I would like to thank Doron Arazi, who is leaving Allot to pursue a new opportunity.

Doron made a significant contribution to Allot's financial reporting capabilities and has put in place an excellent and professional team, as well as a standard of excellence in Allot's financial department.

We wish him much luck and success in his new opportunity.

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

Thanks, Rami, and thank you for your kind words.

I enjoyed my time at Allot and believe that I'm leaving a company that is much healthier than the one I joined several years ago.

I have full confidence in the team I've assembled here, to take Allot through this transition period.

I wish you the best of luck going forward.

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 1 to 3R and the impact of valuation changes in our ARS portfolio, as well as write-downs related to adjustments we made to our inventory level and fixed assets, which had a significant impact on our GAAP results for the quarter.

We 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 $11.5m, up 21% over the fourth quarter of 2008 and 6% over the third quarter.

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

The increase in service revenue's portion is primarily due to the services being provided to the tier one mobile operator we recently won.

Gross margin for the fourth quarter was 74%, slightly higher than our guidance, primarily due to the substantial portion of the SMP in our revenues this quarter.

As we anticipated, operating expenses were up again this quarter, and again primarily due to an increase in sales expenses.

The increase this quarter is primarily due to the increased commissions resulting from the increasing sales activities.

As a result of all of this, our loss from operating activities continued to decline and totaled $120,000, as compared with a loss of $461,000 for the third quarter.

Financial and other income net for the fourth quarter decreased to $65,000, as compared with $297,000 in the third quarter.

This decrease is primarily due to the fluctuations in the exchange rate of the euro against the US dollar.

We expect that the fluctuations in this line item will continue as long as we have significant activity in euro and currencies other than US dollar.

As of December 31, 2009, total cash, cash equivalents, deposits and marketable securities increased slightly, to $53.3m, of which $38.8m were cash, cash equivalents and short-term deposits.

Cash yields in operating activities declined to approximately $200,000.

Cash burn for this quarter was lower than our expectations, primarily due to better collections than anticipated.

Looking forward to the next quarter, as was typical in Q1 in prior years, we anticipate that our cash burn for the first quarter of 2010 will increase temporarily.

As you saw in the press release, during the fourth quarter external valuations showed a net increase in the value of certain auction rate securities in the Company's portfolio by approximately $700,000, leaving the Company with a total book value of $14.5m in ARS at the end of the quarter.

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

Accounts receivable totaled $7.8m at the end of the quarter, with our DSO level declining to 61 days.

This decline is primarily due to better collections than anticipated.

Despite the good collection result, we still believe that our DSO level may increase due to the increasing number of large deals becoming a greater portion of our total revenues.

Let me take a few minutes to discuss our inventory and fixed assets write-down.

During 2009, we introduced a variety of new products.

Some of these products are replacing older products and have better capabilities and use more advanced technology, while maintaining pricing level similar to legacy products.

As these products are expected to dominate our sales in the near future, we have examined our old product inventory levels as well as old product units used primarily for demonstration purposes, which are currently listed under fixed assets.

As a result, we decided to make the necessary accounting adjustment at this time, taking into account our sales projections for these products and our internal plans for end of sales and support.

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

Louise, are you there?

(Operator Instructions).

Your first question today comes from the line of Jonathan Kreizman from Oscar Gruss.

Please go ahead.

Hi, Rami, Doron.

Congrats on the quarter.

A few words on competition.

You previously stated you were seeing less of competitive pressures on the mobile tier one side, and we've seen a few wins by competitors naming NTT as one of them, one of the accounts.

Can you talk on where exactly you're seeing your competitors within these accounts and what kind of market share you expect to be accomplishing on this vertical?

Yes.

Hi, Jonathan.

Thank you for the feedback.

In terms of competition, nothing drastically changed this quarter.

Sandvine are still very dominant in the US market, and specifically in the cable space.

We continued in the past then to see a lot of Cisco out there and some Sandvine.

There's other tier two players, but these are the two main competitors for us in most of the regions.

The recent NTT announcement by Sandvine, no special insight except the fact that we are aware that Sandvine had in the past sold equipment to NTT, so the recent announcement could be upgrades or whatever.

In terms of market share, I think it's too early to talk about an exact percentage.

We feel we have a good jumpstart in the mobile space, with a couple of tier one mobile operators already under our belt and (inaudible) deployment.

One is obviously the large account.

The other is the account I described that is doing -- has just done a major 1-gig to 10-gig network upgrade.

We feel that we are with a good starting point on the mobile market, obviously are putting a lot of efforts in terms of our sales force into this market.

Okay.

Now, just looking at the upcoming year, and from initial bids operators are putting in the market, how many substantial potential deals do you see out there, say in the next 12 months?

How many do you actually expect to compete on, the upcoming quarters?

So it's a difficult answer to quantify.

We have a healthy sales funnel into 2010.

Obviously we're focusing on the large deal and it is healthy and at least half of it is mobile related.

In terms of very large deals, the likes of the ones that we have been following for the past two or three quarters, at this point we are involved in two or three deals which have a potential of being similar in size.

