Allot Ltd (ALLT) 2013 Q2 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Rami Rozen - AVP, Corporate Development

  • Thank you very much, and thank you all for joining us on our second-quarter 2013 conference call.

  • My name is Rami Rozen, and 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 expense, revenue adjustment due to acquisitions, expenses related to M&A activity, deferred tax assets, and amortization of certain intangibles.

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

  • A reconciliation of each non-GAAP measure to its nearest GAAP equivalent is available in the press release containing our second-quarter results.

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

  • I refer specifically to the discussion of our expectations and beliefs regarding our pipeline and funnel of potential future business.

  • Our actual results may differ materially from those projected in those forward-looking statements.

  • I direct your attention to the risk factors contained in the annual report on Form 20-A filed by Allot with the US Securities and Exchange Commission, and those referenced in today's press release, both of which detail factors which could cause our actual results to be materially different from those projected in the forward-looking statements.

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

  • Rami Hadar - President and CEO

  • Thank you, Rami.

  • Thank you all for joining us today.

  • Our second-quarter revenue came in 11% below Q1 levels.

  • While we are disappointed with these results, we are pleased with our very high booking numbers.

  • In fact, Q2 booking was an all-time record.

  • Most of the second-quarter revenue decrease is attributed to the slowdown in EMEA booking results we experienced in the second half of 2012, and the fact that revenue recognition under one $5 million large expansion deal was pushed out from the second quarter.

  • We expect that the booking results of the last two quarters will set a good foundation to resume growth in the following quarters.

  • While we are not pleased with revenue performance, at least in booking lumpiness, we attribute some of the strength of our strategy to penetrate very large, Tier 1 mobile service providers as a big part of the fluctuation we experienced recently.

  • A big part of our growth in the past five years has come from large deals related to a small number of very large Tier 1 operators.

  • Although we have increased the number of Tier 1 accounts beyond the initial agreement we had in 2009, we need to further increase our penetration in these accounts in order to achieve better predictability of our revenue results.

  • The good news this quarter is the positive [build in] momentum we are currently experiencing through our booking-to-bill trajectory.

  • Not only book-to-bill ratio was once again over 1, but we also reached a record level of booking during the quarter, a level of which is 20% higher compared with 2Q last year.

  • We feel confident with all of our booking environment as we go into the second half of 2013, and we believe that revenues during the second half of the year will exceed those achieved during the first half.

  • We will continue to monitor closely our operating expenses and take the necessary measures to increase our operating efficiency.

  • Concurrently, we will continue to invest in our R&D team as we have quite exciting product flows in our lineup, expecting during the next two quarters, that we believe will contribute to our product leadership in growth.

  • We hope to share with you more information on this during the second half of 2013.

  • Let me share with you some information on our value-added service and sales performance.

  • As we all know, we believe that VAS should play a key role in our future growth, and our VAS-related revenues have been growing steadily during the first half of 2013.

  • A deeper analysis of booking trends shows that VAS bookings during the first half of 2013 were roughly 30% of our total bookings.

  • The growing portion of VAS in our bookings is a direct outcome of our DPI-enabled Service Gateway strategy.

  • On one hand, the Service Gateway is the leading DPI product, with best-in-class functionality to the [parental] control market.

  • On the other hand, with our ability to execute high-speed, intelligent steering and load-balancing of applications and users, make it an optimal focus point to introduce new services into the network rapidly, with improved performance and efficiency.

  • Our lineup of VAS offerings is growing rapidly.

  • On top of video caching and optimization we acquired last year, we now have denial of service protection, WebSafe, quality of experience monitoring, network analytics, and network-based parental controls, which we introduced last quarter.

  • We see enhanced demand for VAS has enabled service providers to generate new revenue sources, improve quality of experience, and create great customer differentiation.

  • In several of our [new piece], at least one or two value-added services are included in the initial rollout.

  • Regarding our two recent video acquisitions, from an operational point of view, both companies are fully integrated into Allot.

  • And on the products front, we expect that by the end of the year, as planned, they will be fully integrated with our Service Gateway platform.

  • Video caching was roughly 5% of our Q2 bookings, and showing a growing funnel.

