Allot Ltd (ALLT) 2012 Q3 法說會逐字稿

Good day, and welcome to the Allot Communications Ltd.

2012 Q3 results conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Miss Maya Lustig, Director of Corporate Communications.

Please go ahead.

Thank you very much, and thank you all for joining us today on our third quarter 2012 conference call.

I will be replacing Jay on the call today, as he is in New York with communications challenges.

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 third 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.

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 by Allot with the US Securities and Exchange.

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

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

I am pleased to report another strong quarter in which we reported our fourteenth straight quarter of revenue growth.

For the quarter, non-GAAP revenue grew 40% over last year, and 6% over the second quarter, and reached $28 million.

Non-GAAP net profit was $5.1 million, or $0.15 per share for the quarter, and cash flow remained positive.

We achieved this while we began integrating Oversi into Allot, with the acquisition closing on September 4.

During the quarter, we received large orders from 12 service providers.

Eight of these orders were from mobile operators.

Two of these represented new mobile customers for Allot.

During the quarter, we recognized revenue from a Tier 1 US mobile carrier, as I expected earlier this year, and represents a greater than 10% customer for the quarter.

This is our second large mobile carrier in the US, which we see as a market with potential upside in the mid-term.

This is the first deployment for specific value added service, and (inaudible) mobile value added services of more territories going forward.

I believe this also demonstrates that despite the currently regulatory environment in the US, Allot now offers a long list of value added services which are attractive to US service providers, and are consistent with [accounts] (inaudible).

Large orders made up 40% of revenues during the quarter, demonstrating how we continue to penetrate deeper into our customers' network, and how we are increasingly being deployed by larger service providers worldwide.

Book-to-bill ratio was below 1 for the quarter, but [advanced] 20% higher than what it was in Q3 of last year, where we saw the effect of seasonality.

That said, at this point, the market fundamentals, primarily the growth in data traffic, remains strong, and our [funnel of] opportunities throughout the globe remains healthy, and it continues to grow both in wireless and wireline.

Our post-merger integration programs have been progressing steadily.

We closed the Oversi acquisition in the beginning of last month, and early out of the gate, we are very pleased with the sales (inaudible).

We believe this is due to the very unique nature of video caching.

(inaudible) optimization solutions basically shifts prioritization or bandwidth from one subscriber to another, based on a previously (inaudible) set of rules.

Local caching is really a win/win situation.

While the subscriber experiences an increase in his or her quality of experience, the solution does not decrease bandwidth to a different user.

Rather, it saves bandwidth by locally caching the in-demand, most popular videos.

Here is the case of [pure] games, no compromise regarding any single subscriber, while the video experience is improved.

As we announced, we already received a large order for this product from one of our current large fixed line DSL customers.

This win is additional validation of our service gateway strategy, as well as our M&A strategy of cross-selling additional important value added services over our large account installed base.

Ortiva post-merger integration continues according to plan in deployment, and new trials are progressing with eight customer networks.

We continue to believe that video will be one of the more compelling value added services, going forward.

Moreover, we are in a unique position in our market today with our combined offering of traffic management and video-related value added services that Allot offers to its ever-increasing customers through a single vendor, single platform strategy.

Beyond the growth of [sheer value], if I look at our target markets, our growth and success is being driven also by the dramatic rise in penetration of increasingly sophisticated mobile devices.

These devices are, in turn, (inaudible) the most sophisticated and bandwidth heavy class of over the top data services and applications, such as video application, social networks, interactive gaming, voice over IP, and GPS.

This combination has required service providers to become more intelligent in how these services are provided to subscribers, and how they are charging for them.

As a result, Allot has become a trusted partner with our service provider customers, aiding them in designing and implementing some of the most advanced unique service plans.

The value added services portion of our offering continues to gain traction.

During the quarter, [18%] of revenues came from these services, and increased from around 10% during the previous quarter.

About 3.4% were related to the new acquired video delivery solution.

In summary, we are pleased to report another strong growth quarter.

We have clearly demonstrated that our full portfolio of solutions over a single platform is a major (inaudible) and becoming a bigger factor of our winning of new business.

With the market fundamentals remaining strong, the funnel of opportunities continue to grow, and with the new video delivery offering increasing substantially our total addressable market, we feel well positioned to continue on our successful execution.

