Allot Ltd (ALLT) 2010 Q4 法說會逐字稿

Good day and welcome to the Allot Communications 2010 Q4 results conference call.

Today's conference is being recorded.

At this time I would like to turn the conference over to your host today, to Mr.

Jay Kalish.

Please go ahead, sir.

Thank you very much and thank you all for joining us today.

During this call we will discuss Allot's financial results for the fourth quarter and the full year of 2010.

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

Rami Hadar, as well as our Chief Financial Officer, Mr.

Nahum Falek.

On the call, Rami will review the Company's major achievements over the past year as well as future trends, and Nahum will then follow with a short analysis of the quarter's and the year's results.

Before we begin let me remind you again that certain statements made on the call today may be considered forward-looking statements, which reflect management's best judgment 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.

Just note that management will be participating in five different financial conferences in the US and in Israel over the next few months.

Details regarding these conferences appear on our website.

I would now like to turn the call over to Rami.

Thank you, Jay, and thanks to everyone who will join us today.

2010 was a solid year for Allot.

As we anticipated and spoke about, we demonstrated steady growth in our top line while improving profitability every quarter.

Revenues during the quarter reached $16.2 million, a 41% jump over the fourth quarter last year and 10% over the previous quarter.

Profitability continued to grow as well, which Nahum will discuss in his presentation.

Our operating income was $1.9 million on a non-GAAP basis, and we achieved a 12% operating margin.

Our book-to-bill ratio continues to be above 1, and we continue to build a healthy pipeline of opportunities.

During the quarter we received large orders from 13 service providers, two of which were from new accounts.

We received an initial order from a Tier 1 service provider in EMEA that has over 15 million subscribers and operates both on fixed and wireless networks, as well as an expansion order from a Tier 1 cable operator in EMEA.

On a macro level, based on market data and figures we saw from our own Mobile Trends Report, the dramatic increase in bandwidth consumption continues unabated.

Bandwidth-heavy real-time applications, primarily over-the-top video, are growing significantly and increasingly challenge service providers to meet the flood of data.

Specifically our report revealed that global mobile data bandwidth usage grew by 73%, resulting in a 190% overall 2010 growth rate.

That is almost 3 times as much data in the past 12 months.

Video streaming grew by 94%, representing the fastest growing application.

It is the single largest application type worldwide, accounting for over one-third of global mobile data bandwidth.

YouTube made up 17% of overall mobile data and remains the largest source for video streaming.

Last, by no means least, file sharing -- which includes peer-to-peer traffic -- represents a significant 30% of mobile bandwidth.

With smartphones making up the clear majority of mobile phones being sold in most developed countries, we expect that these trends in the market fundamentals for Allot's solutions will remain healthy.

We anticipate that investment cycles will be from 2G to 3G in developing countries and from 3G to 4G and LTE in developed markets.

At the same time, wireline operators are finding themselves under increasing pressure to meet this data revolution as well.

What does all of this mean for Allot?

First, our funnel of opportunities continues to grow both in quality and in quantity, and is certainly stronger than it was a year ago.

Second, we continue to report book-to-bill ratio more than 1, where it has been for the entire 2010.

These factors position us well for continued growth in 2011, both on the top and bottom line.

In 2010 around 40% of our revenues were from the wireless side, which has become our largest segment; with another 40% coming from wireline, which is a combination of DSL, cable, and fiber; and around 20% from large enterprises.

In 2011 we anticipate that mobile will continue to be the fastest-growing sector, while we continue to see a pipeline of opportunities on the fixed-line side of the business as well.

To meet the new market demands and further enhance our leadership position in the wireless data market, we recently unveiled the next generation of our Service Gateway, the Sigma E series.

Boasting 160 gigabits per second of throughput and supporting 8 million subscribers on a single platform, the Service Gateway Sigma E is designed to meet the high speed and extreme performance requirements of 4G/LTE fixed/mobile converged networks.

This will enable operators to enhance the user experience while generating revenues from over-the-top applications such as video, voice-over-IP, and more.