  • Video optimization is undergoing several promising trials with three Tier 1 service providers.

  • Allow me to review some of our quarterly achievements.

  • During the quarter, we won a multi-million dollar contract with a fixed Tier 1 customer in APAC.

  • We will be helping this customer implement application-based charging strategy.

  • The process was very competitive, and we won against other pure play DPI vendors.

  • We noticed a process we are receiving a multiport product, which [caused] we are receiving multiport product trials are often ahead of the pack, which is another testament to the high quality and performance of our products.

  • During the quarter, we had made an important progress with AT installations, as we have secured orders from three of the top 10 global telecom operators.

  • While these orders come from existing customers are incremental expansion, we view this as another step in the right direction [followed] into the NT space, and that NT rollout will be a growth opportunity for Allot.

  • During the quarter, we had two 10% customers.

  • In total, we have received large orders from 13 service providers, three of which were from new customers.

  • Six of these orders were from mobile operators, and two of these are presented a new mobile operator for Allot.

  • With the new units base Tier 1 we added recently to our customer base, we are now selling to five out of the top 10 mobile providers worldwide, ranked by revenue.

  • In only Q2, Allot was awarded with a $9 million follow-on order from a US Tier 1 service provider for value-added service offering.

  • During the quarter we also received another $1 million expansion order from that client, bringing the total [deal] sites to more than $10 million.

  • This customer was extremely pleased with the fast delivery and rapid execution of this project?

  • And we viewed it as a good foundation towards winning incremental business with this client in the future.

  • In summary, while we are disappointed by the sequential decline in revenues, we are pleased with our booking performance.

  • We expect that the booking results of the last two quarters will set a good foundation to resume growth in the following quarters, and we believe that revenues during the second half of 2013 will exceed those achieved during the first half.

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

  • Nachum, please go ahead.

  • Nachum Falek - CFO

  • Thanks, Rami, and welcome, everyone.

  • Let me take a few minutes to review the results were published earlier today.

  • I will be discussing non-GAAP numbers, which exclude the impact of share-based compensation, revenue adjustment due to acquisitions, expenses related to M&A activity, and deferred tax assets, and amortization of certain intangibles.

  • Full reconciliation of the pro forma results discussed on this call to GAAP results is currently unavailable 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 on a non-GAAP basis was $21.5 million, down 11% versus the first quarter of 2013.

  • As a percentage of our revenues, sales in Americas accounted for 49%; EMEA, 38%; and Asia-Pacific, 13%.

  • During the quarter, we had two 10% customers.

  • Out of total revenues during the quarter, products were 63%; and services, 37%.

  • The $1 million increase in services this quarter was mainly due to professional services we provided to some of our Tier 1 customers.

  • Gross margin for the second quarter was 76.1%.

  • Our operating expenses were $17.4 million versus $17.5 million in the first quarter, and in line with our expectations.

  • Our total headcount is now 444 employees.

  • For the quarter, we reported loss per share of $0.03, and OpEx stayed flat versus the first quarter.

  • The decline in revenues affected the bottom line, keeping the gross margin at the level of 76%.

  • On the balance sheet side, cash balances were $135 million.

  • We had a positive cash flow from operations during the quarter.

  • Our DSO was 96 days, similar to the 95 days we had last quarter.

  • Deferred revenues went down by $1 million, mainly due to recognition of prepaid support and maintenance, along with some product de-recognition.

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

  • Operator

  • (Operator Instructions).

  • Mark Sue, RBC Capital Markets.

  • Mark Sue - Analyst

  • Thank you and good morning, gentlemen (multiple speakers).

  • Good morning.

  • We had a good sense of your qualitative comments on the direction of bookings.

  • And recognizing that the business is quite lumpy, other companies that have lumpy business trends often provide their backlog.

  • Perhaps you could give us a sense of what that might be; or, if you do it on an annual level, what that was at the end of last year?

  • Just so that we can formulate our thoughts outcome, the direction -- particularly in light of the deferred revenues, which are still declining; and also the push out in revenue recognition.

  • Rami Hadar - President and CEO

  • So, good morning, Mark.

  • Our strategy in terms of sharing with the Street was only said that we do not give specifics on bookings.