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

Nachum, please go ahead.

Thanks, Rami, 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 revenues adjustment due to fair value of acquired deferred revenue, stock based compensation, amortization expenses and certain expenses related to M&A activities, and compliance matters.

Full reconciliation of the pro forma results discussed on this call to GAAP results is currently available for review on our website, and in the press release issued today.

Now, let me walk you through the results for the quarter.

Revenues for the third quarter, on a non-GAAP basis, increased to $28 million, up 40% over the third quarter of 2011, and 6% over the second quarter of 2012.

The reason for the non-GAAP revenues is revenues adjusted for impact of the fair value adjustment to acquired deferred revenues related to purchase accounting.

As a percentage of our revenues, sales in America accounted for 44%, EMEA 36%, and Asia/Pacific, 20%.

We had two 10% customers during the quarter, including the large US operator which Rami mentioned.

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

Gross margins for the third quarter were 72.3%, up by 50 basis points from the previous quarter.

Our operating expenses increased to $15.5 million from $14.1 million, and in line with our expectation.

As we closed the Ortiva acquisition on May 15, and Oversi on September 5, this number includes full contribution from Ortiva, and one month contribution from Oversi.

Both Ortiva and Oversi accounts for the most increase in OpEx.

Our total headcount is now 430 employees.

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

On the balance sheet side, cash balances declined from $160 million to $144 million, mainly due to the payment on the account of Oversi.

During the third quarter, cash from operating activities was positive, but declined from the second quarter level.

The decline reflects the working capital needs of Ortiva and Oversi.

Our DSO went up to 71 days, from DSO level of 60 days we had in the second quarter.

Inventory declined slightly to $11.1 million, after having Oversi inventory at quarter end.

The decline was mostly due to deferred inventory that was recognized during the quarter.

This is obviously the result of the declining deferred revenues, and as we discussed in the past, affects mainly our cash flow from operation.

The decline in deferred revenues represents bills for which payments were received before the third quarter, and recognition was during the quarter.

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

Operator?

The question and answer session will be conducted electronically.

(Operator instructions) We will now take our first question from Ittai Kidron of Oppenheimer.

Please go ahead.

Thanks.

Hi, guys.

A quick question for you all.

Nachum, can you tell me what was the -- I didn't get it, the book-to-bill for the quarter?

The book-to-bill, you asked, Ittai?

Okay.

So as Rami mentioned on his call, the book-to-bill was below 1, but we did mention it was 20% more than the booking level we had a year ago in the third quarter of last year.

Rami, maybe you can give us a little bit more color around this.

It seems like there's just a seasonal pattern developing here that I (inaudible).

September quarter, you have a book-to-bill below 1. So is that right?

I mean, do you think that going forward, that kind of makes sense, given your exposure in Europe, and that that would be the case?

And what's your confidence level here going forward from a pipeline standpoint that momentum is not lost here?

So, Ittai, one occurrence is the (inaudible) how to derive too much a extrapolating conclusion.

We do note that typically Q3 is our slowest quarter, and referring to Q3 of last year, where we had book-to-bill lower than 1, it was a very long time, and then in subsequent quarters, we bounced back.

So I certainly hope that this will be the case here.

We were certainly affected by seasonality.

Also, as we stated in the past, as we get into our bigger, larger deals, our booking patterns, they tend to be lumpy.

So this is not a surprise.

I do -- we do note that from a positive trend, the booking level, on an absolute level, was still higher by 20%, compared to what it was in Q3 of 2011.

Okay, but your revenue level is higher by 40%, right?

On a relative basis.

Is that good or bad?

Correct.

Okay.

Can you talk about, then, from a business activity standpoint, does it -- do you feel -- we can't be blind to what's going on around us in the world, right?

And I'm just trying to understand, clearly, DPI, there's a big need for carriers investing in it.

I was just wondering, though, from your standpoint, as you look at the environment right now, does it make carriers slow down on the purchasing decisions?

Are you seeing any slowdown in business activities?

They're probably still high, but I'm just trying to get a sense of the -- if there's a change in pace.

