Allot Ltd (ALLT) 2011 Q2 法說會逐字稿

Please go ahead.

Thank you all for joining us today for Allot's second-quarter 2011 teleconference call.

Today, we will discuss Allot's financial results for the second quarter.

And 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 during the quarter, as well as discussing major trends in the market.

And Nahum 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 June 9, 2011.

Please note that management will be participating in a number of investor conferences in the US and Europe during August and September.

Details regarding these conferences appear on our website.

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

Thank you, Jay, and thank you all for joining us today.

We were pleased to continue reporting consistent top- and bottom-line growth during the quarter as we continue to benefit from the growth in our target markets, primarily on the mobile side.

Revenues during the quarter reached $18.5 million, a 35% jump over the second quarter last year and 8% over the previous quarter.

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

Our operating income was $2.7 million on a non-GAAP basis and we increased our operating margin to 15%.

We still plan to continue leveraging our financial model during 2011 by taking a portion of increased revenues down to the bottom line while reinvesting a portion in sales and marketing and R&D.

This represents the 10th consecutive quarter for which we reported both top-line growth and book-to-bill ratio greater than 1.

During the quarter, we received large orders from 18 service providers, five of which were from new accounts and three of which were Tier 1 mobile operators in their markets.

These new customers are located throughout the world.

On the operational side, we had one 10% customer during the quarter.

We continue successful deployment with our Tier 1 global mobile operator, which now includes penetration into new geographies in bandwidth and feature expansion.

During the quarter, we also reported our first major win with a Tier 1 operator in Russia, which we received through our partnership with Nokia Siemens networks.

This partnership has been in place for a while and we have been working closely together.

Besides this win, we are developing a healthy pipeline of opportunities through this partnership and may represent upside to our direct sales (technical difficulty).

Value-added services continued to evolve as the growing portion of our business with roughly 10% of first half of 2011 bookings coming from value-added services.

Currently, the two top value-added services offering our ServiceProtector solution, which protects the service provider network from denial of service attacks, and MediaSwift, which is our video caching solution.

These products, when embedded into our Service Gateway platform, increase our differentiation and present a revenue expansion opportunity with our current and potential customers.

During the quarter, we announced that our new intelligent charging solution, Allot ChargeSmart, was selected by a multinational mobile operator.

The converged charging solution, which is incorporated into the Service Gateway platform, is being deployed in nine countries serving 30 million subscribers.

Our intelligent charging solution is able to accurately identify over-the-top applications in high-speed networks.

The operator is able to leverage the intelligence provided by the ChargeSmart to support new revenue streams such as content revenue sharing and new service plans and volume quotas, service tiering, and popular application types.

One of the use cases we saw is a social networking plan that makes applications such as Facebook, MySpace, Twitter, toll-free while other applications' traffic is counted against the monthly quota.

You can just look at recent pronouncements from some of the wireless operators, including Verizon and AT&T to see how this is a direction of the billing plans they will be offering subscribers.

I think this is a good example of growing trend with current and potential customers, which is only in its initial stage of limitation.

Our Service Gateway platform is now a comprehensive solution that can offer our service provider customers a unique integrated combination of Policy Management, tightly coupled with intelligent charging, all fully programmable to facilitate easy and quick implementation of the various business strategies of our customers.

To sum up, it was another solid quarter with top- and bottom-line growth, as well as continuing to be cash flow positive and with a book-to-bill ratio over 1.

We continue to build a healthy pipeline of opportunities, particularly in the mobile data arena and we are encouraged to see our long-term strategy come together as we see our growth fueled by our value-added service offering.

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, amortization expenses, and certain expenses we incurred during the quarter related to M&A activities which did not end up closing.

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 second quarter increased to $18.5 million, up 35% over the second quarter of 2010, and 7% over the first quarter of 2011.

As a percentage of our revenues, sales in America accounted for 22%, EMEA, 52%, and Asia Pacific, 26%.

Out of total revenues during the quarter, products were 75% and services 25%.

Gross margin for the second quarter came in at 71.6% versus 72.1% in the previous years quarter, partially due to the lower service percentage out of total revenues.

Our operating expenses grew in line with our budget as we anticipate and discussed over the past few quarters.

For the quarter, we were happy to report earnings per share of $0.10 as compared to $0.8 in the first quarter.