  • And that's a (technical difficulty) outcome on backlog.

  • We do share with the Street the momentum above 1 and below 1. And obviously with this quarter being way above 1, you can assume that the backlog is growing, obviously.

  • But not more than that.

  • Mark Sue - Analyst

  • Okay.

  • If I look at it from a -- you will have the quarterly fluctuation.

  • But if I look at it from a year-over-year comparison for the full year, should we plan, with the qualitative comments that you've provided, that your revenues may actually grow year on year on a full year basis?

  • Or would be -- what you just printed, which you kind of think about a decline, maybe below last year's levels.

  • And then just technically on the revenue -- and then on the revenue recognition for you, if time permits, we could get a sense of what the -- is it really related to just VSOE?

  • Is it related to just customization or deliverables?

  • What might be causing some of the delay in recognition for that European customer?

  • Rami Hadar - President and CEO

  • I'll answer the first part, and Nachum maybe the second.

  • On the first part, as you know, we do not provide guidance.

  • All I prefer to say at this time is what I said on the script, and that is that I do feel that, given the booking level in this quarter and last, that we should see revenues in second half of this year exceed those from the first half.

  • How high, and where will they fall compared to last year, too early to say.

  • Nachum Falek - CFO

  • And then, Mark, the question about the VSOE, so I can just say that the terms weren't materialized during this quarter; and, therefore, we think that the recognition of this deal will probably be in the second half of this year.

  • It was nothing to do with VSOE or any other accounting measurement which is into this quarter.

  • Mark Sue - Analyst

  • Okay.

  • So was it more upgrades for the customization for a particular customer?

  • Rami Hadar - President and CEO

  • Mark, it was an expansion project from an existing customer, so we feel safe to assume that the deal will materialize in the second half of the year.

  • Mark Sue - Analyst

  • Okay.

  • Sounds good.

  • Thank you, gentlemen.

  • Operator

  • Matt Robison, Wunderlich Securities.

  • Matt Robison - Analyst

  • Thanks for taking my question.

  • Nachum, the $5 million that you didn't recognize, didn't really see any effect on deferred revenue unless there was some significant offsetting effect.

  • Have you been able to invoice for that yet?

  • Or is that also subject to deploying certain milestones?

  • Nachum Falek - CFO

  • No, I have to say, Matt, the question is not whether you can invoice or not invoice the customer.

  • I think, as Rami mentioned, we had the deal.

  • We thought it would be part of the revenues in the second quarter.

  • There wasn't any accounting issue in terms of VSOE, or in terms of acceptance or anything like that.

  • The deal was pushed out from the second quarter.

  • At this point, we feel comfortable saying that we're probably going to recognize most of the revenues during the second half.

  • But it wasn't a question of be abling to invoice this or no.

  • That wasn't the issue in this, really.

  • Matt Robison - Analyst

  • Nachum, you don't get where I was coming from.

  • I wasn't asking you about the accounting or anything like that.

  • I was just interested in cash flow.

  • Nachum Falek - CFO

  • I didn't get that, Matt.

  • In terms of cash flow, we didn't got anything on that deal at this point.

  • I think that cash flow for that specific deal will -- most of it will probably be between 30 to 60 days after recognition.

  • Matt Robison - Analyst

  • Okay, good.

  • And then, it's not a big number, but just kind of curious why the M&A piece went up slightly, or why it even continued to be a factor in non-GAAP?

  • Nachum Falek - CFO

  • Why this number went up?

  • Matt Robison - Analyst

  • Yes, yes.

  • I would've thought that you would have (multiple speakers).

  • Nachum Falek - CFO

  • Matt, some of it relates to the orders that we got before the M&A.

  • Some of it is related to the intangibles itself, and it's not necessarily going to be a linear depreciation.

  • Matt Robison - Analyst

  • Okay, that was the key word.

  • Thanks.

  • That's all the questions I've got for now.

  • Operator

  • Alex Henderson, Needham.

  • Alex Henderson - Analyst

  • Hey, guys.

  • So, obviously up sequentially from 1H to 2H is better than down.

  • But it's almost damning with faint praise, in the sense that your baseline for second quarter is so low.