I believe that this product further enhances Allot's leadership position as a solution provider for the mobile market, as it enables service providers to offer and manage value-added services on a single platform.

I believe that our new Service Gateway with its 160-gigabit scalability offers substantial advantages over integrated solutions.

As I look out at the market in 2011 and beyond, I am seeing two encouraging trends for Allot's solutions based on value propositions we have been discussing with customers for a while now.

The first is that service providers will be moving ahead with intelligent metering, metered pay-as-you-go service, in line with functionalities we have recently added to our Service Gateway.

Some of these features include real-time quota with reporting capabilities directly over industry-standard 3GPP compliant interfaces.

This enables our customers to implement intelligent charging plans.

For example, in A-Pac we are seeing this becoming more of a trend, as service providers are introducing charging based on specific applications or classes of application.

A good illustration of this is gaming, which is a real-time delay-sensitive application and therefore requires a unique class of service.

A second trend we are seeing is that service providers in Europe and A-Pac are beginning to talk about revenue sharing with major content providers.

While this is still at very early stage, the providers are talking about a more even split of revenues with content providers, which would enable them to catch up on their own network investments.

This would actually become a positive trend for subscribers, as service providers would now have a new source of funding for this necessary investment while not having to pass these costs along to subscribers.

We continue to watch these trends carefully as they increase the number of opportunities for deploying our solutions within the networks.

To summarize, 2010 was a significant year in Allot's development.

We continued steady growth in revenues and profitability, in non-GAAP and net income for the year.

With the Sigma E release we further enhanced our leadership in the fast-growing mobile market and expect continued growth in the top and bottom lines for 2011.

I will now turn the call over to Nahum for a short financial review.

Nahum, 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 fourth quarter reached $16.2 million, up 41% over the fourth quarter of 2009 and 10% over the third quarter of 2010.

For the year, sales were $57 million, up 36% over the $42 million we did in 2009.

As a percentage of our revenues, sales in America accounted for 19%; EMEA 57%; and Asia-Pacific 24%.

Out of total revenue during the quarter, products were 72% and services 28%.

Gross margin for the fourth quarter was 72%, similar to the third 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 continue to be in the R&D and sales and marketing lines.

For the quarter, we were happy to report earnings per share of $0.07 compared to $0.05 in the third quarter.

Operating margin was 12% in the fourth quarter versus 8% in the third quarter of 2010.

Looking at our progress over the last year in terms of margin, we were break even a year ago, reaching to 12% operating margin in one year by leveraging the top line growth to the bottom line.

We did increase headcount and expenses in the last year in order to meet the opportunities we are seeing in the market.

So this nice margin improvement did not skip the investment we are doing in supporting our customers and roadmap.

Cash balance has increased to $59.4 million.

During the fourth quarter we generated approximately $2 million in cash from operating activities and total of $8 million for the year.

Our inventory increased to $11 million, reflecting increased orders as well as equipment which we have shipped to customers but have not yet invoiced.

Deferred revenues went up in the fourth quarter by $4 million, reaching close to $15 million at year-end.

This increase represents payments we received from customers for deals in which we did not yet recognize revenues.

Our DSO levels were at 60 days compared to 47 days in the third quarter.

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

(Operator Instructions) Daniel Meron, RBC.

Hello, Rami, Nahum.

Congrats on the solid execution here.

First -- a couple of questions but first one, can you provide us with some sense on how you see 2011 and the following years unfold as far as the growth and the industry landscape?

Thank you.

Yes, hi, Daniel.

Thanks for joining.

So as you very well know and this is our habit not to give quantitative guidance for forward quarters of a year.

What I did try to do on my script is give some color to the fundamentals who contributed to our growth this year.

I.e., very fast growth in the mobile segment; moderating growth on fixed; and about flat on enterprise.

I believe that these trends that helped us in 2010; seem to be continuing -- in some cases even enhancing -- in 2011.

And from that you are welcome to draw your own conclusions.

But the fundamentals are there and continuing into the next year.

Okay.

As far as the pipeline and the prospects discussion that you have got with carriers these days, can you provide some more color on where these stand, say, compared to a quarter or six months ago?