As a percentage of sales, total OpEx went down from 59% in the first quarter of 2011 to 56% in the second quarter.

As a result, the operating margin continued to improve, increasing to 15% from 13% in the first quarter.

As we have discussed in the past, we plan to continue to leverage a portion of the top-line growth to the bottom line while continuing to reinvest in the business in order to meet the increasing opportunities we are seeing in the market.

Cash balance has increased to $63.5 million compared to $61 million on the first quarter of 2011.

During the second quarter, we generated approximately $3 million in cash from operating activities.

Our DSO's went down to 55 days from DSO levels of 71 days we had on the first quarter of 2011.

Inventory declined to $10 million from $12 million at the end of the first quarter.

This reflects mainly products which were at customer premises and transferred into revenues.

Deferred revenues were relatively stable during the quarter, being at $16 million at quarter end.

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

(Operator Instructions).

Ittai Kidron, Oppenheimer.

Thanks.

Congrats, guys, on good numbers.

Can you talk a little bit about your operating income comment, the fact that you intend to increase your spending in sales and marketing?

Should we think about the pace of improvement of your operating margin right now?

Should we see a slowdown in that pace of improvement?

How do we think about that balance going forward?

So, yes, Ittai, basically, if you look at Allot, so a little bit more than a year, we were just breaking even and since then, improving up our operating margins.

Obviously, the top-line growth helped us to improve the margins.

And the only comment that we had is we still see opportunities in the market.

We want to build the company and we will invest more into the business.

So basically, we are trying, I think, nice growth, nice improvement in the margins.

Hopefully it will continue.

This is Rami.

This is nothing different than what you have seen in the past couple of quarters, where on average you can see that maybe out of the available dollar gross margin, we generated about half went back into the business, and half dropped to the bottom line.

So we don't see any change in that strategy -- just reiterating.

Okay.

And just by looking at your results, and I might be connecting a few dots I shouldn't be connecting together, but I see a decline in your accounts receivable.

I see a decline in your inventories.

At a time where you're still growing, I see a flattening or even a decline of your deferred revenue.

And I see a not too spectacular quarter in Europe on a sequential basis unless I got my numbers wrong.

Is there any of this an indicator of some deceleration in business activity?

How do I think about this?

Not at all.

Basically, as Rami mentioned, when book to bill is above 1, that means that the business is growing.

It means that we increased revenue 35% versus last year.

More than that, I can say that inventory went down because we had product at customer premises and we recognized revenues during this quarter.

And therefore, accounts receivables went down because obviously we got the payment as soon as we got the acceptance.

So, I said in terms of the business, in terms of the growth, book to bill was above 1, and therefore, it's kind of obviously that the backlog is growing, and the business is growing.

Can you give us some color on how much above one was your book to bill?

No.

Comfortably, some color marginally?

At least qualitatively if not quantitatively?

Again, this has been our habit for the past three years not to provide any forward-looking statements.

And the only element is really the ratio of book to bill, and we don't plan to deviate from this habit.

Good luck, guys.

Matt Robison, Wunderlich Securities.

Hi, thanks, and add my congratulations for your performance.

I -- following on the theme there, in the past, for at least three or four quarters, we have seen a surplus inventory build associated with bookings; and does the inventory decline here -- does that suggest a new phase in your business where your bookings are more for networks that have already -- where there has been acceptance, and therefore, you're not shipping so much ahead of invoicing as you have in the past?

And I guess also on the deferred revenue, it looks like there's a pattern in the second quarter given that it was down quite a bit more last year in the second quarter that you have a slight decrease.

Is that -- I'm wondering if that's because you book a lot of maintenance revenue in the first quarter?

So those are kind of -- I have some follow-ups, but since I'm only allowed two, I will go back in the queue after this.

No, Matt, I think you're a little bit over reading this.

Over the past quarters, we actually constantly accumulated inventory as we shipped product which was not recognized.

This quarter, such a large project reached acceptance and, therefore, got recognized and been taken off the inventory.

This is all what's happened.

And Matt, this is Nahum.

Sorry, just adding to that, at the end of the day, the difference was $2 million.

And I would say that it's kind of obviously that since book to bill is above 1, the backlog is increasing.