  • Can you give us a little bit more context around your percents of momentum, the activity rates?

  • Is your deal book of activity stronger as you're going into the back half, that would continue to give you visibility for book-to-bill running the above 1 in the back half of the year?

  • Can you give us any sense of the size of the deals that you're chasing?

  • Or any of the other metrics around what it is that you're looking at in the headlights that might give us some confidence that we are not just struggling along to be down year over year, and unimpressed upon the order rates?

  • Rami Hadar - President and CEO

  • Yes, I'll try to give some color, Alex.

  • But obviously we'll be -- have some cautions, as well.

  • So, if you look at the first (technical difficulty) and the present, this quarter was extremely active and positive in terms of booking activities.

  • And as I said, it's now in terms of 20% of upgrades.

  • The previous same color up here, but it's actually an all-time record booking quarter for us.

  • Then we had some fairly high booking quarters last year, as well.

  • In terms of looking forward for the rest of the year, in terms of activities and trails and so on, it remains a very healthy, as I said in the [top].

  • But as I note, we are somewhat in a unique position.

  • We are a roughly small company, $100 million of revenue, but taking a very brave strategy of penetrating very large Tier 1 accounts.

  • Now, these accounts, sometimes you get lucky and you penetrate in six months, and you might commence revenues in another three.

  • And sometimes it's two years to achieve the same.

  • And this is why I'm very cautious.

  • The amount of activity in the trials remains healthy and high.

  • We have the final to support further growth in bookings as well, not just in revenue.

  • But, again, I'm cautious, as I repeatedly warned in the past, we are in a lumpy phase in our growth.

  • What we need to do is, one, expand our portfolio of Tier 1 accounts.

  • As I mentioned on my script, we have five out of the 10 top mobile operators in the world as customers.

  • We need to increase that list.

  • And we need to increase our penetration into these accounts.

  • So, obviously, expansion deals are most predictable.

  • Alex Henderson - Analyst

  • Second question, when you're talking about the book-to-bill number of being substantially greater than 2Q of last year, you are talking about the book-to-bill being greater than the bookings of last year, not the revenues of last year, by over 20%, correct?

  • Nachum Falek - CFO

  • That's correct.

  • And, Alex, we did mention last year that book-to-bill ratio was above 1.

  • Rami Hadar - President and CEO

  • Like when we said that 26.4 of revenues booking well above that.

  • Alex Henderson - Analyst

  • Right.

  • So is it reasonable to think that you might be able to produce at least a bookings rate similar to that in the back half of the year?

  • Or is that too aggressive?

  • Rami Hadar - President and CEO

  • All we can say, Alex, again, is we have the final, we have the activity.

  • But again these large deals total in the same market environment where telcos are not rushing to pull out the expenses and launch large deals.

  • I want to be cautious in my prediction.

  • We have the foundation, we have the coverage, we have this product to continue this momentum.

  • But I think I would not guarantee it at this time.

  • Alex Henderson - Analyst

  • One last question, then I'll cede the floor.

  • Do you think the integration of the technologies that you have acquired into your core products is having any impact on the ability to close transactions or recognize revenues on transactions?

  • Is there any delays -- as people say, I'll wait until you integrate that; I like the concept of it integrated.

  • You've got these new products coming in the back half; we're waiting for those -- as opposed to acting today?

  • Rami Hadar - President and CEO

  • No, not at all.

  • There is already an element of integration existing today in the products, and we have showed that with customers.

  • We are already getting some joint wins, as I mentioned on the script.

  • So that's not in any way related to the delays that we experienced.

  • Alex Henderson - Analyst

  • I'll cede the floor.

  • Thank you very much.

  • Operator

  • Peter Misek, Jefferies.

  • Peter Misek - Analyst

  • Good morning, gentlemen.

  • I'm going to try this a little bit differently.

  • I know you don't want to give guidance, but maybe you can give us some understanding of RFP/RFQ activity, how it looks; some sort of sense for what the potential deals are out in the market; how the competitive landscape has changed, if at all.

  • And if we can think of a little bit longer-term, how you feel that the current product portfolio stacks up versus the integrated end-to-end system type players.