And provide also what is the regional color, any [sense] with, say, the progress with potential US carriers' interest in your solutions as the net-neutrality debate was resolved?

Yes, to give you some color into next year, first we have noted that over the year continuously we reported a book-to-bill of over 1, so obviously our opening backlog for 2011 is substantially higher than our opening backlog in 2010.

Same is true for a funnel.

I say that with caution, given the funnel is a subjective measure.

But nevertheless -- if in the past we would talk about two or three or four large service providers or Tier 1 service providers, the funnel now is actually much larger than it was a year ago.

So certainly funnel being a subjective measurement is bigger both in quantity and also in quality.

And amount of large operators in there is quite exciting.

Regarding regional growth, I believe that in 2011, EMEA will continue to be our strongest market.

Our products and our ability to help service providers are really correlated to markets where you see fast penetration of smartphones or a laptop connected to mobile Internet with dongles or modem and a flash.

We are starting to see movement in developing countries where we see movement from 2G to 3G.

We started seeing that this year, and I hope that that will accelerate into next year as well.

We need an operator to be at least on a 3G network to enable meaningful usage of data and thus for our equipment to be needed.

So that is pretty much right for developed countries and developing.

In terms of the US, we have seen net neutrality make good progress towards our view.

But the way we see it, the recent FCC guidance -- which really tried to go easy on mobile operators -- is still not conclusive enough.

We would be waiting to see conclusive guidance either from deployments or from further lawmaking before operators will feel comfortable moving forward.

Obviously, the trends are moving away from flat rate to metered charging; and eventually hopefully to intelligent charging will be helpful for our penetration in these markets as well.

Okay.

Thank you.

I will hop back into the queue.

Good luck.

Matt Robison, Wunderlich Securities.

Good morning and congratulations on the results and progress you are making.

I've got some -- I'm hoping to get a little more color on the customer concentration and applications, or type of customer concentration.

You mentioned 40% mobile for the year.

In the press release it looked like you also implied that was the case for the quarter.

There was a -- you filed about a 30% customer for the first nine months.

Can you give us some color as to whether it was 40% mobile in the fourth quarter?

And if that is the case, if you still have a single customer that is providing 75% of your mobile business?

And also maybe if you could also add some color as to what the relative customer concentration is for orders as opposed to revenue.

Then I have some follow-ups.

Sure, Matt.

I will try to answer all the questions.

So as you mentioned the Tier 1 customer that we are discussing was 30% in the first nine months.

It was above 10% for sure in the fourth quarter as well, which will make it around that number for the entire year.

I mean that is the color I can give about this quarter.

Obviously, it was our largest customer on a quarterly basis and on an annual basis as well for 2010.

Moving forward, as we mentioned in previous calls as well, we are getting more orders from that customer; and obviously it's going to be a very important customer for us going forward.

Matt, to give you some color here, I believe that moving forward, although this customer will certainly remain above 10% customer -- and actually we are working very hard to make sure that is the case.

Although we do not give out booking data, but it was a pretty strong booking year, as well as we indicated by our book-to-bill.

On a booking level, this 30% customer on revenue was actually lower from a bookings standpoint.

So moving into 2011 again I believe the customer will stay above 10%, but probably lower than 30%.

Okay.

Did mobile decrease as a percentage of revenue in the fourth quarter versus the third quarter?

Matt, we don't have that number at hand.

Once we find out, we can share it in one of our coming public presentations.

Okay.

The inventory increase, was it similar to the third quarter when you had -- when it was pretty much all related to bookings?

On the third quarter we did mention that the $2 million increase was due to shipment that we shipped and didn't bill.

In this quarter we had additional increase of $1 million -- which by the way, it was just in orders that we got toward the end of the quarter and we will ship during the first one.

In the past you guys have not had a lot of deferred revenue associated with equipment; it was more just services contracts.

Does the fact that your deferred revenue went up so much in the fourth quarter reflect a little bit different terms for a new customer?

Not necessarily, but you are absolutely correct.

In the past -- and I would say that usually the majority of deferred revenues is coming from our maintenance and warranty.