Said if you want to monitor the business at all, second quarter was a great quarter for us in terms of financials -- results.

Inventory or the ship-not-billed inventory is part of the backlog anyway.

So at the end of the day, this number was growing during the quarter.

So if at all, those are good signals to the business.

Yes, yes.

So I guess we can assume that there will be some variation in this pattern where you potentially could see -- we could potentially see inventories going back up for bookings that you shipped to in advance of acceptance in future periods.

Is that right?

Yes.

And look, in the past couple of quarters, inventory actually grew constantly to the point it was actually a concern for me.

And to be able to recognize a large project, get it to completion, recognize revenues and actually improve our DSO, while doing so was, for me, an operational target.

Yes, so it sounds like the quarter was pretty linear in terms of revenue recognition as well.

Is that true?

That's fair to say.

So, Nahum, any other color on the deferred revenue pattern?

I think as you mentioned, you know, it's mostly at this point with maintenance, that we are getting ahead of time.

It will change from quarter to quarter, but again, it's also taking into account that both the inventory that we didn't ship and the deferred revenues are part of the backlog.

The best way to monitor it or the best way to look at it is looking at the backlog numbers.

And these numbers was increasing during the quarter.

We will see, you know, as you mentioned, it depends on renewals, et cetera, this number can go up or all go down.

Yes.

Now your gross margin was flat year over year, but down a little bit sequentially.

Anything about that that we should be changing our expectations about gross margins or the more recent acceptances at lower margin?

Or is this just within -- a fluctuation within normal range?

Exactly.

I think it -- within the range that we're targeting.

A little bit of product mix, a little bit of maintenance, portion out of total revenues.

Nothing into it within the range, and no special trends going forward.

The one trend I would add, Matt, is that in terms of a challenge to our high gross margins, the value-added services which are based on third-party solutions traditionally have lower gross margin.

On the other hand, we're now starting to see our new Sigma E 14 and E6 product offering come to market.

These products not only have improved performance, but actually better cost basis and that's -- can help mitigate the vast effect and improve gross margins.

So, all in all, these two things cancel each other out, and we've been bumping around the 72 plus/minus 0.5% for quite a while.

And just to clarify, when you guys say value-added services, you mean to say features that enable value-added services by your customers really.

You're not doing like professional services for people, right?

Correct.

We're talking about, like I said in the script, the MediaSwift, the video caching, the ServiceProtector, Voice-over-IP quality measurements, things that we add on in an integrated fashion in our service gateway, some of which were organically from Allot and some are [I would say] solution partners.

Okay.

Nahum, one more for you, on the balance sheet, pre-paids were up quite a bit and Accounts Payable were down, offsetting quite a bit.

Any comment on, was that related to CapEx on the pre-paids?

Or what were we looking at there?

No; I mean again, Accounts Receivable went down mostly due to the reason that [other] revenues came from inventory that we shipped on the previous quarter.

And obviously by that, payment terms are shorter than product that we would have shipped in the same time.

Other than that, it's just a question of timing, cutting date of the balance sheet.

Nothing into it.

Pre-paids?

Thank you.

Jay Srivatsa, Chardan.

Thanks for taking my questions.

Congratulations on the quarter.

As you look ahead with service providers, can you highlight how the competitive landscape is these days?

Has it changed from the last few quarters as you look ahead?

Yes, hi, Jay.

So, in the past, when we discussed competition, we split it into two categories; one is other pure plays like ourselves; nothing majorly new there.

Those of the pure plays are doing actually well and growing like us, which in general, I see as a positive trend to the whole sector, which is quite small and growing.

In terms of the second category, which is large system integrator equipment, router vendors, trying to embed certain DPI functions into their routers.

Again, to the limited visibility I have to what they have today, some of them have what we call thin layer deep packet inspection and are trying to convince the home accounts to settle in for that.

In general, I'm encouraged to see that if an RFP for DPI does come out, typically it calls for a standalone best-of-breed equipment.

So if there is a race out there and there is an RFP, typically it will be for stand alone.

Nevertheless, very strong system integrators who have a very strong account ownership can occasionally convince accounts to stay with instead of 14 layer DPI embedded in account equipment.

So these are not new trends; they have been around for a while, and we have continued to see them in the past quarter as well.

