Allot Ltd (ALLT) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allot Communications 2011 Q4 results conference call.

Today's conference is being recorded.

At this time I would like the turn the conference over to Jay Kalish.

Please go ahead.

Thank you very much, Barbara, and thank you all for joining us on our fourth-quarter 2011 conference call.

Joining us today are Allot's President and CEO, Rami Hadar, as well as our Chief Financial Officer, Nachum Falek.

The press release announcing our fourth-quarter results is available on the Investor Relations section of our website, www.Allot.com.

All results and expectations we review on the call are on a non-GAAP basis, unless otherwise described as GAAP.

Non-GAAP net income and non-GAAP net income per share exclude stock-based compensation expenses as well as amortization of intangible assets and certain one-time expenses.

Please note that all earnings per share amounts are on a fully diluted basis.

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.

On the marketing side, I am attending the Pacific Crest conference in San Francisco next week, and Nachum will be attending the Oppenheimer conference in New York next week as well.

A full list of our conference schedule is available on our website.

Please be in touch with me directly if you would like to schedule a meeting.

With that, I would now like to turn the call over to Rami.

Thank you, Jay.

Thank you all for joining us today.

2011 turned out to be a great year for Allot, with a dramatic rise in both the top and bottom lines.

For the fourth quarter, revenues grew 36% over last year and 10% over the third quarter, and reached $22 million.

For the year, revenues also grew 36% and reached $77.8 million.

Net profit reached $4.2 million or $0.14 per share for the quarter.

For the entire year, net profit tripled and reached $12.5 million or $0.46 per share.

Our operating profit for the fourth quarter continued to grow and reached $3.8 million on a non-GAAP basis, and we increased our operating margin to 17%.

The book-to-bill ratio was over 1 for the quarter, over 1 for the second half of 2011, and over 1 for the entire year as we continue to build backlog.

I feel very positive entering 2012 with a strong sales pipeline and a large backlog.

During the quarter, we received orders from 10 large service providers, five of which were for mobile customers.

Five of the orders were from new customers, three of which were mobile.

On the operations side we had one 10% customer during the quarter, and only one 10% customer for the year, which totaled approximately 15% of total revenues as we continue to diversify and enlarge our customer base.

We continue to execute in all of our major markets.

As we previously announced, we received a $9.5 million order on the wireline side from an operator in APAC.

We also are maintaining our leadership in the mobile space.

In addition to healthy deployments, we deepened our penetration into a second Tier 1 customer in Europe during the quarter.

When I look forward at 2012 I see many new opportunities in our pipeline.

I believe that Allot will finally see revenues from US mobile operators in 2012.

Alongside growing mobile opportunities in APAC, we are seeing a rise in interest among large fixed-line operators in this region.

This could be related to the large growth in video traffic.

We are also seeing increased interest in monetization opportunities amongst fixed Tier 1 operators, especially in the area of smart charging.

Europe continues to be a strong market for Allot.

At this time, we are not seeing a slowdown in European opportunities.

Despite macroeconomic conditions, DPI has become a critical technology for operators as they continue to contend with the increasing flood of data, especially on the mobile side.

The introduction of optimization alone can save up to 30% of bandwidth for the service providers, and enables them to push out the deployment of additional routers and expensive access equipment, which can cost up to 5 times more than our solutions, or delay full 4G LTE deployment.

Our expanded penetration during this quarter into a second mobile Tier 1 service provider in Europe is further evidence of this attractive value proposition we offer service providers.

In Latin America, we recently received multimillion-dollar orders from two large fixed-line operators, further expanding our penetration in this region.

On a general level, many recent wins with large service providers have included value-added services, which was a critical factor in our being selected.

I believe that one of the main differentiators between Allot and its competitors is our unique Service Gateway platform.

We are the only company which combines optimization and monetization on a single platform.

While optimization remains the table stakes in this market, and I strongly believe that we have the best optimization solution on the market, value-added services is clearly the direction in which the industry is heading.

Value-added services are becomingly increasingly important to our customers around the world as service providers continue to seek new sources of revenues to finance network upgrades.

In addition to smart charging, which we discussed last quarter, Allot offers service providers the widest range of value-added services in the industry in a single platform, without the need for additional servers or external equipment such as load balancers.