In this quarter in particular, we got the money up front for shipment.

And more than one customer actually that we already shipped, installed, we got the cash but didn't recognize the revenues.

I can only guess at this point, but I can -- a good guesstimate will be that at least one of these two customers we will recognize the revenue during the first quarter, so it will be a logical assumption for this number to go down during the first quarter.

So maybe you should look at that as kind of a budget flush sort of a deal, where they had some money to pay from a seasonal standpoint.

Would that be a reasonable way to view it?

Without getting into their budget and stuff, I would say that we try to stay conservative in recognized revenues.

We have acceptance tests, and sometimes in some cases we are getting the money ahead and only recognizing the revenues afterwards.

And that actually was the case in this.

It is more acceptance terms.

Certainly very large operators have very rigorous accepting measures.

So even though the equipment got shipped, installed, they even paid us -- until we get the written approval according to contract of acceptance, we don't recognize.

Sure.

Now you have given metrics in the past about number of mobile service providers, which went up quite a bit in the September quarter because you had some regional subsidiaries that seemed to make -- or were counted separately, because they make autonomous decisions, at least that is my understanding of it.

You didn't really give the number of mobile service providers in the fourth quarter.

Is that a metric that we can get from you now?

Matt, in the past, these were numerous and few.

The list is actually quite long at this time.

So getting into numbers -- and again we are talking about funnel, which I tread with cautious as I share, given it is a very subjective measure, what's real and what is not, what we can hope to close and not.

But I can tell you the list is substantially longer than the two or three names we used to say out in the past.

Okay.

What was the -- can you give us the CapEx, depreciation, and headcount?

Yes.

So headcount was 264 at year-end; depreciation was 650; stock-based compensation was 450; fixed asset purchase, fixed asset was 450.

Okay.

Thanks a lot.

Catharine Trebnick, Avian Securities.

Thank you very much.

Congratulations on the quarter.

I have a quick question on regional breakout.

I didn't see that; or did I miss something?

Sure, Catharine.

So the Americas was 19%; EMEA 57%; and Asia-Pacific 24%.

All these numbers obviously for the fourth quarter.

Okay, great, and a follow-up on that is what -- is there any way that I could look at revenue from value-added services and the policy enforcement versus your Service Gateway?

Let me try to help you, Catharine.

I would actually partition it to a slightly different than what you proposed.

When we sell our Service Gateway it always comes with an ability to do network intelligence, monitoring, reporting, also built-in functionalities, basic to optimize and monetize the traffic.

So 98% of our customers once they buy the product, Service Gateway Sigma, whatever, they utilize our ability to report on the network and also optimize resources.

A new segment which is enabled by the Service Gateway platform is really the value-added services.

These are functions that are needed in the packet core but not necessarily tied to deep packet inspection technology.

Yesterday we released our three known functions.

One is ServiceProtector which protects the network from denial of service attacks.

We released our MediaSwift, which is really a video caching solution to accelerate video traffic delivery.

And WebSafe which if chosen by the subscriber or imposed by country regulation prevents access to illegal websites.

We continue [adding] functions, value-added services, and every quarter or two we add a new value-add service to our portfolio of growing value-added services.

Over the year, I can roughly estimate that about 10% of our revenues out of $57 million came from specific value-added services which are kind of optional when an operator orders from us.

So bottom line the answer is around 10% of revenues.

All right.

Thank you very much.

Thanks for taking the question also.

Greg Weaver, Invicta.

Hi, nice job, guys and thanks for answering that software question, Rami.

That was interesting.

Just to confirm, so on the large customer's business, you're expecting that to go down as a percent due to dilution of other guys' businesses growing; but yet on a dollar term stay flattish.

Right?

That will be nice if it happens.

I can tell you that although we continue to have nice booking trends in the second part of the year, in actual course the proportional ratio of this very large customer out of our bookings went down.

Actually in the last quarter, even though it was a good booking quarter, their contribution to our booking was somewhere in less than 10%.

So naturally moving into next year, we expect a continued rate of bookings, but their large portion of our revenues should decline.

