Allot Ltd (ALLT) 2012 Q2 法說會逐字稿

Thank you very much Caroline, and thank you all for joining us on our second-quarter 2012 conference call.

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

The press release announcing our second-quarter results is available on the investor relations section of our website at 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 excludes stock-based compensation expenses as well as amortization of intangible assets and certain one-time charges incurred relating to M&A activities and compliance with regulatory matters.

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

Before we begin, let remind you 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 there with the US Securities and Exchange Commission.

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

Thank you, Jay.

And thank you all for joining us today.

The second quarter picked up where the first quarter ended for Allot.

For the first quarter, revenues grew 43% over last year and 9% over the first quarter and reached $26.4 million.

Net profit was $5 million or $0.15 per share for the quarter and cash flow remained positive.

We achieved this while we began integrating Ortiva into Allot, with the acquisition closing on May 15.

The book to bill ratio was over 1 for the quarter as backlog continues to grow.

While we do not issue press releases with every new order, during the quarter we received large orders from 14 service providers, six of which were from new customers.

Six of these orders were for mobile operators and two of these represented new customers for Allot.

During the quarter we received an order for our third AC deployment which was an expansion deal with the current tier 1 mobile operator in EMEA in another demonstration of how LTE represents a new growth opportunity for us.

Large orders made up almost 60% of revenues during the quarter, demonstrating how we are penetrating deeper into our customer's network.

On the operations side, we had one 10% customer during the quarter, a tier 1 Latin American fixed mobile operator.

The Ortiva post-merger integration has been going according to plan and we remain excited about the unique video optimization solution.

As we all saw during the quarter, we announced the deployment of their solution with Three UK, a subsidiary of the Hutchison Group, one of the major operators in the world.

Our video optimization solution has now been deployed in two Hutchison operating companies.

Also during the quarter we signed a global purchase agreement with Hutchison for the supply of our video optimization solution.

In addition, we are seeing a healthy funnel of opportunities for this product and have a number of customers looking to try the platform.

Based on this I reiterate what we said last quarter that we still expect between $3 million to $5 million in revenues from the Ortiva solution during the second quarter -- second half of 2012.

Currently we are gaining market share, as you can see from our results today, and believe we are well positioned in the market.

Despite the macroeconomic environment, the market fundamentals are still solid as data and smartphone sales continue to grow significantly.

As an example, Barclay's anticipates that smartphone sales will grow 42% this year and the Ackerley Group expects that in two years Americans will own 175 million smartphones.

According to the Nielsen Group, the average US mobile subscriber more than doubled his or her monthly average data use, which now reached 454 megabytes per month.

As long as the fundamental trends continue, the niche for solutions like ours continues to rise as well.

The relatively small part of the CapEx budget, along with a quick return on investment and the ability to drive new sources of revenue, are the main reasons for our growth to date.

So while we are seeing these values of our fees remain healthy, the RFP process is taking longer more related to pricing issues than actual needs.

We continue to monitor market developments and demand for our solution.

While still in its early stages, customers are showing increased interest in our value-added service portfolio which is the most comprehensive in the market.

We're winning increasing amounts of business as a result of these services, which provide our customers with additional functionality and value both for current needs and for future offerings which are now clearing on their roadmaps.

Allot's fixed line customers report that data traffic [calculates] over 50% of bandwidth and is (technical difficulty).

On the wireless side, according to Allot's latest global mobile trends report, video now represents 42% of mobile data traffic worldwide and rising aggressively.

All of this explains the acquisition of Oversi Networks which renounce this morning.

Oversi now gives us the leading video caching solution, something that an increasing number of service providers are seeking.

We have been offering caching for the past [two] years through an OEM relationship and as demand for this started to grow, we looked to acquire a solution of our own.

With the acquisition we offer now a complete video suite for our service providers to meet the ever-increasing Internet video challenge.

We chose Oversi, whose solutions have been deployed at medium and large service providers worldwide, for several important reasons.

The scalable solution is optimized for large-scale caching deployments and therefore a good fit for our growing tier 1 customer base.