In the past we focused on enhancing the speed of our Service Gateway, which now has 160 gigabits per second throughput, which has been independently verified.

This capacity appears to be more than enough for our customers, and many anticipate that even this throughput will not be required until next year.

While we certainly continue to have speed enhancements in our product roadmap going forward, over the past year we have been focusing on increasing the number of value-added services and features that we can offer to service providers.

We currently lead the industry in this category, making our solution the most robust offering in the market.

Value-added services represented approximately 12% of our revenues during the fourth quarter, and we are seeing a steady increase in this category.

To sum up, 2011 was a great year for Allot with revenue growth of 36% over 2010, increasing profitability, and ever-growing customer lists both of wireless and wireline service providers.

We believe that Allot is positioned for continued growth on both the top and bottom lines in 2012.

We will continue our strategy of investing a portion of revenue growth in enhancing our sales and R&D capabilities during this year, with the balance going down to the bottom line.

I will now a hand the call over to Nachum for a short financial overview.

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, amortization expenses, and certain one-time expenses we incurred during the year related to the public offering and M&A activity.

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 and for the full year.

Revenues for the fourth quarter increased to $22 million, up 36% over the fourth quarter of 2010, and 10% over the third quarter of 2011.

As a percentage of our revenues, sales in America accounted for 25%, EMEA 60%, and Asia-Pacific 15%.

Out of total revenues during the quarter, products were 73% and services 27%.

Gross margin for the fourth quarter was 71.7%, similar to the third-quarter level.

Our operating expenses increased to $12 million and in line with our expectation.

During the quarter, we recruited 50 new employees, mainly to the R&D and sales and marketing departments.

For the quarter, we were happy to report earnings per share of $0.14 as compared to $0.13 in the third quarter.

Keep in mind that we closed the secondary offering on November 15, so that EPS reflects an increase of 3.2 million shares in the weighted average.

An additional 3.2 million shares will be added to the share count in the first quarter of 2012, and this will reflect the full effect of shares issued as part of the offering including the Green Shoe.

As a percentage of sales, total OpEx went down from 55% in the third quarter of 2011 to 54% in the fourth quarter.

As a result, the operating margins continued to improve, increasing to 17% from 16% in the third quarter.

To recap 2011, revenues for the year reached $77.8 million, a 36% increase over 2010.

Net profit for the year tripled, reaching to $12.5 million as compared with $4.1 million in 2010.

EPS for the year reached $0.46 as compared with $0.17 in 2010.

On the balance sheet side, cash balance has increased to $159 million, which of course was affected by the $85 million that we raised in the offering during the quarter.

During the fourth quarter, we generated $7.7 million in cash from operating activities, and $15 million for the entire year.

Our DSO went down to 50 days from DSO level of 59 days we had in the third quarter of 2011.

Inventory increased to $10.5 million versus $9 million in the previous quarter.

Logistic inventory level was similar to the third-quarter level, and the change was mainly due to shipped and not billed product.

Deferred revenues went up by $8 million during the quarter, reaching $22 million at quarter end.

The increase was mainly due to new product which we should probably recognize partly during the first half of 2012.

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

(Operator Instructions) Ittai Kidron, Oppenheimer.

Congratulations, guys, on a great quarter.

Rami, can -- there's two things I want to ask you about.

One is, you talked about the fixed carrier environment.

It seems like while most of the focus has been on mobile, it seems like fixed is something we should pay a lot of attention to as well.

So can you give us a little bit more color on the pipeline over there, and what are the applications typically that is being used, and how do we think about the growth in your fixed business through the year?

So, yes.

A matter of first facts, we were a little bit surprised as well.

And when we looked at some of the key wins in Q3 and Q4, we found a nice group of several large fixed accounts.

We also look into our [foundry] in 2012, and we find there's a couple of fixed key accounts as well.

So I am not yet ready to say if this is a macro trend or what.

But it seems that, even with the very latest fixed-access technologies, the growth rate, probably fueled by video, is more than catching up, and the fixed guys are starting to feel pressure as well.

Maybe not as severe as mobile, which we spoke a lot about, but something is accelerating there as well.

What we are seeing, the common named applications are -- our fair share of bandwidth; and interest in moving away also from flat rate; charging into some form of intelligent charging, whether it is simple cap base or whatnot, but it seems that charging is a common feature in many of our fields we are seeing.