So, all in all, we have a pretty good funnel, an overall funnel in quite strong bias towards mobile, with two or three accounts that are in advanced stage and have a potential of being multi-million-dollar deals in the magnitude of the very large deal we are now investing in.

Okay.

I see.

Now, any thoughts on how you expect to manage the operating expenses on top of the growth you currently see?

So right now we expect, if any, very little growth in operating expenses.

This is obviously limited to -- certainly unforeseen issues will come up, for example dollar to shekel ratio, if we win a major account, like last year, when we have to ramp up for specific services capabilities.

But in normal course of business, I would expect little growth in our operating expenses and to see -- assuming we continue to grow, see a portion of the growth going to the bottom line.

Okay.

Now, just very generally, how do you describe the current visibility into the year, maybe as compared to six or 12 months ago?

So again, from a funnel point of view, I feel we have a pretty strong funnel.

I'm not going to get into the exact numbers, since it could be very misleading on what constitutes a qualified prospect and what not.

But it's pretty healthy.

And that's on one hand.

On the other is I feel that we are opening 2010 with a pretty strong backlog of purchase orders, which give us nice visibility into 2010.

Okay.

But considering that, how far away do you feel from -- yes.

Can we let -- let me suggest we let other people have a chance in Q&As and if not, we'll get back to you again.

Okay?

Sure.

No problem.

I'll follow up.

Thank you.

Thank you.

Your next question today comes from the line of Daniel Meron from RBC Capital.

Please go ahead.

Thanks, Rami, Doron and Jay.

Congrats on the good execution.

Also, Doron, good luck going forward with your new endeavors.

Thank you, Daniel.

Sure.

Couple of questions on my end.

If you can give us a sense on where we are with the revenue commission from the tier one operator.

You've got $17m worth of orders so far, I guess in something like six months, if memory serves.

Can you quantify how much of that $17m is already recognized and what's the revenue recognition policies around that?

Thank you.

Yes.

Actually, Daniel, we actually said that in the conference.

We recognized $6.4m so far.

Okay.

So that leaves a lot to be recognized.

So what are the prospects going forward?

Do you see additional opportunities with this particular carrier?

And others, where would other carriers be?

Would it be the same kind of size, if this is somebody that is of similar scope to that tier one carrier?

So first, regarding the specific large carriers, as I said it on my talk, Daniel, we do expect to see further orders coming from these customers.

These would be related to various upgrades, new geographies and increased licenses as the number of active data mobile customers go up.

In terms of other accounts, we have a growing large customer funnel.

And as I said it to Jonathan, two or three of these have a potential of being the size of this current large account.

Okay.

And then, can you give us a sense on the progress around net neutrality and how we should think about it in 2010?

Is this something that is going to hold up the market in 2010 for the balance of the year?

And once this is resolved, what do you think the impact will be on the market?

Okay.

So our assumption is that the net neutrality discussions will go through most of 2010 and only towards the latter part of the year some resolution and compromise will be achieved that will enable the North American market to move forward.

So in our growth assumptions, we don't expect any immediate resolution.

To put things in context right now, net neutrality is primarily a North American or US issue.

I believe, and this is my belief only, that some kind of reasonable compromise will be achieved and then we can see the market move forward.

Obviously mobile operators and also cable operators are hurting very much from growth in data traffic congestion on their networks, which is not good for anyone, not for the operators and certainly not for the users which are seeing quite a bit of experience in going down.

So I think that we will reach some kind of a compromise and we can all move on and into deployments in the US market as well.

Okay.

So that's helpful, Rami.

Just to clear up, is this issue impacting just the US decision-making or North America or elsewhere as well?

And I sensed from your discussion that you guys are not factoring any sort of revenue, at least from major carriers in the US right now, but that growth is actually coming from the rest of the world, just like it did in 2009, right?

Correct.

Right now, at least from our eyes, it's a US-only issue, not even Canadian.

So our expectation from the US tier one market is modest.

We do have, nevertheless, roughly 18% this quarter but higher other quarters coming from the Americas, partly US, partly South America.

So we -- the market is active for us.

We are out there.

We are working with our customers at all levels.

But my -- but given that I'm thinking that it will take throughout the year to resolve this issue, I'm not building my growth plans on North America just now.

Okay.

Thank you, Rami.

I'll yield the floor.

I've got a few more follow-ups.

Thank you.

Thank you, Daniel.

(Operator Instructions).

Our next question today comes from the line of Marc Silk from C Silk & Sons.

Please go ahead.

Thanks for taking my questions.

Congratulations on a good quarter.

And Doron, good luck going forward.

You've been very receptive to my questions in the past, so I do appreciate that.

Let's see here.

You've mentioned you have four new customers this quarter.

Could you at least break down what tiers they are and what areas they are focused on in regards to mobile or cable, etc.?

So on the call what I said is that, if I remember correctly, out of the nine, four were new.

And then I broke it down into different segments.

Out of the nine, either four or five are mobile customers.

