Allot Ltd (ALLT) 2010 Q3 法說會逐字稿

Good day and welcome to the Allot Communications 2010 third quarter results conference call. For your information, today's conference is being recorded. At this time, I would like to turn the conference over to your host today, Mr. Jay Kalish. Please go ahead, sir.

Thank you very much Monica, and thank you all for joining us today. During this call, we will discuss Allot's financial results for the third quarter of 2010. With us on today's call are Allot's president and CEO, Mr. Rami Hadar, as well as our Chief Financial Officer, Mr. Nachum Falek.

On the call, Rami will provide insights in the results and growth drivers for Allot's business and Nachum will then follow with an analysis of the quarter's results. After that we will be taking your questions.

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.

I'll now turn the call over to Rami.

Thank you, Jay and thanks to everyone who has joined us today. We are pleased to report continued steady growth on both our top and bottom line. Revenues during the quarter reached $14.7 million, a 35% (sic - see Press Release) jump over the third quarter last year and 8% over the previous quarter.

Profitability continued to grow on both a GAAP and non-GAAP basis with non-GAAP income reaching $0.05 per share and GAAP income reaching $0.03 per share for the quarter.

Our operating income was $1.1 million on a non-GAAP basis, a 45% increase over last quarter. In light of our execution ahead of time on the revenue side, we decided to expedite certain product development plans to meet new customer requirements and also leverage the momentum in our growth to expand our sales coverage and customer-facing teams.

At this time, I expect that these expenses will be relatively flat for the fourth quarter. Our book-to-bill ratio continues to be above 1 and it continues to build a healthy pipeline of opportunities. During the quarter, we received large orders from 19 service providers, 8 of which were from new accounts.

Of these 19 service providers, 12 were from the mobile side; 10 of the mobile operators are large local operating companies of some of our Tier 1 mobile customers.

The largest opportunities we're seeing at this time continued to come from the wireless side as mobile data, particularly video and peer-to-peer traffic, continues to rise dramatically.

We are recently awarded a contract to serve as the prime contractor and received [POs] for a large Tier 1 mobile operator in Latin America.

These purchase orders cover initial deployments in six countries. On top of these classic optimization EPI-based function, we are also interfacing with online charging servers enabling the operator to increase the ARPU by offering differentiated quarter plans, personalized on a per-subscriber and per-application basis.

While deploying our service gateways throughout the network, we are also incorporating a third-party PCRS solution as well as integrating our MediaSwift product. MediaSwift is the carrier-class media caching and video acceleration service designed to enhance subscriber quality of experience and dramatically reduce operational costs associated with the delivery of popular Internet video and peer-to-peer traffic.

This deployment, again, demonstrates our ability to step out as the prime contractor and provide a complete end-to-end solution for Tier 1 service providers directly.

During the quarter, we also received [funnel line] orders from our large European global mobile Tier 1 customer. These orders are divided into two types, expansion units for new mobile switching centers and software licenses for new value-added services recently integrated into our service gateway Sigma platform.

These two large mobile wins demonstrate our ability to deliver value-added services beyond the classic EPI functions to our customers and reinforce the huge benefits of having standalone EPI-based service gateway behind every GDSN rather than [shallow] EPI functions integrated into routers.

Although data over fixed network is a more mature market, data is still growing quickly driven by peer-to-peer and video-related applications. As a result, we are seeing continued expansion deals from existing customers as well as new wins.

During the quarter, we began a new large service gateway deployment with a Tier 1 fixed operator in APAC and received our first major win with a fixed line incumbent service provider in Eastern Europe.

To summarize, we are pleased to report continued growth in revenues and increased profitability. We continued to add large Tier 1 service providers both on the wireless and the wireline side to our growing customer list. We have reported book-to-bill ratio of over 1 during the course of 2010.

This along with growing funnel of opportunities demonstrates increasing backlog and improved visibility into the coming quarter.

I will now turn the call over to Nachum for a short financial review. Nachum, please go ahead.

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 and amortization expenses.