So, not to make any mistakes I mean, still are -- the growing segment and the focus is mobile.

Fixed was always there with the Tier 3 and Tier 1 accounts, and maybe we will get a nice upside from Tier 1 and fixed carriers as we move deeper into 2012.

Okay.

The second question, with regards to the value-added services which you mentioned, which if I remember correctly you said were 12% of your revenue in the fourth quarter.

I know you don't give guidance, but maybe qualitatively if we think about 2012 as the year, would you expect value-added services to grow much faster than your underlying product revenue?

And if so, what is the impact and implications to your gross margin for the year?

So, yes, I do expect value-added services to grow probably, maybe along the lines, maybe faster than just our top line.

We note on the call that actually many of our wins, strategic wins in the past quarter, in most of them or even in all of them, included some form of -- at least one if not more value-added service functions in the Service Gateway.

On average, value-added services have lower gross margins than our overall Company average.

This is because some of these value-added services are based on third-company solutions and not only our homegrown.

But that is typically coupled by the fact that anybody who wants to invoke value-added services has to go through buying our subscriber management licenses, which are the SMP, which is licensed on a per-subscriber basis.

So in overall that up until now kind of balanced out and helped us maintain our 72% plus/minus gross margin.

Very good.

Good luck, guys.

Matt Robison, Wunderlich Securities.

Hey, thanks, and great quarter, guys.

First, I guess my two questions.

First on linearity.

The deferred revenue and DSO performance was extraordinary.

Should we take that to mean that you had an unusually front-loaded quarter?

Then I guess I would be curious what your thoughts are in getting an additional 10% customer, whether we should expect that to happen in the current quarter with the strong bookings?

Or -- and when you think we might see a second 10% customer that would deliver that kind of magnitude for a full year?

Yes.

Thanks, Matt.

So, first, I would say the quarter was kind of linear.

For sure it wasn't back-ended.

I think that's obviously part of the reason why DSO went down and why deferred revenues went up.

It is more of a cash flow issue.

I think as always what is important to remember is that the best way to monitor the business is really looking at the book-to-bill ratio.

And seeing that book-to-bill ratio in the fourth quarter was above 1 and for the second half it was above 1, which means that we are increasing the backlog.

So that is, I think, the most important.

But you are correct.

The quarter wasn't back-ended and we got paid for I would say most of the product that we shipped.

In regards to the 10% question, so it is true that in 2011 we had only one 10% on an annual basis.

But on a quarterly basis, we had, if I remember correctly, around three different customers, except for the one that was on an annual basis.

I do think that next -- or in 2012, on a quarterly basis we will have more than one of a 10% customer; but it is very hard for me to say on an annual basis whether we are going to have an additional one, if at all.

Do you expect your current 10% customer to remain at that magnitude this year or --?

Yes, it is very hard to guess, but I would say the business is continued.

We have got more orders than we recognized, so obviously we will have very close relationship with that customer on 2012 as well.

Thank you.

Daniel Meron, RBC Capital.

Thank you.

Hi, Nachum and Rami.

Congrats on the continued solid execution here.

A couple questions on my end.

First of all, Rami, you mentioned that you expect to win your first wins in the US carrier market in 2012.

Can you provide a little bit more color on the potential size of it?

Not necessarily in 2012, but rather on a long-term basis.

I mean, we have seen you guys grow dramatically over the last several years, partially thanks to some major Tier 1 wins in Europe.

How should we think about it, if you start winning some additional carrier wins in the US?

Thank you.

Yes, so thank you Daniel.

You know, obviously there is some very large mobile carriers in the US and there are some very -- pretty good medium-sized ones.

I guess right now I want to be cautious about forward-looking statements, but I can tell you that I feel that these revenues that I do expect to recognize in 2012 will be multimillion-dollar revenues.

Will they become so one of them will be a 10% customer?

Right now, no.

So, I think it gives you a range.

We are not talking about hundreds of thousands of dollars; we are talking about multimillion-dollar revenues which I expect to recognize in 2012.

But not yet maybe the magnitude of the large Tier 1 we have in Europe.

Okay.

Understood.

Another question, maybe relating to net neutrality.