Distributed hierarchical caching architecture allows us to place caching at optimized points in the network.

And the solution is equally suitable for both fixed and mobile service providers, which are all seeking this type of solution to meet ever-increasing Internet video traffic.

With our sharp vision, we believe it will be another company which we can integrate into Allot relatively quickly and seamlessly.

We are excited about the Oversi team joining us and becoming another important part of Allot.

Nachum will review some of the financial considerations with you.

In summary, it was another good quarter with another steady rise in the topline and bottom-line stability despite closing of the transaction and the continued healthy cash generation.

The addition of Oversi is yet another piece in the service gateway strategy of offering the most comprehensive, intelligent platform in the market and in line with our broad strategy we have shared with you over the past year.

With value-added services becoming an ever-increasing differentiator, we continue to broaden our service offering as well as acquire those valued services which our customers see as critical during the near and long-term.

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

Nachum, please go ahead.

Thanks and welcome 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 related to M&A activities and compliance measures.

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 $26.4 million, up 43% over the second quarter of 2011 and 9% over the first quarter of 2012.

As a percentage of our revenues, sales in Americas accounted for 38%, EMEA 40% and Asia-Pacific 22%.

We had one 10% customer during the quarter.

As Rami mentioned, this revenue shift reflects the increased booking in the Americas we discussed last quarter.

Out of total revenues during the quarter products were 74% and services 26%.

Gross margin for the second quarter was 71.8%, similar to the first quarter level.

Our operating expenses increased to $14.1 million and in line with our expectations.

As we closed the Ortiva acquisition on May 15, this number includes one-half-quarter of Ortiva's operating expenses.

For the quarter we were happy to report earnings per share of $0.15, flat with the first quarter, but again including the additional operating expenses from Ortiva.

On the balance sheet side, cash balance has declined from $165 million to $160 million due to the cash payment we made at the Ortiva closing.

During the first quarter we generated $4.8 million in cash from operating activities.

Our DSO went down to 60 days from DSO level of 62 days we had in the first quarter.

Inventory increased from $10.7 million to $11.7 million.

This was due mainly to the consolidation of Ortiva's inventory.

With regards to the Oversi acquisition we announced today, here are a few financial aspects of the deal.

The purchase price is $60 million, plus up to a $5 million earn out based on 2012 performance.

On a non-GAAP basis, we currently expect the transaction will be breakeven by the first quarter of 2013 and will generate around $2 million in revenues per quarter in 2012.

Gross margin should be similar to Allot's current levels, and operating expenses are estimated at approximately $2 million per quarter during 2012.

We expect that during 2012 this will negatively impact our earnings per share by around $0.02 in the fourth quarter.

In terms of headcount, currently Oversi has 34 employees.

The acquisition has been approved by the Board of Directors of Allot and Oversi, and is expected to close during the first quarter, after the satisfaction of customary closing conditions.

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

(Operator Instructions) Ittai Kidron, Oppenheimer.

Thanks, hi guys.

Great results and good acquisition.

Rami, can you talk a little bit about strategy here?

You're buying a lot of companies now.

First of all, thanks on the color on Ortiva.

It's nice to see you're executing well on that one.

But how do you see a year from now Oversi and Ortiva getting integrated?

Is that the path or are there parallel paths?

And how do you maintain the sales force focus on your core product?

How do you balance those delicacies?

So first, I thank you for the positive feedback.

From a strategy product point of view, we see we have now completed our moving into providing value in the video delivery space.

In my mind, these are two smaller-sized acquisitions that basically give us two halves of the same -- in the same direction.

While Ortiva gives us video optimization, Oversi gives us video caching.

These are two major functions that enhance, improve, optimize the delivery of video traffic, which as I said on the call is getting bigger and bigger portions of broadband network.

So, for us, we complete again moving to video by doing the Oversi acquisition as well.

In terms of execution, strategy is great.

But you are right; we are on track with the Ortiva integration and we will commence aggressively to do the same with Oversi, which actually will be easier given the geographical closeness to Allot.