Whether it goes down to 20% or 15%, I don't know; but I do expect it to stay relatively high.

And we do expect continued stream of orders as they expand into new geographies and expand existing implementation, both software for more subscribers and more blades for more bandwidth.

Okay.

So is it fair to say some of the business you might get from them might be this higher value-added software, higher margin stuff?

When I say expansion that is one of the scenarios, yes.

It has actually happened already in 2010 as they buy into some of the value-added services.

Got you.

Okay.

So when do we see a new 10% customer?

Any sense of that?

Well, we are working on.

It is interesting, we do have -- we did share throughout the year in the past few quarters that we have won two additional very large customers.

One was a very large cable operator in EMEA, and another is a very large mobile operator with subsidiaries over Latin America and Africa.

We have not started recognizing revenues from these two operators.

But when we do, depending on how -- the rates we recognize, but these certainly could be 10% customers.

Actually, one of them we mentioned was a $5 million purchase order, which we have yet not recognized; and actually we see continued orders from these guys.

So they certainly would be a 10% customer as they get recognized in 2011.

On a quarterly basis, of course.

Right, yes, yes.

Just in terms of -- nice job on the flow-through here.

But in terms of the model, the operating margin and gross margin, what should we think about there?

You continue to ramp the operating margin.

But should we think about gross margin maybe this is kind of the bottom end of the range, given that we are talking about a little more software mix on a go-forward basis?

So, Greg, it is very hard to estimate the gross margin.

It really depends on the mix between services and product and then the mix within product.

You know, enterprise versus carrier, etc.

On an annual basis I would say that we want to keep the 72 range as our gross margin; obviously on a quarterly basis there might be some changes in quarter to quarter.

As for the OpEx, as we mentioned in the past, we are continuing to invest.

We will recruit more people into Allot.

So basically OpEx will grow quarter to quarter a little bit.

But I see -- I am sure that you saw the graph, the great improvement in terms of our margins.

Breaking even a year ago and getting to 12% on the last quarter.

So obviously we are committed to profitability.

You know, we also want to see this revenue growth going into the bottom line and improving the margins.

Okay.

Any impact from FX on that?

Whether it be the euro, shekel, potentially crimping your ability to grow those margins?

For sure, but it's already in the model.

If I compare 2011 to 2010, obviously the changes in the exchange rate will influence that OpEx.

It will be part of it.

But as you know, that is the environment that we are living.

We are hedged, at least part of our expenses, in shekels.

And we will try to keep the exchange rate I would say to the minimum effect, obviously quarter-to-quarter.

Okay, and last question for me on the new Sigma E box.

Is there any proprietary hardware in there, ASIC, or is this all off-the-shelf?

The main blades which run our core DPI functions and quality of service, these were always blades developed by Allot.

We always had to have special hardware, not ASICS, but special blades that could put a lot of computation power with switching power on the same blade.

So basically the Sigma E is an upgrade path of a new blade that was -- the older one was Allot and the new one is also an Allot-developed one.

Okay.

Thanks.

(Operator Instructions) Jason North, Jefferies Investment Bank.

It's actually Peter Misek from Jefferies.

A couple questions for you.

In terms of competitive landscape changes, have you seen any major changes in the last three or four months?

By that I meaning either changes from Cisco, given acquisition activity, product portfolio, etc., or some of your other more pure-play competitors?

And then I have some follow-ups.

Yes, Peter, no major changes on competition.

From a stand-alone point of view, pure-plays or stand-alone products, obviously Sandvine is our major competitor; followed by Cisco stand-alone product which is based on the P-Cube acquisition -- are our two main competitors.

In terms of integrated action, there are large routing vendors, Cisco amongst them, that are talking about or having or have some thin layer of DPI.

They continue to be an indirect competition.

Usually when an RFP goes out for DPI, it calls for stand-alone solutions.

Certainly there are some of these RFPs is -- in the vast majority of the cases the selection is made in favor of a stand-alone solution.

But there will be deals where maybe are not even open to RFPs that a large router vendor can get away with a thin layer DPI.