Yes, so, right now, in terms of fundamentals, the customer behaviors, the rate of new projects, in a subjective manner, I do not see any behavior in (inaudible) actually, the amount of new projects, new RFPs, both mobile and fixed, calling for a DPI, of projects that are being announced, so we're anticipating video related RFPs.

The (inaudible) growing and stronger than ever.

How do -- we've been executing and showing growth quarter despite macroeconomy being challenging for a quite couple of quarters, then, now.

So I'm not seeing any fundamental shift right now.

Okay, very good.

And lastly, regarding that US Tier 1 carrier, congratulations on that.

Can you give us a little bit more color, though, on the implementation, what's the application that it's being used for, and you know, as you look forward, what are the -- what's the likelihood you're attaching to kind of follow on large orders from that customer?

Yes, I'm afraid, Ittai, that we need to respect both the privacy of our customer, and also, their -- definitely, their business strategy.

I did say that this was a (inaudible) for a specific value added service in our portfolio, and that service definitely doesn't -- you know, [read] on any potential conflicts with net neutrality.

So if you may, we've been talking about the [youth] market for a long time.

As I promised, this year would be the year that we get some traction regards there with the first win a couple of quarters ago.

I expected to get a second wind with a (inaudible) earlier this year, and now I'm happy to deliver results.

So that gives us a now two very large US mobile [baseband] carriers, and our strategy is two-fold.

One, continue upselling mobile value added services that we now have in our quiver, that don't have any net neutrality issues.

And second, obviously, this penetration is a very -- to a very (inaudible) portion of the same carrier network, and we expect -- we hope to get also additional orders, geographic orders and new market expansion.

So both upselling new value added services, and also, expansion in geography.

Very good.

Good luck, guys.

Thank you very much, Ittai.

We will now take our next question from Matt Robison of Wunderlich Securities.

Please go ahead.

Hey, good morning.

Following on the last question, for your second 10% customer here, was that your first or second US operator that contributed that much?

Hi, Matt.

It was the second 10% customer, is our second large US operator, yes.

And what region was the other 10% customer?

If you want, the first 10% customer is not the first US mobile carrier.

One is EMEA based, and one is the US based, if you want.

Thank you.

And so you had -- obviously, had some nice bookings from a couple of US customers, and it would seem that you recognized revenue and they didn't do as much booking with you perhaps in the third quarter.

Is that -- can you give us a flavor -- how we -- the cadence of the deployment, and when we might expect more bookings activity from these operators?

You know, I'd say we don't make any forward-looking positions or guidance.

But actually having recognized revenues from this very large project means that we delivered this phase of the project very successfully.

And there, because of that, we are hopeful that with execution on this part of the project, we can expect to, again, either penetrate new geographies -- it's not like this recognition covers the whole network of the specific [players].

There is many other geographies where -- to expand.

And also, obviously, with the backwinds from this project, we hope, but can't predict, also a deeper penetration with new value added services.

And Nachum, the DSO stretch you're -- how much of that should we attribute to the [stub] accounting for Oversi versus your back-loaded -- of the core business?

Yes, so obviously, if you're looking at the balance of accounts receivable for the end of the quarter, part of it is relating to Oversi, as we started the consolidation at the beginning of September.

In general, you know, Oversi has the same DSO level as Allot did, 60 to 70 days.

That's within the credit that we usually give our customers, and it relates more to which specific deals we recognized during the quarter, and exactly when.

And as you know, exactly when we invoice.

So, in general, obviously, DSO went up from 60 to 70, and I would say part of it is Oversi, but also, you know, the quarter was a little bit more back-ended for Allot as well.

And I didn't catch the revenue you attribute to Oversi and Ortiva in the quarter.

How much was that?

I mentioned that we analyze our value added services for the quarter because of 18% of our revenues, and 3.4%, just roughly $1 million ,were contributed from the video delivery solution, the Ortiva, Oversi solution.

Having said that, just as an indicator, we already -- we have already started to receive orders even for these products standalone, but also, these products are line items, and greater orders that include a mixture of our equipment and licenses.

So it's moving forward.

It will be increasingly challenging to split them out, and do them adjusted, but nevertheless, for this quarter, out of the gate, it was $1 million contribution, roughly.