In terms of sales, what we're planning to do is we're actually using the Ortiva salespeople and the same with Oversi salespeople, at least in the first year, to be -- overlay sales team and basically promote and leverage our installed base and sales relationships to promote their respective products.

Only after that will they resumed regular geographical responsibility within that Allot sales force.

In terms of a product, in order to contribute to our revenue immediately and breakeven as fast as possible, we're offering the product with a simple integration, basically invoking our Layer 7 redirection and load balancing function within several gateways.

But obviously I will spend several quarters, we will gradually absorb the product and blend and move them onto our array platforms and our array blades.

The Ortiva integration plan is already in place and being executed.

And we will use this couple of weeks until the Oversi closing to put in place and aggressive integration plan with Oversi.

A year from now, my vision is we spin off of these products on a standalone basis.

Both companies have a nice funnel and installed base of existing customers, so they will be offered on a standalone basis.

But more importantly, they will be offered in an integrated manner which provides our cost efficiency and performance improvement over standalone solutions within the service gateway platform.

Very good.

And Nachum, regarding the financials, you've talked about Ortiva contributing -- I thought it was $3 million to $5 million, but maybe if I got it wrong correct me -- in the fourth quarter of this year and that you are talking about Oversi contributing $2 million.

I'm trying to understand if that $2 million is 100% incremental or basically the replacement of the volume that you already have through your OEM relationship.

I'm trying to understand how incremental that is versus replacement of existing revenue line already.

Yes, okay, so I would say that in terms of Ortiva, we said $3 million to $5 million in the second half of the year.

And in terms of Oversi we said $2 million per quarter on a standalone basis, meaning just additional revenues coming from Oversi.

We didn't discuss anything in terms of replacing or -- let's say performance of Allot on a standalone.

So it means that on a combined basis, those two acquisitions should give you around the $4 million to $5 million per quarter in the fourth quarter of this year and going forward.

Am I about right?

A little bit aggressive; again we said $3 million to $5 million in the second half of this year for Ortiva and $2 million from Oversi from kicking in starting in Q4 of this year.

(multiple speakers) So (multiple speakers) combined it is $5 million to $7 million in the second half.

$5 million to $7 million -- that means two quarters, third and fourth combined.

Remember that Oversi will not be consolidating the first quarter on a full basis.

(multiple speakers) months before the closing.

Very good.

And lastly, on the gross margin you have talked about Oversi being in line with your current gross margins.

But as you replace some of that OEM business longer term, is there opportunity for that business to actually be accretive to your gross margins?

Yes.

And the challenge is how to factor that in given that maybe some of the incremental sales we'll get from Oversi, are they going to be on top of what we saw on an OEM basis, or some of it will be actually replaced.

So there is some overlap with the numbers we did on a standalone on an OEM basis.

Very good.

Good luck guys.

Good stuff.

Matthew Robison, Wunderlich Securities.

Good morning.

I guess first I want to talk a little bit more about the Oversi versus your current caching OEM.

I presume there is pretty significant differences between the approach of these vendors.

Can you verify that?

And if we should -- what timeframe would you expect to start to adapt the Oversi technology to fill in and support the customers you are currently supporting with OEMs?

And I know with Ortiva, you had a nice hardware story there with the same kind of basic form factor as you have been using.

Is that also the case for Oversi?

And if you could comment, I think in this might be a tough one, but I'm kind of interested to know.

There seems to be a -- the use of DPI for analytics versus enforcement; seems to be kind of a range amongst carriers with those approaches.

And if you could comment a little bit on how your business lines up with the use of analytics versus enforcement, I would like to get some comment on that.

Okay.

So, good morning, Matt.

I guess there are three questions in your statement.

First, on the technical differences between our current OEM solution and the Oversi solution, I think they brought in to the same target of providing caching solutions for popular video peer-to-peer content to the edges of a network.

What I will say about the Oversi product is it does lend itself to larger scale deployments, which really was attractive to us and one of the technical reasons we eventually chose Oversi.

Also, the technology is a little bit more linked to our deployment, which will ease introduction to mobile networks eventually as well.