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 third quarter reached $14.7 million, up 35% (sic - see Press Release) over the third quarter of 2009 and 8% over the second quarter.

As a percentage of our revenues, sales in America has accounted for 17%, EMEA 65%, and Asia-Pacific 18%. Out of total revenues during the quarter, products were 73% and services 27%.

Gross margin for the third quarter was 72%, similar to the second quarter. Our operating expenses grew in line with our budget and as we anticipated and discussed over the past few quarters. As you can see, the increases continued to be in the R&D and sales and marketing lines.

We made a decision to invest in new opportunities in our target market and as a result we decided to move forward the increases that we anticipate to the third quarter in order to address these opportunities.

We currently believe that OpEx will remain relatively flat for the fourth quarter. For the quarter, we were happy to report earning per share of $0.05 as compared to $0.03 in the second quarter.

Operating margins were 8% in the third quarter versus 6% in the second quarter and 4% in the first quarter of 2010. As you can see, we did leverage the top line growth into operating income and margins on one end, but still investing in new opportunities we are seeing in the market.

Cash balance has increased to $56.2 million. During the third quarter, we generated approximately $1 million in cash from operating activities and total of $5 million for the first nine months of 2010.

Our inventory level increased to $9.6 million. In this case, it is a positive sign to our business reflecting increased order as well as equipment which we shipped to customer, but is not yet invoiced or recognized as revenue due to acceptance testing or other customary terms.

Our operational inventory was at the same level as the second quarter. Our DSO levels were similar to the second quarter at 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 conclude my remarks and we will now open the call for questions.

Thank you. (Operator Instructions) We will pause for just a moment to allow everyone to signal.

And we will take our first question from Matt Robinson from Wunderlich Securities.

Thanks. And congratulations on the progress you're making. Nachum, interesting point you mentioned on inventory and the concept of operational inventory. What -- how should we view -- I know you had mentioned it was flat with the June quarter in that context. What percentage of your inventory is in the field at this point?

It's a tough question, Matt. I don't want to get into the details, but as you said the increase that you are seeing for the third quarter versus the June one, most of it is equipment that is already in the field, that we already shipped, but didn't build or recognize the revenues for it.

So I can really -- I'm more able to talk about the difference rather than say exactly how much we have right now in the field that didn't shipped and didn't build yet.

Okay. And we -- and I think, Rami, you mentioned book-to-bill throughout the year was better than 1. Does that mean also in the third quarter?

Yes, correct. I said that separately. For this quarter again book-to-bill over 1 and since beginning of the year, actually I think even before, we've been constantly stating a book-to-bill over 1.

Okay. What should -- Nachum, given what you're doing with inventory and acceptance testing, what should be expect for deferred revenue? It's been pretty flat -- well, it's pretty flat this quarter at least sequentially.

Yes, so deferred revenues are actually more of maintenance and that we are getting in advance and getting paid for it. I think the best is as Rami mentioned to monitor the book-to-bill ratio making sure it's above 1 and that's about it.

Looking at deferred, it's more of maintenance that we [order] getting a year in advance and sometimes more than that, I don't think there's much into it looking at the entire business or operation of Allot.

I heard your commentary on regional mix. Did you have any sales into the US in the quarter?

Yes, so Americas in general were 17%, for both North America as well I would say that in the US we probably have 50% out of it.

Okay. And that -- give us a little flavor on what's the kind of programs you're pursuing that caused you to accelerate R&D a little bit?

Matt, hi. This is Rami. These are mainly around value-added services that were planned for next year and due to certain opportunities we decided to expedite them into this year.

Some -- most of the value-added services we have we talk about publicly, the MediaSwift, Service Protector and so on, but there are certain ones that we at this time at least don't publish in a general way and the specific ones that cause us to accelerate are under these -- let's call it quiet ones.

We'll probably be announcing them sometime early next year. So the acceleration in R&D are planned programs that were planned for the first half of next year. Given that we are executing ahead of plan, both on top line and profitability, we thought this would be wise then to move forward with them earlier than later.

But as we said so you don't get too concerned, that is now done and at least for Q4 we don't expect any further rise in operating expenses.