Okay, so you figure that the next quarter will be the last quarter where you're going to be giving us separate data?

Most probably, yes.

And Matt, remember, as Rami mentioned, we already got bundled orders, so it's already quite difficult to split between the different products.

Understood.

Thanks.

Thank you.

We will now take our next question from Daniel Meron of RBC Capital Markets.

Please go ahead.

Thank you.

Hi, Rami, Nachum.

Congrats on the ongoing execution here, despite the backdrop.

A couple of questions on my end.

First, can you provide us with a little bit more regional color, as far as the different geographies?

Obviously, you had a really good US win.

What's the momentum that you see in this market?

And then also, some color per product category, if there's anything that you can add on that.

Thank you.

Yes, so in terms of the geography, Nachum stated the breakdown.

Obviously, on the revenue side, the Americas is having a very strong quarter, mainly due to the recognition of this very large mobile customer and account.

But even without that, America came out fairly strong this quarter.

EMEA came in second, for the (inaudible).

So I think if we continue our traction in the US, then we would probably fall into a more healthy pattern of still expecting EMEA to remain our strongest sales region so far, despite the macroeconomies, US to be -- to grow into a second place, where it used to be third in the [task].

And APAC to be third.

So definitely, if we are able to execute and continue our penetration, we will see more from the Americas.

In terms of a product mix, you're seeing here a first quarter -- again, as I said it, it's [various] services are 18% of our revenues.

That's a record, and seeing a strategy come together.

Second note, the [0.5%] increase in our gross margin is mainly thanks to our -- to more an upselling of licenses, as they are proportional to the number of active subscribers.

We've discussed that in the past.

And from platform point of view, we are seeing more and more shift towards the larger part of platforms, the service gateway, Sigma and Sigma E, and less, say, to the lower end of products, the NetEnforcers, the 500, 1400 and 3000.

Okay, that's helpful.

And then, on the demand from both mobile carriers versus wireline carriers, any update on what you're hearing from the wireline carriers as far as their deployment plans, given the rise in the over the top content?

And related to that, what's your sense, as far as prioritizing deep packet inspection and network traffic management in general, when it comes to carrier spending in this environment?

So, again, I (inaudible), in terms of spending, obviously, (inaudible) macroeconomy is not in the right direction, but we are fortunately (inaudible).

We see a very small portion of that, and in categories which usually make sense both in good times and in bad times.

Certainly in times where over the top services is something service (inaudible) cannot ignore, either define needs to control them, or they simply join them with advanced charging techniques.

So again, we would not be probably the right company to ask about macroeconomy and carrier spending.

At least, for now, is our side, it's very small of the market spending, and the business case is very compelling.

From the fixed versus mobile side, mobile still rates very strong.

As I mentioned, it was new deals, eight of which were for mobile, so obviously, mobile is a big part of the quarter.

Fixed, as I expected, will -- predicted would (inaudible).

We are seeing some of that, but not flood, excuse the analogy, of rise in fixed.

I do expect that the video caching offer we are now bringing to market will be -- initially will be more attractive to the fixed market rather than the mobile, initially.

Right.

Okay, thank you.

Good luck.

Thank you, Daniel.

We will now take our next question from Catharine Trebnick of Northland Securities.

Please go ahead.

Hello, good morning, and congratulations.

Two quick questions.

Rami, can you pretty much -- can you split out the video caching?

Is that a, right now, more regionally specific, would you say, stronger from Asia-PAC than perhaps Europe?

And then the second thing, could you discuss some of the trends at Vodafone, and how that might accelerate more DPI technology?

I know that they're expecting like somewhere over [2,000] growth rates in data?

Thanks.

Okay.

So on the caching side, Catharine, you're very much right.

Caching tends to be a more (inaudible) and [RI] is more compelling in markets outside of the US and Western Europe.

So specifically, markets that are -- a lot of the content is brought in from overseas websites, in that a long distance, [inter-country].

[Dense traffic] tends to be expensive, so that would (inaudible) all operations, specifically Japan, India, West, Eastern Europe, Africa, Latin America.

These are the areas where we see more healthy demand for video caching, not that (inaudible) of interest and activity is zero in Western Europe, but the most natural and easy business case to prove is in countries I just mentioned.

