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Operator
Good day, and welcome to the Allot Communications 2010 Q2 results conference call.
For your information, today's conference is being recorded.
And at this time, I would like to hand the call over to Jay Kalish.
Please go ahead, sir.
Jay Kalish - Executive Director, IR
Thank you very much, Emma, and thank you all for joining us today.
During this call, we will discuss Allot's financial results for the second quarter of 2010.
With us on the call today are Allot's President and CEO, Rami Hadar, as well as our Chief Financial Officer, Nachum Falek.
On the call, Rami will provide insights on the results and how he sees the year 2010 progressing, as well as some comments on the recent net neutrality developments in the US.
And Nachum 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 on April 8, 2010.
Also, please note that Rami and Nachum will be attending the Rodman & Renshaw Investor Conference in New York in mid-September and will be available for investor meetings in New York and Boston during that week, which is September 13.
If you would like to schedule a meeting with management during this time, please be in touch with me directly.
I will now turn the call over to Rami.
Rami Hadar - President & CEO
Thank you, Jay, and I would like to welcome everyone participating in today's call.
We continued our strong growth during the second quarter of 2010 with revenues increasing by 36% over the second quarter of 2009, and 9% over last quarter, reaching $13.6 million.
Non-GAAP profitability continues to grow with EPS of $0.03 for the quarter.
Our operating income grew to $765,000, a 36% growth over last quarter.
Operating expenses increased by 4.4%, primarily in R&D and sales-related activities as a result of our accelerated growth.
We may still see some increases on the sales and marketing and R&D lines as we are investing in new opportunities in our growing target markets.
However, we expect these increases to be at a lower rate than the increase in revenues.
Our book-to-bill ratio was well above 1, and we continue to build a healthy pipeline of opportunities.
As we noted in our press release, we succeeded in selling off our entire ARS portfolio for a total of $12.25 million.
While the portfolio was current in all interest payments, these were assets that were set to mature in the very distant future.
We are pleased that we were able to monetize this portfolio at a price close to its current value.
Nachum will address this issue in a few minutes.
During the quarter, revenues included large orders from nine service providers, four of which were from new accounts.
Of these nine service providers, five were from the mobile side.
As you may remember, last quarter, I mentioned that we are in advanced discussions with three Tier 1 operators.
During the quarter, we made good progress and closed two of these customers.
We announced a new $4.5 million order from a Tier 1 European fixed line operator during the quarter.
This is an operator we have worked with in the past and represents a major expansion within their network.
A large amount of our Service Gateway Sigma units were being sold throughout their network in all major points of presence.
In the first phase of the project, our equipment will provide valuable analytics of the network behavior, will enforce policies to maximize average productive experience [and further] distribution of bandwidth between users and applications.
We expect further upside from this customer as they adapt some of the more advanced value-added services over our Service Gateway, such as Subscriber Management Platform, WebSafe and others.
We expect to start recognizing revenues from this deal starting Q4 2010.
Our second large win is an international Tier 1 mobile operator with over 10 million mobile subscribers in 14 countries.
During the quarter, we concluded a multimillion dollar supply agreement with this operator.
I'll also be acting as the prime contractor on the deal.
Our Sigma units will be installed all over the network next to existing [GGSM] elements in the packet core.
On top of classic optimization solutions, the Sigma units will be tightly integrated with policy controls and online charging functions to provide intelligent [quarter] billing information on a per-subscriber and per-application basis.
We already started receiving purchase orders from this Tier 1 customer, and we expect to start recognizing revenues from this deal during the Q4 2010 timeframe.
Beyond these major accounts, we continue to show a healthy pipeline of opportunities with more than 50% of large deals coming from mobile operators.
We remain positive in our long-term growth potential as we continue to make inroads and expand our footprint into new, large mobile accounts on one hand and also upsell expansion and value-added services into our growing installed base on the other.
Finally, I would like to take a few minutes to discuss our perspective on the Verizon, Google network quality proposal, which they issued yesterday.
We are encouraged that the industry leaders from the network and application sides have published a constructive proposal to resolve a long US debate on net neutrality.
From my reading of the proposal, it is consistent with the vision which Allot has been expressing since the introduction of Service Gateway platforms three years ago.
Let me focus on several issues.
One, the proposal states that, "a provider will be prohibited from emerging and unduly discriminating against any lawful content, application or service in a manner that causes meaningful harm to competition or to users." This does allow prioritization of traffic if there is no harm to subscribers, providing a lot of leeway for service providers to manage their networks.
Second, the proposal states that service providers may use reasonable network management "to reduce or mitigate the effects of congestion on its network, to address traffic that is unwanted by harmful -- to users, to ensure service quality to a subscriber, to prioritize general classes or types of Internet traffic based on latency." Again, this fits clearly with the Service Gateway offering and in line with our optimization proposition, and how many of our service provider customers outside the US are using it today.
Third, and most exciting, it allows for service providers to offer "any additional differentiated services and could make use of, or access, Internet content applications or services, and could include traffic prioritization." This could empower service providers and content providers to team up and offer unique differentiated services based on revenue-sharing arrangements for service providers which can have a profound impact on their ARPU.
This is in line with our vision for the Service Gateway which provides actionable application and subscriber awareness to implement these differentiated services.
While this is a very encouraging step, we hope that the SEC will adopt the industry accommodation and allow us all to move forward.