So, that is on the technical side on the two solutions.

In terms of enjoying a head start on integration platform, you're right to remember that in Ortiva we are based on ACCA platform and we're already in the process of moving them to our ACCA platform, which is obviously a much easier task if there was really some kind of a proprietary solution.

With Oversi it's a little bit different if you may -- the caching solution has two elements.

One is a big chunk of storage and that is going to stay.

No point of putting that into a service gateway.

But the control functions and redirecting video traffic and video control messages will be integrated very quickly alongside management.

So, that is on the platform integration.

Moving on to DPI and analytics, let me (inaudible) into two fundamental functions.

There is the sheer real time challenge to extract the raw data out of the real time and traffic, and that is something you need to do by an in-line, high scalable network element like ours.

The task is not a trivial one.

Although it is only monitoring, it is a very not trivial one, given the enormous amount of data that one needs to export, especially if you have a DPI function where you actually are able to export more insightful and more deeper data, which contains also application knowledge.

So those are great things with DPI in terms of policy are relevant for analytics.

You can do an analytics based on Layer 3 and Layer 4, but you can do even better and more insightful analytics if you have Layer 7 knowledge.

But again, having said so, in analytics there are two functions and we play in both.

One is an organic -- our ability to export a huge amount of analytical information out of the real-time traffic.

The second element is an external analytics tool which really is more about the data -- big data, data basing, extracting and reporting of information.

And we announced our Proactive Analytic tools several months ago.

When you talk about the ease of use in the mobile networks, I didn't quite catch what you said there on the Oversi.

Mobile networks, like video optimization, because it saves the data links across the network all the way to the handset and over the air.

Caching solutions usually save the bandwidth upwards from the caching point and up towards the network, and up until now, not in the backhaul and not over the year.

So we expect mobile -- in order to interest mobile players in caching, we need to push the caching element deeper and close as much as possible to the base station.

There are advantages and disadvantages to do that, and one of the engineering compromises is to do a centralized controlling function, but through the caching in distributed manner.

The Oversi solution is a natural fit to do that.

Thank you, that is helpful.

Kiera Kilkowski, BofA Merrill Lynch.

Hi guys this is Kiera on behalf of Tal Liani.

Thanks for taking my questions.

I just have a few quick ones for you.

First, is there any additional color you could provide on the activities you are seeing in the US market and Europe?

Second, I may have missed it, but can you provide the percent of value-added services of revenue in the quarter?

And third, some of your customers have had some weak results and others have announced new competitive solutions.

And I'm just wondering if you're seeing any changes in the competitive, environment.

Thanks.

So regarding the US, no new news as of today.

As we said on the last quarterly call, we had one national mobile operator when -- in the past quarters, and we expect -- we hope to expect to have another one before the end of the year.

Regarding value-added services, the high level, this is still early days in the fluctuation.

But I would say in the first half of this year value-added services sales on a booking basis were about 10% of our booking.

And in terms of our competition, we haven't seen anything that is a game changer here or there.

Competition is doing a good job improving their products.

Most of the features they announced do not surprise us.

We feel that we are fast being a DPI company and really executing on a service gateway strategy.

And the announcements we make are actually unique and not at the expense of our very high scalable and with deep feature base of our service gateway, the DPI function as well.

Got it.

Thanks and good luck.

Daniel Meron, RBC Capital Markets.

Congrats on the strong execution; another good deal as a team.

Rami can you give us a sense, based on where you guys are heading with these acquisitions, on how do you see Allot in the next several years?

And what do you think the market opportunity is with these acquisitions?

You've already mentioned that the value-added services is already above 10% in bookings so far in the year.

With these acquisitions where do you think it's going to head to, let's say in 2013 and beyond?

And also what is the impact on the overall trending for the Company?

Thank you.

So, starting from the last note in terms of value-added services, so it's now we are reaching a point of about 10% of our new bookings.

I believe as we move into our next year, I would expect to see them with 20% and above.

Remember that it's kind of a good rate between getting new accounts, which usually they view are not necessarily buying to value-added services, but most of the fundamental propositions and later on expand versus more the install base will get comfortable with our products, and then go on to buy whatever value-added services they believe in and fits their business models.