Regarding Vodafone, we have -- we are not in the habit of discussing by name our customers.

So, you want to rephrase the question?

Yes.

My question then, rephrased, is, with the LTE, number of LTE service providers coming online with data, and accelerated traffic from tablets, like you had said earlier, over the top services driving that, I -- I mean, is it still safe to say, structurally, things are very -- are people still buying VPN and value added services from your type of firms?

I mean, those demands are -- are those demands still intact with this macro backdrop?

Yes, absolutely.

I cannot help but say that the first 10% customer that we recognized this quarter is a -- one of the more long-term, growing Tier 1 mobile customers that we've had for the past three years.

So demand there continues and remains very strong.

In terms of the fundamentals and why that is, it's expansion, both [available bandwidth] and number of subscribers and value added services.

This is why we generally like the mobile market, versus fixed.

All the underlying reasons were mentioned, and you repeated them as well.

And on top of that, I think LTE is actually in the category of geography and bandwidth expansion.

We already have several LTE deployments.

We see it as a nice upsell, as we go out and either write up new or (inaudible) or exchanges, this being one.

Our Sigma platform is already LTE ready, already taking on LTE traffic.

And the nice element is that for us, the migration is really, and for our customers, it's seamless.

The same Sigma (inaudible) taking 3G traffic has enough capacity and is ready to take on LTE traffic.

So from that point of view, that gives another -- a growth driver in the mid to long term.

Thank you.

Thank you, Catharine.

We will now take our next question from Alex Henderson of Needham.

Please go ahead.

Thank you.

I was wondering if you could just take a look at the two acquisitions and tell us if they had an impact on the book-to-bill ratio.

Would it have been higher or lower without the acquisitions?

Well, they did support our booking already this quarter, so obviously, they had a positive contribution, both on the bookings and on the revenue.

Well, yes, but the question was on the book-to-bill.

Would -- was the book-to-bill higher on the acquisitions, or lower on the acquisitions?

Alex, I mean, I think that we prefer not to get into that detail.

And bear in mind that we did mention that the orders that we are getting are already for bundled solution, and getting through a lot orders for the acquisitions that we did.

So first, it's very difficult to split the orders to begin with, and therefore, we are now getting into specific of book-to-bill ratio.

It will be much more difficult.

And again, the (inaudible), the [PMI] plan that we have is to integrate it into Allot, and have one solution, so I really don't see even -- I would say, for us, we are not analyzing the data.

Okay, thanks.

Second question.

When you look at the customer base that you're currently selling into, how often are you the sole solution for DPI?

And if there are other players in there, how many players do you see in the footprint, and any sense of how that penetration looks at those customers?

Let's see.

In the vast majority of cases, usually we are the single DPI vendor that is selected.

It's maybe that the very large carrier that is spread over multiple countries, you might see two DPI vendors.

We are experiencing sometimes when we are into a large mobile customer with multiple countries that sometimes, some countries will remain with an integrated DPI solution, and gradually, they convert to a standalone.

So that might constitute a dual-vendor, a transitioning period.

Others (inaudible).

I mean, there are a couple of cases, but it's fairly rare that there would be a dual-vendor decision.

The last part of that question was penetration within those customers.

What portion of their network needs do you think have been fulfilled?

(inaudible) service provider is operating in a single country -- let's talk of some mobile, for a second.

So if we're talking about a mobile service provider in a typical country, let's say in -- I don't know, France in Europe, a country of that size, then once you've penetrated, you pretty much cover the whole country.

Basically, we've said it in the past, for every [GG sale, PGW] in the network, there is one service gateway.

And operators that operate in multiple countries, or operators that operate in a very large country, you might see a partial deployment, usually on the primary market.

So you might start with a 20% or 30% penetration, and then typically, you grow eventually to a full penetration.

Does that answer your question?

Yes, thank you.

Thank you very much, Alex.

We will now take our next question from Sanjit Singh of Wedbush Securities.

Please go ahead.

Thank you for taking my questions.

I wonder if you could give an update on the competitive environment.

I think [F5] is coming out with their DPI platform next quarter.

Citrix looks to be ramping up Bytemobile, and then you have your traditional players, pure play vendors, as well as some of the integrated players.