We will still have to wait and see how this plays out.
To summarize, we continue to grow our top and bottom line.
Our strong position with major Tier 1 operators primarily with the wireless carriers who support tens of millions of subscribers continues to be the primary growth driver for Allot.
We continue to believe that the value proposition that the Service Gateway provides our customers [and] unmatched in the industry, as we enable our customers to realize significant cost savings, as well as develop new ways to drive additional revenues from their network.
Nachum, please go ahead with your financial overview.
Nachum Falek - CFO
Thanks, Rami, and good morning, everyone.
Let me take a few minutes to review the results we published earlier today.
I will be discussing non-GAAP numbers, which exclude stock-based compensation expenses, amortization expenses, and the impact of the sale of our ARS portfolio, which we completed during the second quarter.
Full reconciliation of the pro forma results discussed on this call to GAAP results is currently available for review on our website and in the press release issued today.
Now let me walk you through the results for the quarter.
Revenues for the quarter reached $13.6 million, up 36% over the second quarter of 2009, and 9% over the first quarter.
As a percentage of our revenues, sales in America accounted for 17%; EMEA, 62%; and Asia Pacific, 21%.
Out of total revenues during the quarter, products were 73% and services, 27%.
Gross margins for the second quarter were 72%, slightly below our average.
The decrease in gross margin is due to different product mix in the quarter and lower services percentage out of total revenues.
Our operating expenses grew in line with our budget.
And as we anticipated and discussed last quarter, as you can see, the growth was mainly in R&D and sales and marketing lines, as we remain committed to investing in new opportunities in our growing markets.
As a result of all of this, we were happy to report earnings per share of $0.03 as compared to $0.01 in the first quarter.
During the quarter, we were able to sell our remaining ARS portfolio for $12.25 million.
This provides us with the opportunity to clean up our balance sheet and increase readily available cash on hand.
We received a total of $12 million for the entire portfolio, leaving us with a net cash of $55.4 million on our balance sheet.
As a result of this sale, we made the following financial adjustment to the second quarter's GAAP results.
We recognized a loss of $1.9 million, representing the difference between the sale price and the value of our ARS portfolio as of the first quarter, as well as an additional $5.8 million loss, which we had reclassified in the fourth quarter of 2009 as a reduction in shareholders' equity.
Cash balances were $55.4 million.
During the second quarter, we generated approximately $1.4 million in cash from operating activities.
Going forward, we still anticipate some cash burn due to working capital requirements for large customer orders.
Accounts receivable increased to $7.1 million at the end of the second quarter, as compared with $5.4 million at the end of the first quarter.
This was the result of an increase in revenue.
Our DSO level increased to 47 days.
We still believe that our DSO level will probably increase due to the increasing number of large deals becoming a greater portion of total revenues.
That concludes my remarks, and we will now open the call for questions.
Operator
(Operator Instructions).
[Dove Rennisberg], RBC.
Dove Rennisberg - Analyst
Hi; this is Dove on behalf of Daniel Meron.
First of all, congratulations on the strong results.
My first question is on the geo split, do you give any indication what it was between Europe and North America, Nachum?
Nachum Falek - CFO
Yes, for sure.
So America, we're -- on no, for [beginning]?
No, we're just saying that Americas was 70% and then EMEA, 62%.
Roughly, we think that America, I would split it as 50-50.
Dove Rennisberg - Analyst
Okay.
And then, this first half of 2010, you have a very strong run rate.
Do you -- do you think you -- I mean do you see this going forward also?
Nachum Falek - CFO
So, you know, we are not providing any guidance for the entire year.
You're absolutely correct that comparing year over year, we are experiencing nice growth.
And it's obviously -- looking at 2010 it will be much better than last year, but at this point we will not give any specific guidance for the second half of this year.
Dove Rennisberg - Analyst
Yes, yes, of course.
Now, just on the Google, Verizon, do you see -- just in your professional opinion, do you think that this notion has a chance of holding?
Rami Hadar - President & CEO
It's a tough call.
Obviously, the biggest proponent of net neutrality was Google.
So, I find it hard to believe that the SEC will continue on its version -- stricter version of net neutrality for the [main point] that Google actually struck a very reasonable compromise with Verizon.
So I hope this initiative will prevail.
Dove Rennisberg - Analyst
Okay.
Now, just the last one also within Verizon, Google, if let's say the SEC accepts it, how long do you think till you will start seeing -- till it might affect you guys in North America?
Rami Hadar - President & CEO
This is the multimillion dollar question.
I hope that it will open a decision process with our USA carriers.
These are fairly large carriers that we've been waiting for them to take action.
These guys, they could take anything between two to six quarters to really have impact on revenues.
Really depending how quickly they are ready to move.
But we're talking anywhere between two to six quarters.
Dove Rennisberg - Analyst
Okay, great.
Thank you very much.
Rami Hadar - President & CEO
Thank you.
Operator
(Operator Instructions).
As we have no further questions in the queue at this time, I would like to hand the call back over to your host today for any additional or closing remarks.
Please go ahead.
Jay Kalish - Executive Director, IR
Thank you all for joining us today.
We look forward to seeing you either during management's trip to New York next month or during subsequent trips that we will be making overseas.
Thank you for joining us.
Operator
Thank you, ladies and gentlemen.
That will conclude today's conference call.
You may now disconnect your lines.