We have seen some announcements and publications about net neutrality being imposed also in Europe, beyond what we are seeing right now in Europe -- sorry, in the US.

So, what do you think will be the impact, if at all, on the deployments that you have in Europe?

So, you know, it is very hard to predict regulators.

While we feel that in the US net neutrality is starting maybe to wind down or at least reach reasonable compromises, the debate in Europe comes and goes.

Sometimes the debate rises, and sometimes it disappears for six months.

So it is hard to predict where this is going.

Right now, except maybe for Netherlands, which is a very significant market for us, although we do have some deployments there as well, it feels that right now the arguments are more academic, where regulators are sending various [bodies] to do feasibility studies and come back with what net neutrality really means.

So again, my bottom line is we are not feeling any effect yet how to predict the future.

And part of our expansion into value-added services is to insert more and more functionality to our products, like charging, like retail monitoring analytics, and others which don't touch and don't read on net neutrality, is part of a mitigation strategy we are taking.

Okay, thank you.

Good luck.

Dan Cummins, ThinkEquity.

Thank you.

Well, you answered my question, Nachum, about book-to-bill being above 1 for the second half of the year, and that is tremendous.

I wanted to ask then perhaps about Asia-Pac.

I guess I was a little surprised it was only, I think you said 15% of revenue in the fourth quarter.

Do you expect that contribution, that regional contribution to grow in 2012?

Thanks.

Yes, most likely it was on a percentile basis normal, because Europe and Americas did a nice comeback.

Asia, APAC remains a very strong market for us, and the funnel and the activity there remain strong.

Okay.

Then just quickly, on the order that you announced at the beginning of the quarter, can you give us some idea of how much of that was recognized in fourth quarter?

Thank you.

Yes.

So without getting into specific details, I think as we mentioned on the previous conference call when we got the order, this is an order that we will recognize over several quarters.

We already started to recognize some revenues from it; but it is not one quarter or something like that.

It will take us more than one.

Okay.

Does that make up a majority of the increase in the deferred revenue that we are seeing here today?

It contributed some.

I'm sorry, what?

Pardon me?

You are correct, some of the increase in deferred revenues relates to that order.

Okay.

All right.

Thank you.

Sanjit Singh, Wedbush.

Thanks, guys, for taking my question.

I was wondering if you could talk on the competitive environment.

Are you seeing any incremental opportunities, given some of the disruption that is going on with Sandvine?

And are you seeing anybody else besides Cisco and Sandvine in RFPs?

What is the competitive environment looking like right now?

So, no drastic changes.

Obviously, from afar we've witnessed some of the challenges faced by Sandvine and trying like everyone else to figure out what is going on.

As we stated, we are not encountering a similar headwind.

As we said in the past, the industry is growing, the segment is growing, DPI is becoming a must-have technology in many mobile and fixed networks.

So the segment and the space is growing, and several players are enjoying the success, not just us.

In the mobile space, we actually see the incumbent GGSN vendors with various forms of DPI as the main competitors versus looking at Sandvine and Procera.

There is a lot of greenfield out there.

In all of these greenfields there is some kind of a form of a GGSN and a GGSN vendor claiming they can do DPI.

So they are really our main competitors, where we need to come in and show enough functionality and features and value to justify another Service Gateway, another box in the network.

And that continues to be our execution strategy moving forward.

I appreciate that.

Now regarding -- knowing that you guys don't give quarterly or full-year guidance, is there any reason to think seasonality in Q1 would be any more pronounced than your typical pattern over the past few years?

We could see seasonality in Q1.

Remember, we still have 20-plus-percent of our revenues coming from the enterprise space.

That definitely seasonality -- subject to seasonality.

Also, obviously, budget flushes with telcos typically happens -- not only, but typically happens in Q4.

So Q1 is a suspect of seasonality.

How much, if any?

We're still in the first months, and hard to know.

Thanks.

I appreciate it.

Jay Srivatsa, Chardan Capital Markets.

Yes, thanks for taking my question.

I want to step back a little bit.

Several service providers seem to be a little bit concerned about capital expenditures.

They are seeing some weakness near term.

What is your read on it, both on the wireline and mobile side as you look to the rest of the year, in terms of their own expenditure patterns and how it plays to you?