So if I can get an update on the competitive environment, see if there's anything changing, anything -- anybody getting more aggressive.

Yes, thank you, Sanjit.

You mentioned -- what was the first name you mentioned?

F5.

I think F5 is coming out with their platform in Q4.

Right.

So I think -- you know, and almost answer, if you ask me right now, I'm not seeing any drastic change compared to previous quarters.

I mean, obviously, every vendor is -- has their wins and would not.

As I've said many times in the past, this market is growing very rapidly, and a market always -- a healthy market always constitutes several players.

It seems to us, based on revenues, that we have the number one [fast] in gaining our market share.

We know some about F5 to do things, some amount of DPI functions in their platform.

We haven't (inaudible) them too much.

It doesn't mean that maybe in some of their installed base they offer that as an expansion or an upsell and got away with it, but I do believe carefully that they have a lot of catching up to do, to have a meaningful DPI and scalable functions that can compare to the incumbent player.

So right now, not a (inaudible) in the market, and I've not seen any meaningful signs from their side.

F5 is very -- has been saying for a very long time that they want to come out with some DPI offerings.

We have yet to see that.

And once we do, we can evaluate further.

Again, I point out that we have kind of changed the rule of the game, and for us, I don't believe that our DPI engine will support (inaudible) [recognition], and coupled with a prioritization engine, charging engines and (inaudible) engine, it's cutting edge, and it takes -- the barrier to entry is huge.

You know, I have a lot of respect for F5, I give them benefit of the doubt, but we have yet to see them step up and show product.

I appreciate your answer.

I had two quick follow ups.

The first, on the operating margin.

Before the latest two acquisitions, we saw a nice trend upwards on operating margin.

Now that we've had -- now that you've finished integrating these two acquisitions, how should we think about operating margin going forward?

What's your, kind of overall strategy, your policy as it relates to expenses and growing margins?

Then secondly, on the Oversi and Ortiva overall combined contributions, I think you guys had talked about $3 million to $5 million for Ortiva the second half, and $2 million in Oversi in Q4.

Are we still on track for that overall combined contribution?

Yes, so, again, getting into the margin, we did mention that looking into the fourth quarter, both acquisitions actually will break even and start to contribute to our margin.

Thinking about next year, as you know, we are not giving any guidance, but they should be hopefully part of the Allot experience, the growth that we experienced in the past.

On the two companies, I would say, as I noted in my talk, Oversi is probably doing -- we'll probably do in Q4 above our $2 million expectation, while Ortiva will probably be closer to the lower end of the range.

But this is again, just based on track record and what's in the final, and when it's going to to get recognized.

So it's a little bit of (inaudible) enterprise, and it's obviously a little bit slower with Ortiva.

Got it.

Thank you very much.

Thank you.

We will now take our next question from (inaudible) Rosenberg of (inaudible).

Please go ahead.

Hi.

Thank you.

Congratulations.

First question is a follow up on the competitive environment.

Are you seeing any difference in how the market splits between the pure plays and the integrated?

Or, let's say, more demand for high end versus low level DPI (inaudible)?

Yes, so I would be happy to answer, but just to qualify my answer, integrated deployment is something that we don't have for the [debate].

I mean if a large system integrator offers DPI as part of a larger deal, and that business doesn't go to a separate RFP, or at least the customer doesn't take a vendor meeting, it might happen without us even knowing about it.

So it's hard for us to exactly quantify what exactly is the integrated part of the (inaudible).

So what we do know, obviously, is that we are aggressively, and also from our competition, gradually converting -- and other mobile operators, from either doing nothing, or doing limited DPI with integrated, into doing a standalone solution.

I have not heard of anyone who went standalone that went back to integrated.

Also, kind of counting, without getting into names now, but I'm sure you can do the math, but if you look at the penetration of our sales, and I'm mainly focusing on mobile, and complemented with the achievements of our competitors, you can see that the standalone is gradually getting to a -- maybe I would take China out of the equation, but outside China, standalone is gaining continuous traction, and winning over the mobile space with standalone solutions.

Good, thanks.

That's helpful.

Seeing that geographically, you guys -- you mentioned growing and expanding into new geographies.