So obviously our growth is biased from the mobile space.

This is also in line with where our focus lies, both in terms of our sales efforts and also our new product features and releases are very much focused, not only, but quite strong focus on the mobile space.

In terms of new clients, I don't have the exact list in front of me, but either two or three of these four new accounts are mobile as well, but not all.

It's ironic because a few years ago, when I started researching your stock, you thought mobile was going to be far out.

But anyways, my next question.

Besides DPI and maybe building towers or laying pipes, what other options do you see these telcos have or maybe want to utilize as -- just so I can see how the competitive marketplace is playing out?

Actually not much, to our observation.

Any other option than to deploy our optimization solutions is very, very costly.

We have seen operators discuss 3G to 4G or ATE upgrades.

These are usually in the billions of dollars of decision and years to create.

There are out there people who are trying to advance within 3G with technologies of HSPA and HSPA+ and ++, trying to extract every bit possible out of the existing air infrastructure.

But the ones that we talked to see that the return on investment of optimizing the resources they have now is quite compelling, given the very lengthy and expensive alternatives.

Also, they are realizing that the demand for bandwidth is quite elastic.

As soon as they create and expand more bandwidth, very quickly it gets eaten up, so they are back to square one.

I'm going to break the rules.

I have one more question.

I saw an article about this fear that the iPad, when that comes out, it's going to really clog these networks.

Have you seen people maybe coming to you in anticipation of this phenomenon?

Not specifically with iPad, but definitely with iPhones.

And closest to it, especially very strong trend in Europe is nomadic laptops with dongles, modem on a chip, that many mobile operators are positioning themselves as alternatives to WiFi or even fixed solutions over mobile networks.

And these are very heavy data users.

Well, good luck going forward.

It sounds very exciting with what's to come.

Thank you, Marc.

Thank you.

Your next question today comes from the line of Greg Weaver from Invicta Capital.

Please go ahead.

Hi.

How big was the revenue associated with the tier one operator in the fourth quarter?

Basically, we said that for the whole year we generated like $6.4m.

Bear in mind that we started recognizing revenues from this tier one in the second half, so you can assess what is the size in average.

All right.

And Rami, you mentioned about you felt OpEx would be reasonable stable on a go-forward basis, but you said assuming growth was normal.

Can you define normal?

Well, yes.

As an example of events that might cause us then to nevertheless see substantial growth in operating activities as we -- when we won this major tier one mobile operator, obviously we had to ramp up in terms of both pre and post-sales support, as we took this account directly.

Obviously it contributed nicely to our gross margins, but we had to step up and support the customer very closely.

That caused us to unexpectedly increase operating expenses to step up.

So in general, unless we either do a major M&A, any major fluctuations in foreign currencies, or a major customer event could cause an increase.

Otherwise, it will be on a need basis if we want to open a specific geography or whatever, but then it would be a slight increment.

Okay.

Thank you.

Thank you, Greg.

(Operator Instructions).

We have a follow-up question from the line of Daniel Meron from RBC.

Please go ahead.

Thank you.

Just a quick question here.

Gross margins, it was pretty healthy this quarter.

You've got the mix working for you.

On the other hand, the other platforms may pressure it longer term.

Where should we expect gross margins basically to stabilize?

What's the normal rate, in your opinion?

Daniel, I think that in average what we have seen in the last couple of quarters, 73% -- 72% to 73%, would probably be the prevailing gross profit percentage going forward.

And I think the good thing is that the mixture between the SMP and the new products that, like you said, are kind of pressing down our gross profit, will lead to such gross margins.

Okay.

Got you.

Thank you.

Good luck.

Thank you, Daniel.

Thank you.

We have no further questions coming through.

We do have one question coming through from Jonathan Kreizman from Oscar Gruss.

Please go ahead.

Jonathan, your line is live.

Okay.

A brief follow-up.

Just considering now your visibility somewhat improved and a stronger backlog coming into this year, how far away do you feel from giving quarterly guidance or giving a little more color on how you expect the quarters to come in?

It's hard to quantify, Jonathan, exactly when I will start giving quarterly guidance.

But in my talk I did say that with the trends we are seeing right now in the market, the strong backlog, the strong book-to-bill ratio, the visibility, we expect a growth year in 2010.

So I think that gives you an initial estimate of what we hope will happen in 2010.

Can't say exactly when we will move into actual quarterly upgrades.

At the end of the day, this is still a young industry and our penetration into the tier one is bearing fruit, but early.

So I cannot rule out lumpiness, and this is why I'm being a bit more careful.

Okay.

Get you.

Great.

Good luck.

Thanks.

Thank you, Jonathan.

Thank you.

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

Thank you all for joining us today.

As I mentioned at the top of the call, Rami will be in Barcelona next week at the Mobile World Conference and he will be in the New York and Boston area the week of February 22.

Those who would like to meet up, please be in touch with me.

Thanks for joining us and we look forward to seeing you either during our trips or at the next conference call.

Ladies and gentlemen, thank you for joining.

You may now replace your handsets.