Okay. Interesting quarter from -- in terms of customers across the board additions, but particularly remarkable I think in terms of the fixed side of things and especially getting into an incumbent type of a setting. What's -- are we seeing anything new in the fixed space that's driving this?

Yes, I think you've picked up on that and I certainly allocated some time in my talk to emphasize that although I would still say that mobile is the exciting space and we're seeing the largest part of the final and quick decisions and so on -- relatively quick decisions and huge potential.

Fixed still has a pulse. Data over fixed networks is growing nicely, not as fast as mobile, but still growing nicely. And in this quarter, we've actually seen a nice pickup on the fixed side by winning two Tier 1 deals. One is a follow-on and another one is a new one in Eastern Europe.

Okay. I'll let somebody else ask a question. Thanks a lot.

Thank you, Matt.

Thank you, Matt.

Thank you. We will take our next question from Dove [Rennisberg] from RBC. Please go ahead.

Hi, thanks for taking my question. Congratulations. I'm actually going to follow up on the last one. Just as far as the dividing in between the business between mobile and wireline enterprise, do you -- where do you see it -- how do you see it dividing forward?

Well, on rough numbers I can tell you that for the first three quarters of 2010 -- and again very, very rough numbers -- it's roughly -- fixed has caught up a bit. So now we are seeing about 40% mobile, 40% fixed, and 20% enterprise.

Now, when I say 40% fixed, that encompasses pretty much everything cable [via sale] and fiber or pure-play ISPs. So mobile is still our largest category by far, but we bundle all the fixed ones under one umbrella and there you get the 40%, 40% and 20% splits.

Okay. And going forward just because -- I understand there was a big win in fixed now in Eastern Europe or several, but going forward -- I'm not asking for guidance of course, but 2011 you see the same kind of mix or do you see mobile taking front stage?

Well, on a percentage-wise, mobile is growing steadily. Obviously I would love the fixed market to continue as well, but looking at the funnel, at least half of it is dominated by mobile. So I would expect that mobile will continue as a percentage of total.

Again don't be misled by the fixed. Because it encompasses so many flavors of fixed technology, it comes up to a large number, but really as a vertical, mobile is our largest vertical by far.

Okay, just one more question on the OpEx. You guys said that it will be flat next quarter and the growth -- so I'm just trying to understand. In other words, the investment that you made in the value-added services are expediting different products.

That was a one-time thing and or should we expect it again in the beginning of 2011?

The jump is a one-time jump. So operating expenses increased by somewhere around 5% or 6%. That's not going to go down next quarter.

But we're not expecting another jump. This is why I've emphasized that it's going to stay flat at least going to Q4 and maybe even beyond.

Okay. Just one more question from me on that topic, on the new products. Is that something that you already see -- I don't know, is the demand for that something you're already talking to customers about or is that more of a future first half, second half of '11?

It's a combination. What's happening is that as part of being service gateway, as I emphasized on my talk, we're now setting up to deliver a more complete solution and not just some other classic or EPI shaping functions, but much more than that.

What's happening is that we get many requests for value-added services. Some of the things we have off the shelf. Some things which are on the plan, we are open to -- if a customer is large enough and justified to move up certain development plans from -- for next year. Some of it was already delivered, and even recognized this quarter and some of it is in the works.

Okay, that's very helpful. Thank you.

Thank you, Dove.

Thank you. Our next question comes from Rami Rosen from Harel Finance. Please go ahead.

Yes, hi, good afternoon guys. Another question about headcount. Can you say, Nachum, how many employees did you have by the end of the quarter and how many did you add over the course of the quarter?

Hi, Rami. So at the end of the third quarter, we had 261 employees while at the end of the second quarter, we had 253 employees.

Okay. And so this number give or take is expected to remain stable throughout 2011, is that correct to assume?

No, the plans in -- right now in 2011 is to increase headcounts. Talking about OpEx staying relatively flat, we meant into the fourth quarter. In 2011, OpEx obviously will increase.