All right.

In terms of progress in the US, in terms of net neutrality, have you gotten any updates in the recent quarter to give you visibility into what could happen over here as you look at DPI going forward?

The only observation I would make, and I would make it very carefully, is that since the SEC issued the recent -- I would call them guidelines on net neutrality, where they did spell out a little bit in more detail what's allowed and what's not allowed, and also, said that net neutrality regulations which will be kind of less applicable to mobile operators, we have seen some rise in interest from US mobile operators.

Whether that turns into RFPs and serious revenues is yet to be seen.

But all in all, any clarification was a positive spin, positive step.

And we could see maybe in 2012, certain US mobile operators maybe take a step forward.

Okay.

Thank you very much.

(Operator Instructions).

Dan Cummins, ThinkEquity.

Thank you very much.

Great job, guys.

The two questions I had -- one, is it possible you would be willing to tell us on a full-year basis, how many 10% customers you expect to see when all is said and done this year?

And, I wonder if we could get into some color about -- let's call them orders 2 through N for a typical Tier 1 carrier.

I think what I'm getting at is the kind of coverage or kind of a benchmark range that we can use to estimate the size of the market if a carrier says I'm going to need to spend X dollars per sub over X number of years, I think that would be really helpful for us.

But just some color on how secondary orders are looking.

Thanks.

Sure, Dan.

So I will start with the 10% question.

On the first quarter, we had two customers that were above 10% on a quarterly basis.

This quarter we had one.

You know, we did mention there's still one mobile operator that we have in Europe.

It looks like it's going to be a 10% customer in the second half of the year at this point.

And assuming it will be, obviously, it would be a 10% customer -- above 10% customer on an annual basis as well.

I can guess that we will have another 10% on a quarterly basis for sure, which is not the one that we had in the first quarter; meaning that on -- so we have roughly three that would be on a quarterly, one that will be on an annual basis.

I don't know if any one of the other two might get to 10% on an annual basis.

It's too soon.

They might, but it's a little bit too soon for us.

That's great.

Regarding your second question, Dan, numbers are a little bit all over the place, but I'll try to give you some stakes for you to quantify.

So, a typical mobile account for us, it could be anyone from 2 million to 3 million subscribers to 30 million subscribers.

And I'm talking about one property, not a combination of -- some of our accounts are multinational accounts where they have op co's in different -- many different countries.

I'm talking about the specific operator in a specific country which covers anywhere from several million subscribers to 20 million or 30 million subscribers.

The range of initial revenues could get anywhere from say $1 million to $5 million day one.

Usually, when the account is small, it never goes down below $1 million, so the revenue per sub was actually relatively high, where in very large accounts with 20 million subscribers, where the initial order was only $5 million, the ratio -- the order is large, but the average per sub is relatively lower compared to the smaller guys.

But in any case, the range is between $1 million and $5 million.

And the size of the accounts are anywhere between 2 million or 3 million subscribers, all the way up to 20 million or 30 million subscribers.

What's very important for us is that with our revenue models, which is a recurring revenue model, which is, one, driven by service and maintenance and the right to get protocol updates, which pretty much guarantee for us 10% to 15% recurring revenues on the end of that, and then come geographic expansions as they break up mobile switching centers and for each one, they come back to buy another Service Gateway; bandwidth expansions -- you have seen from our mobile trend report that mobile data is growing by at least a 100% every year if not more.

That means more blades from more bandwidth-enabling blades into the Service Gateway.

And finally, we also, all of the tiered services quota options, the more advanced monetizing options, are, you buy them on a per active subscriber license.

I'm not going to get into the specific pricing, but we see constant growth in the amount of mobile data active subscribers, and each quarter or two, these mobile customers come back to buy from us more licenses.

At a very high level, if -- say if a mobile customer bought X amount of dollars day one, it's reasonable to expect that after a 24 months, that X dollars will become 2X.

Okay.

That's great color.

Thank you so much.

As there are no further questions in the queue, that will conclude today's question-and-answer session.

I would now like to turn the call back to your host for any additional or closing remarks.

Thank you all for joining us today.

We look forward to meeting with many of you over the next few months, especially with our heavy conference schedule.

And as usual, please be in touch with me if you require any additional information on Allot.

Thank you for joining us today.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.