On top of the many deals we are seeing, even if they don't buy specific value-added services day one, it is a differentiator against solutions out there.

Long-term, my vision is truly that broadband networks are conceived of routers and do routing, just like Class 4, Class 5 switches that did switching 10 or 20 years ago so let routers be routers.

But let all intelligently far and above the function be done in the service gateways.

And as you can see, what we have been telling you about the strategy and now we are executing and building exactly in this function.

The value-added services we choose are a combination of trends and fundamentals we see in the market.

But we also keep a very open dialogue with our key customers who contribute to how we go about prioritizing which value-added services and which acquisitions we do and do not.

Is there a way to quantify the expansion in the market place through these value-added services?

Or compare it to the DPI segment that you observe so far and how it should track in the next several years as you integrate these offerings into your solution suite.

So, you know today, actually, again and obviously our value-added service offering really makes a huge leap, so it will be interesting to know.

So far, with mainly organic and one acquisition in (inaudible) space and some homegrown (inaudible), we reached [10%] and I believe it can go even further.

I believe the expectation is not giving you on revenues from Ortiva and Oversi and their contribution, that 10% would adjust significantly into the next period.

Is it 20% or 30% of our revenues?

Yet to be seen; it is also a function of what we grow organically versus what they contributed to us.

Okay, thanks.

And just a follow-on, you guys mention that so far you have not seen any slowdown.

Can you provide us some granularity on the trends both in the carrier segment between mobile, fixed volume and also what is going on in enterprise?

And if there is any regional color into the Pacific, Latin America or Europe and the Americas in general, how do you see it differentiated across these two segments?

Well, not that much.

As I said in the script, we're watching the business very carefully, trying not to be the only optimistic player in town.

We're pleased with what we have done so far.

So, not being drastic, I guess enterprise Europe is a little bit more under pressure versus the others.

We are seeing operators spend more time during the negotiation phase of RFPs, making sure they optimize the CapEx.

But so far, we haven't seen anything major driven by the fundamentals that we talked about on the call.

We hope these continue and drive our customers to make CapEx decisions.

So I would continue to watching the fundamentals and see that push our customers to spend their valuable CapEx dollars.

And if they continue then I hope that we can continue alongside them.

But it's certainly time to watch very carefully the market fundamentals.

Okay, thanks, Rami, and just to clarify that, is there a way to quantify the return on investment that your products provide, be it the mobile carrier or fixed line provider on the equipment?

Is there a way to quantify how much savings you provide them the equipment side versus deploying more routers or any other solutions, or just providing more services on top of it?

Yes, absolutely.

We have marketing tools that we use.

Obviously, the end results (inaudible) depends a lot about many assumptions that are specific to a given operator, how much is paying for an axis (inaudible) versus how much he is paying for a back order or long-distance bandwidth in Q1 or Q2.

Are they -- what, how will they be using their extra efficiency?

We give them to their network with a push-out and deployment by year, or just say [by about] 20% on an increasing sales capacity.

So you really are comparing two alternative costs.

But I can share with you that in many cases, our [ride] duration as well under a year and quite compelling.

Now that is on the savings piece.

If you took revenue-generating, then you can imagine even the smallest of increments in ARPU provides a very immediate and huge return on investment.

Thank you Rami and Nachum.

Good luck.

Thank you, Daniel.

Peter Misek, Jefferies.

Thank you.

Two quick questions, firstly on pipeline, you mentioned book-to-bill greater than 1. Can you give us any sense for the size of the pipeline conversion rate, some sort of feel for what the market is RFP activity?

And then secondly, competitively you have a handful of your competitors that seems to be struggling a little bit.

Would consolidation in the industry made some sense in terms of use of the cash?

Thank you.

Thank you.

Regarding our funnel of RFP activity, this is a very subjective measure.

Nevertheless, our pipeline remains healthy as it was last quarter.

As I mentioned on the script, the need is definitely there.

Maybe service routers are a little bit more cautious and more anxious to optimize their CapEx spending.