Would that mean an increase in sales and marketing -- let's say, the percentage of revenues, or faster than the revenues?

We -- obviously, with the two acquisitions, the main contribution in operating expenses was to the R&D.

We are leveraging our installed base of -- existing base of sales, presales in general.

So except for maybe getting a little bit deeper into the territory, I do not expect large increases in sales and marketing.

We have a good sales force.

There is more or less that could be leveraged there.

Totally now with two new products in their portfolio to sell, so actually, I expect even greater efficiency from our sales and marketing team.

Not to say that expenses there remain absolutely flat, but I would expect greater efficiency, and average sales per head to increase.

R&D, on the other hand, has increased, again, mainly due to the two acquisitions, and also, are continuing to invest in using our strategy of using part of the new proceeds from growth, investing back into the business, primarily in R&D.

Okay, thanks.

I was wondering, two questions on -- well, in general, I would say, how are you impacted from operator consolidation?

I mean, for example, if you're in a certain operator and he's either merged or bought out, would that -- how would that affect you guys?

So, without getting into names, obviously, when a customer of ours goes through a merger process, definitely near term, it's a negative.

Usually no new buying decisions are made.

Maybe long-term, it's really a roll of the dice.

You could either end up with a larger and stronger and healthier customer, or you could -- you know, you could lose, depending on what side of the coin you fall.

The short term, it definitely slows down decision making.

Long term, it could be an upside.

Okay, thank you, that's helpful.

Last question.

The -- what kind of revenue patterns do you expect from the new Tier 1 operator?

Is it a one-time revenue, or is it sort of an ongoing growth, or -- should I expect them to -- can they -- can we expect them to be 10% also going forward, or it's in --

So I wouldn't use the word expect, but I did say, our strategy, which works very nicely with our other prior, very large Tier 1 mobile customers we won in EMEA, and that is that once we are in, work very hard to upsell our value -- other new value added services, and we definitely have a lot to offer.

And second, go wider with new geographies.

That's the strategy, and we will hopefully see the results in coming quarters.

All right.

Thank you very much.

Thank you.

(Operator instructions) We will now take our next question from Matt Robison of Wunderlich Securities.

Please go ahead.

Yes, Rami, I noticed that in some of the standard documentation coming out of 3GPP, there's a new function called the traffic detection function, which looks like it's something you might have been involved with.

I was wondering if -- how long that's been part of the narrative for the infrastructure standards, and if you've seen any influence from that activity on operators.

Presumably, I guess it would be mostly overseas operators, but if that's in -- if that process is indicative of wider constituency for using services gateways.

Yes, Matt, very impressive on how you follow standards, developments in our market.

Indeed, the TDF function is a fairly new function that came out with the latest releases of 3GPP.

Allot has very strong representation in these committees backed by some of our large end mobile customers.

And you are correct, in the new reference model by 3GPP, there is a new element called TDF, which is primarily in charge of detecting and recognizing applications, i.e., the underlying technology is -- would be DPI.

Also, around that, the new -- the (inaudible) was defined called SD interface, so it's primarily (inaudible), the model now is that the TDF will talk to an SD interface, to the [PCRF] or the [PCF].

Obviously, we're not only proactive, but we have implemented this functionality of these new two features, and are in the process of early deployment.

So would it -- do you think that this is -- are you starting to see some of the adjacent companies like the rules function companies adopting these standards, and are you -- what's the cycle time for this to get implemented in networks?

So it's early days.

Knowing the mobile space for quite a many years, there's no doubt that the mobile customers will adopt the 3GPP reference model.

They are very strict on their -- on how they bid the networks and with performance.

So I have no doubt that they will incorporate the video function.

In certain ways, our presence in the networks is already doing some of that.

But it's early days.

We're already seeing it in some RFPs, and I expect that down the road, it will come as the mandatory requirement, and I -- not hearing anywhere, any noise around it, I think we have an early mover advantage here.

Thank you.

As there are no further questions, I would like to hand back the call over to the speakers for any additional or closing remarks.

Thank you very much, everyone, for joining us today.

(inaudible), we wish you lots of health and stay safe and dry.

Thank you very much.

That will conclude today's conference call, ladies and gentlemen.

Thank you for your participation.

You may now disconnect.