But as you can see in the last couple of quarters, we are committed to the bottom line as well and you are seeing the improvement that we are showing on operating margins as well.

And rough basis, Rami, again, we give you exact focus as Q4 will definitely stay flat. Going to 2011, as we hope to see continued growth in our top line, our plan on rough basis is to leverage some of the increased profitability to the bottom line with some of it to invest back into mainly sales and in R&D.

But again these rises will be incremental and small and only when we see definite opportunities.

I see. And I guess it would be premature at this stage to discuss the overall growth that you're seeing for 2011.

Yes, Rami. If you've been on prior calls, we're not giving our guidance. We are sharing our fundamentals with you, but are not -- and no quantitative guidance.

I see. All right guys, very nice progress this quarter, and thank you very much.

Thanks.

Thank you, Rami, take care.

Thank you. (Operator Instructions) And we take the next question from Marc Silk from C. Silk and Sons. Please go ahead.

Rami, nice quarter again.

Thank you.

After the election in the United States, I just wanted to know what the inside buzz in your industry is about in regards to the issue of net neutrality?

Yes, thank you for the question. So obviously I think you're referring to the fact that Republicans increased their presence in the lawmaking process in the US. Therefore according to more insightful people than I am, the expectation is that the ability to pass any new legislation which allow the SEC to enforce any form of net neutrality is highly diminished by now.

So that is definitely in a way from a lot and I don't want to take any sides from a political point of view, but obviously we have major issues with net neutrality. The fact that it's not going to go forward, at least from a law point of view, is certainly good for us.

What -- having said so, we don't like being in stagnation as well. We would like and actually we would plan to get proactive and propose that instead of going to lawmaking, go to some kind of a compromise process, maybe along the lines of the Verizon and Google compromise that will allow the industry to move forward.

Tier 1 service providers in the US tend to be conservative. I think they would need better than stagnation, they would actually like to see an explicit compromise be put forward in order for them to move forward with their BPI plans which they're very interested in. But these guys need to see a clear decision to move forward.

Okay, and just one comment. I think you've been doing a fantastic job, and good luck going forward.

Thank you, Marc. It's the whole team and we appreciate your feedbacks.

Okay, great. Bye-bye.

(Operator Instructions) And we take the next question from [Bill Dawkins] from [Burless & Dawkins]. Please go ahead.

Hey, nice job, guys.

Thank you, Bill.

Just a question on 2011. What are your comments on pricing for next year and competition for next year?

First, the two topics are obviously related. Our pricing levels today is based on the -- the fact that we are getting very nice gross margins is a testimonial to the very obvious proposition in value-add we bring service to service providers.

When they do qualitative [RIs], the business and the decision to deploy solutions like ours are very compelling. And this is why we can get away with -- in general telecom space with fairly nice gross margin.

Obviously the fact of the competition, they could have actually -- they could have actually been higher given competition. Nevertheless, if you look at the other few players in our space, they also enjoy this -- the bigger -- the larger ones and the serious ones are workingon similar gross margins levels as well.

So assuming no price wars, which hasn't happened in the prior years, no new major entrant, which I don't know of, I would expect to be able to keeping close to current pricing levels.

I did say in prior quarters that as the space is maturing and as we are seeing more and more formal RFP, RFI coding process for solutions like ours, there is more than in the past pricing pressure.

We are mitigating that by offering more complete solution services, software licenses that have -- so far we managed to -- the two phenomenon managed to cancel each other and we've been operating in the 72%, 73% gross margin range.

Actually it's not seen in the numbers, but last quarter, our gross margin was slightly below 72% and it has increased by almost half a point this quarter. It is now at or slightly above 72%.

So if all goes well, we continue to execute both in cost reduction and bring into market new value-added software-based solutions, we should be able to keep our current gross margins.

Well, again, very, very nice job these past few quarters and good luck in the future.

Thank you, Bill. Thank you very much.

Thank you. There are no further questions at this time.

We'd like to thank you all for joining us; look forward to meeting you during our trips to the United States and we -- and in Israel. And we hope to see you on our next quarter call.

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.