But the fundamentals remain fair and the outcome is a healthy flow of funnel in RFPs.

Can you repeat the second part of your question, please?

Just on the competitive product, a couple of your competitors are struggling; wondering whether a good use of your cash or would love your thoughts on a good use of your cash would be consolidating up some of these weaker players for new customers, client lists.

Thus far your acquisitions have been complimentary add-on type acquisitions.

Do you feel like there is a need to consolidate in the service gateway DPI market?

Okay, I get your question now.

I would think that a lot of it has been written and said about the merging between two players in existing markets through (inaudible).

Obviously you want to create a merger that 1 plus 1 would be greater than 2, and that could be very tricky.

I would not rule out anything at this point.

I think there is some interest to consolidation.

It does make sense and I think it can bring -- can create shareholder value.

But in any case it has to be done, at least my belief is that has to be done in a cooperative manner with both teams on both sides excited about such a proposition versus something hostile, which I would never consider.

Great, thank you.

Thank you.

Brent Bracelin, Pacific Crest Securities.

Thank you for taking the questions here.

I have a couple if I could.

First on the Americas contribution, obviously signaled last quarter you had a big win there in the Latin America.

Clearly that showed up in the numbers here with that region tripling sequentially, more than doubling year-over-year.

My question really is the sustainability of the Americas region, clearly very strong this quarter.

Do you expect that region to be lumpy?

Or is there anything there that could suggest that that strength you saw this quarter could continue going forward?

Yes, so I think obviously if you're looking on a quarterly basis any region can be lumpy.

In general the Americas was strong also during the second quarter.

So we mentioned that in terms of booking I mean.

When you mention Americas, strong in the first quarter on bookings.

We saw it on revenue in the second quarter, and obviously it becomes more and more of an important geography for us.

Okay, fair enough.

The second question is on the RFP process taking longer.

I believe you said that in the script.

Could you talk a little bit more about kind of what you are seeing on kind of the RFP?

Is this isolated to APAC and EMEA?

Or is this generally in most areas and most product segments that you have just that RFP process is taking longer?

And is it a lot longer?

Is it a couple of extras steps they have to go through?

Just trying to understand when you mentioned that in the script, any more color there on the lengthening of the RFP process would be helpful.

Yes, so I think it's another description.

It's not like RFP process is doubling.

We're just seeing, especially in EMEA operators, spending a little bit more steps during the negotiation and closing phase.

I would say maybe getting closer to the APAC counterparts, which always spend time optimizing pricing when it comes down to closing time.

Again I'm trying to be ultra-sensitive to any changes in our landscape.

The two or three dots create a line, and sometimes yes, sometimes no.

So again it is more and cycles in the closing phase.

It is not anything like doubling or whatnot.

Just being a little bit more pricing sensitive.

Perfect, and certainly understandable given the environment.

My last question is really are around this concept are around how people are deploying your technology.

Is there any way to slice up, just bucket what percentage of your business is driven by customers that are to deploying the technology for monetization versus deploying the technology for capital cost avoidance.

I'm just trying to understand the change in the business.

And obviously we know that your technology is being used more and more for monetization.

But where are we at, if you had to kind of ballpark that mix of the business, how much is driven by monetization versus capital cost avoidance?

Thank you very much.

Good question, but a very tough one to provide a quantifiable answer.

I [can say that fill] optimization is the majority of the deals as monetization grows.

I can't give you exact numbers because in many deals.

They also do monetization, always do optimization as well.

It's kind of like class, so if optimization was 101 and monetization would be 102, where would they go directly to monetization.

So all of the monetization are really mixed deals.

Sometimes it's an existing customer who only did bandwidth-saving measures with us and launched a tiered service, or if not, moving into monetization.

So there are both propositions, monetization being new and growing.

Fair enough.

Thank you so much.

Thank you.

Catharine Trebnick, Northland Securities.

Congratulations.

Thanks for taking my question.

I have a couple.

On the six wins that you announced, were have a competitive bids and did you compete against one or two competitors?