Sometimes these deals, then, after one year of development and growing data pressure, will open up again for stand-alone RFPs.

So on a direct basis it is the same players.

And there is some movement on the routing vendors, but again we haven't seen anything that scales even closely to our previous Sigma, let alone to our 160-gigabit Sigma E product.

Great, thanks.

In terms of OpEx as you see it progressing throughout the year, where are areas that you think that you have to bulk up or get ready for?

If we look at RFP/RFQ activity and what you have described, it seems like there could be some additional operating expenses required maybe around sales and marketing in particular.

Yes, if you looked at our trend in 2010, on one hand we are committed to improving our profitability; on the other hand we are in a growing, very dynamic and young market, both from the macro mobile data market and also specifically in our Service Gateway DPI space.

So we believe that it will be short-term thinking to use all of our new available operating margin just for the bottom line.

So we are taking a habit of taking some of the additional profitability and investing back, primarily in sales and marketing, opening up markets which let's say are covered from remote.

So in the sales and marketing category, it's primarily sales to achieve better geographical coverage, get closer to customers.

And occasionally for R&D, mainly we now see the fruits of that with the new Sigma E platform.

So we are continuing investing in accelerating scalability and also developments of new value-added services.

So there is a practical balance of investing back available funds in the business while growing our profitability as well.

Great.

Thank you, guys.

Walter Ramsley, Walrus Partners.

Thank you.

Just a couple of questions.

In the fourth quarter, the Company had a tax credit of about $112,000.

Can you explain how that occurred and what you think the tax rate will be in 2011?

Yes, so obviously looking at taxes is usually on an annual basis, and that is why we had some sort of -- this credit during the fourth quarter.

Going forward I think that 5% to 10% will be good estimate and it would be even -- probably will be closer to the 5% actual tax rate.

Okay.

For the entire year -- you gave the fourth-quarter numbers; but do you have a geographic revenue breakdown for the full 12 months?

I don't have it in front of me.

Obviously, we can calculate it because I am mentioning that on every quarter.

And we will -- very close we will issue our financials; you can find it over there as well.

Yes.

No, it would just be a little more convenient for us.

(multiple speakers) I can give it to you (multiple speakers).

As far the new product goes, the (multiple speakers) Sigma E, do you view that as an add-on to the product line?

Or is that going to replace a portion of the products that you already have on the market?

No, unlike our prior announcements which usually are a new product -- like the Sigma replaced the Omega -- Sigma E will not replace the existing Sigma.

So customers will have a choice to either select Sigma.

So that any customers with a large installed base of Sigma units will continue with the Sigma; and then new customers -- certainly ones with expectations for very high scalability either of bandwidth or users -- will buy into the Sigma product.

So we plan to maintain both.

Sounds good.

Thanks again.

Congratulations.

Marc Silk, Silk & Sons.

Rami, congratulations on a fantastic year.

My question is on more clarity on net neutrality.

How has that affected the carriers that you are talking to in the US?

Yes, thank you, Marc.

Again, if we go to the extreme forward for a second, have we seen enough regulation to say, okay, the US market is now opening a hunting ground for us, and mobile operators can move forward?

The answer unfortunately is still not yet.

But, I believe that more clarity from the FCC plus proposals coming up such as the Verizon and Google compromise, and probably Verizon forcing the FCC to be more deterministic on their own guidance whether it is over public press or in court, the bottom line is that eventually this has to come to some kind of a deterministic, clear compromise which seems to be much more open to reasonable network management, and certainly realizing that there is enough competition in mobile market so the FCC doesn't need to put in place hard limitations.

That still could take several months.

The FCC has taken steps in the right direction, but we have yet to see the final and deterministic guidance in order for large service providers to move forward.

As one of them stated, we can move forward only when we are explicitly told what we are allowed to do.

If it is unclear, then we won't do it.

Okay.

Thank you so much.

There are no further questions in the queue.

I would now like to turn the call back over to your host, to Mr.

Jay Kalish, for any additional or closing remarks.

Just want to thank you again for your interest and for joining us today.

We look forward to meeting with many of you over the next few months.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.