Yes, Jay, thank you.

Good question.

We have actually been seeing these kind of headwinds for quite a while.

They have been coming and going at different levels of severity.

We have been able to grow despite that.

One can argue that maybe if macro conditions were even more favorable we could have actually grown even faster; but this is hard to analyze.

What we do observe is that the capital spending towards our equipment is relatively small compared to the macro scale of things.

So we are not the first or second budget line to cut.

Also because of the strong saving elements in our equipment, haul optimization, that piece, and what I said on the call -- a very obvious and provable 20% to 30% bandwidth savings, sometimes actually plays in our favor where a mobile operator is actually trying to push out multibillion-dollar deployments of 4G or LTE rollouts by deploying our equipment.

Sometimes the tough markets play in our favor.

All right.

Following up on the comparative landscape, as you look at the US market, do you see the competitive dynamics being any different from what you have experienced in some of the other markets?

Meaning are there more entrenched players here that will pose a bigger threat for you relative to what you have seen in Europe and Asia-Pac?

No, not much.

In general to the best of my knowledge, companies utilizing DPI and catering to very large service providers -- I mean, the pure-play group is more or less stable over the past, say, two or three years.

On the contrary, we have seen one or two players disappear like Ellacoya.

And I feel this is actually a testimonial to the very large technology barrier to entry.

So on a stand-alone basis, the answer is no.

The integrated players, we are seeing continuous attempts -- some are more successful, some are less -- out of the routers/GGSN vendors to embed similar functionality like us into their routers.

That continues to be my focus on strategy and roadmap.

There we do see continuous improvement with some of these routing vendors or GGSN vendors, so they do continue to invest and improve.

In the meantime, obviously, we expand and improve our speed, functionality, scalability, and value-added services.

All right.

Thank you so much.

Catharine Trebnick, Northland Securities.

Oh, good morning.

Nice quarter, guys.

I have a question on technology.

Basically, with the shift to more video streaming away from peer-to-peer traffic, and peer-to-peer traffic is where really DPI technology really got its boost, do you think the shift more towards video traffic in the United States -- I believe it's now like 70%, where peer-to-peer was 70% three years ago -- will that shift the competitive landscape toward some of these GGSN competitors, or not?

What is your take on that?

Thank you, Catharine.

Actually a very insightful question.

You are right.

In a way the DPI function, at least the Allot interpretation where we use DPI to identify applications -- and I might add here to do that and only that, identify application -- certainly, the peer-to-peer applications were the toughest to identify.

And typical video stream applications are easier to identify, so maybe someone who has a mediocre DPI capability might be able to better get away with it if video streaming is it.

Having said so, first, peer-to-peer is still a very large part of traffic.

We note that because of the lack of ability to identify peer-to-peer correctly, we believe that some of these measurements out there misclassify peer-to-peer as video streaming.

Oh, by the way, most of the peer-to-peer traffic is video.

And the fact that only maybe three or four vendors can successfully identify and call it by its name, we believe that a lot of the peer-to-peer is misclassified as video.

And, finally, many other applications such as the gaming certainly are voice and Skype and others, you still need a pretty elaborate DPI technology to keep up and do a good job recognizing and identifying these technologies.

So, bottom line, yes, there is some effect; but nevertheless DPI is very much needed.

And again, having said so and I couple back to my answer to Daniel Meron, we are much past DPI.

Allot is now a Service Gateway Company.

We offer many value-added servicing, charging functions, Field Services, fair share.

So we are now getting into deals where DPI is maybe a factor, but a small factor of the overall proposition.

Well, that is very good.

Thank you very much.

Then my second question is, could you split out your Americas number between Latin America and North America?

Because you had two wins in Latin America, so that would be interesting to see how it splits out.

No, sorry, Catharine.

We don't have the numbers off our head.

We have one VP managing the region, and this is why we just provided one lump sum to both.

We might consider doing that in the future.

Okay.

Thank you very much.

Thank you.

Sorry.

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

I would now like to hand call back over to Mr.

Kalish for any additional or closing remarks.

Thank you all for joining us today and hearing about the progress we have been making at the Company.

We look forward to meeting with you over the next few months as we travel to the US and to Europe, and of course, hopefully, see you on our next call.

Thank you again.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.