That is the first question, more color around the wins and the application or the use cases of these wins.

Thank you.

I think that some of the six new wins, at least the two that come to my mind in APAC, these were in two competitive processes against two competitors where we have been chosen.

Also I mentioned in the past a big Latin American name win which was a very visible account, was a very lengthy competitive process against a pure-play competitor and we prevailed there.

So, that is a (inaudible) lift of -- but not all of the six new wins are a competitor.

I would say maybe half of them were, and ended up with us winning.

Okay.

And the other thing (technical difficulty)

Your line is open.

Please go ahead.

It appears the caller may have muted her line.

Shall we move on to the next question?

We'll take the next question then we will pick her up if she comes on, please.

Jay Srivatsa, Chardan Capital Markets.

This is Jay Srivatsa.

Rami I want to ask you at a higher level.

It seems to be a lot of discussion and talk about how service provider spending in terms of CapEx is slowing down.

And yet you seem to be seeing pretty good traction for your products.

Can you set the stage on what is happening at a macro level and what that means for your own product and your own outlook going forward?

As we said in the past, and today on the script very carefully, obviously with certain operators CapEx spending is under pressure.

But it's not like it's going to zero, but it is under pressure.

I would say first in our mobile services are less affected than our (inaudible) under pressure than there are fixed counterparts.

That is one.

The second is what we are seeing is there are really -- when an operator needs to do a budget cut or delay CapEx spending to really prioritize and allocate the budgets in the most optimized manner.

The good news so far is that we make the cut.

The value we bring, the cost savings that included -- that we spoke about a rise earlier are things that have CapEx decisions our way continued to be taken in a favorable manner.

We are seeing some service from others being more aggressive in negotiations.

Not anything hysteric, but they are being a little bit more price sensitive than let's say a year ago, and that is pretty much it.

There's not really much to say beyond that.

All right.

In terms of competitiveness, how do you see the landscape going forward?

Do you believe some of these acquisitions you are making are imperative to being competitive and building some areas going forward?

Or are there other dynamics that are going on that could change the way the landscape looks as you look ahead maybe six months, a year down the road?

You are referring to the DPI standalone marketplace?

That's correct.

So, I guess you can analyze this from two different directions.

On one hand, we maintain our leadership in the pure-play DPI marketplace.

In terms of revenues, we do have -- we are number one in terms of the market share and growing our faster than the market.

And we believe this is based on both good product execution and sales execution.

And in terms of beyond that, in a way we are maybe charting our new brave way, building a service gateway which is DPI-based, but really attempting to become a service gateway to services providers.

And bringing in functions like security, like video and so on is quite unique to Allot.

I don't see similar players out there, which have built a service gateway based on a DPI platform.

We have seen some newcomers coming from different spaces that try to move into this from different directions, whether it is from the mix space or service delivery space.

But so far we have not seen a platform like ours really make a move -- certainly not consolidate (inaudible) video optimization or video caching solution.

So, we've got a two-pronged approach.

We maintain a leadership in the pure-play DPI space which is still good, healthy, and growing.

But we move beyond that into a category of our own, which is service provider, service gateway space.

Thank you very much.

Good luck.

Catharine Trebnick, Northland Securities.

Sorry about that.

I'm not sure what happened.

My follow-on question was with the customer count.

Do you have a total number of mobile operators that you have?

And then also the last two acquisitions, between Ortiva and Oversi, do you have their customer count?

Thank you.

Yes, so in terms of the number of mobile operators that we have, I think the number -- a very ballpark rough number is around 70 mobile service providers worldwide would be the rough estimate.

In terms of new acquisitions, Ortiva was -- video optimization is still in the early days of penetration.

Their number one customer which they have brought to us is Hutchison and we announced both the deployments and execution of a massive purchase agreement with Hutchison Global.

They literally brought very few mobile service providers to the game.

Oversi is a little bit more advanced.

I guess they brought to us an installed base of about 20 medium-sized and some large-sized service providers mainly on the fixed side.

Okay, thank you very much.

I appreciate it.

And keep up the good work.

Thank you.

Sanjit Singh, Wedbush Securities.

Thanks Rami, thanks Nachum for taking my question.

Regarding Ortiva wireless, is there any way to describe what the revenue contribution was this quarter?

I know it closed in the middle of the quarter.

Less than $0.5 million this quarter.

Okay, less than $0.5 million, great.

And looking forward, is there anything unique about the Q3 quarter in terms of seasonality?

It should be perhaps more seasonal given we have the Olympics and the macro that is going on in Europe.

How are you viewing seasonality going into the September quarter?

Yes, Q3 is traditionally a tough quarter given the July/August traditional slowdown.

Olympics is affecting mainly UK (inaudible) anybody else out there.

So, just a regular July/August slowdown and the pickup in September.

Right.

Thank you.

My final question, if we were to bifurcate the market into the integrated players and the pure play players, do you feel more comfortable competing against one versus the other?

You have been competing against all of these guys for a number of years, but do you see yourself gaining any competitive advantages versus one type of play versus the other?

Regarding a pure-play like ours, most of them are public companies, so they publish the numbers.

And you can see how we are faring and actually gaining our market share.

I believe the market is big enough to sustain two or three players long-term.

So I am pleased with our traction so far.

Regarding the integrated group, there the name of the game is to really continue executing a product roadmap, and maintain feature and function and scalability advantages far beyond the integrated options, so we can justify standalone solutions.

So to compete against another standalone, one maybe can win by going to it's good enough.

But to compete against integrated solutions, you really need to win by a knockout.

So far, despite this being a major concern and a point to watch for us, we managed to maintain our distance.

And I expect that the Ortiva and Oversi acquisitions will even increase the distance between us and these players.

And nevertheless, they're not giving up and they are constantly improving their internal end solutions and we plan to do the same on our side.

I think the wins are moving towards our direction.

Once an operator is totally mobile, converts from an integrated, it is kind of a default compromise to standalone.

They typically never go back.

And the flow of our street tells me that more and more operators are gaining the realization that there is enough merits and benefits in a standalone to do a bit of re-decision, even if it means another box in the network.

Thank you very much.

Good luck.

Daniel Cummins, ThinkEquity.

Thank you very much.

I'm sorry I got on late.

I missed any comments you may have made about deferred revenue.

And I believe you said the book-to-bill was greater than 1. I'm curious, with respect to the deferred revenue, how much related to the $9.5 million order you booked in the fourth quarter.

And the second question relates to AT&T and Verizon.

In the second quarter I believe both carriers are out with shared family plans, a new service.

So my question is, are they using your technology or those of your competitors?

They seem to be racing ahead here with some sort of platform.

Is there room for a standalone DPI, assuming they are pressing ahead with something that is good enough for now?

Thanks.

You were breaking out a little bit, but we'll try to answer to what we heard.

In terms of the deferred revenue and the book-to-bill, so as Rami mentioned, book-to-bill was above 1 also in the second quarter.

And therefore in August we are continuing and building the backlog, and I think that is almost the most important factor looking at the business.

In terms of the deferred revenue, it is a cash flow issue.

And as we're always saying, and deferred revenues went down by $1 million, getting them back to the level that we had in the fourth quarter of 2011.

To your second question, Daniel, obviously we like the statements coming out of operators like Verizon Wireless and AT&T.

Having said so, I apologize but I cannot comment specifically on who has what and what they are doing with it as a general statement.

Okay, thank you.

Nachum, I'm sorry; I thought that what I saw this morning indicated the deferred declined $2.8 million quarter on quarter.

Is that not correct?

Taking into account that we had the long-term ability as well.

Okay, was any of that an adjustment with respect to currency?

No, no.

Once it shows on the balance sheet, it is in dollars and that is it.

Okay, thank you.

Matt Robison, Wunderlich Securities.

It's okay.

My questions got answered.

Thanks.

Thank you, Matt.

As there are no further questions in the queue, I will now like to turn the call back over to your host for any additional or closing remarks.

Thank you all for joining us today.

We look forward to meeting with you and speaking with you during the coming quarter.