  • Rami Hadar - President and CEO

  • Okay, in some of our deal activities in RFPs, I believe it will be meaningless to state a number.

  • When you engage in a presets process with a telco, you could (technical difficulty) anything that is maybe a small-scale demo, up through testing in a lab, testing in a limited environment in the network.

  • And RFP process, integration testing with other vendors.

  • All of these could be attributed under the title of trial or and RFP activity.

  • And to say that this number is 10 or 20, I think would be -- could be very easily misinterpreted and misleading.

  • Therefore, this is one of the reasons I do not mention trial activity.

  • All I can say, it's healthy and high, but again, unpredictable and lumpy in nature.

  • In terms of competitive nature, as I stated in the past, I want (inaudible) I'm looking here naturally in the last quarter, but maybe I'm looking up for the past, say, year or so.

  • On one hand, we experienced the DPI space becoming more mature, more well-known.

  • It's no longer that we'd need to evangelize this technology and its merits.

  • On the other hand, the three pure plays are maturing as well, bringing better worldwide coverage.

  • In the past, we used to run to each other in less occasions each one was more concentrated on their geographies.

  • Now we do run to each other more often and do create pricing pressures.

  • But that's expected in a growing and maturing market.

  • In terms of the product leadership, I believe that we have a very strong product in terms of scalability on one hand, and also in terms of a feature set on the other hand, which each one relates to an advantage versus our two other competitors.

  • On top of that, we are quite unique in our value-added services offering, and that's a key differentiator.

  • And sometimes it makes the whole difference in winning.

  • Our ability to maintain our very high gross margins obviously this quarter, it went up by (technical difficulty) [1%], shows that we maintain our leadership, and the value we present to the customer remains high.

  • Obviously, I've hinted that we'll be coming out with some very exciting product announcements in the next two quarters.

  • And I believe that will have (technical difficulty) closed up further in the distance.

  • In terms of integrated competition, it's more or less same there.

  • They know how to sell DPI now.

  • Many of them are being implemented which we call thin layer DPI, which is more or less the environment for the past same 1.5 years.

  • And the name of the game there is really sales execution.

  • If we can convince the customer on the merits of standalone, despite the need to introduce the new vendor and a new [metal pyramid], we can win the deals.

  • The product is by far light years of integrated solutions.

  • But these integrated companies have very strong positions and influence on certain name operators, and sometimes can try to take our part of a big, larger (technical difficulty).

  • So, bottom line is there is some main changes and frustrations in the competitive environment, but not by much.

  • I believe that we maintain our product and technology leadership.

  • Peter Misek - Analyst

  • Okay.

  • I guess the final comment I'll make -- and the reason why you're getting a lot of questions is, obviously, we think that there's a huge opportunity for technology.

  • It seems to have a very quick payback.

  • You seem to have a great portfolio, and yet the growth just doesn't seem to be materializing it.

  • So that's where the level of frustration in the hope that we get some more clarity on the growth projections or the growth trajectory, and where the market or when the market gets its velocity, its takeoff velocity.

  • So, just to give you that context.

  • That's where we're coming from.

  • We're trying to figure that out, and right now it seems very, very vague and difficult to do that.

  • Rami Hadar - President and CEO

  • Peter, I acknowledge and I do share your frustration.

  • But, again, this is actually the reason for my cautiousness.

  • We are playing in the big worlds and the big guys' game.

  • We are going up to top-tier accounts (technical difficulty).

  • (technical difficulty) to calling either the top 10 mobile operators in the world as our customers in very strategic points of the network, is a very major achievement, but yet a very dangerous point, as these deals again are very, very lumpy in nature and very, very hard to predict closure.

  • As this (technical difficulty) down deal have been closed, we would have been having a very different discussion right now.

  • And it was very close to happening.

  • Peter Misek - Analyst

  • Okay, great.

  • Thank you very much.

  • Operator

  • Kiera Kilkowski, Bank of America Merrill Lynch.

  • Kiera Kilkowski - Analyst

  • Hi, guys.

  • Thanks for taking my question.

  • I just have a few quick ones.

  • First, some of the deals that you called out in your press release were from fixed-line operators.

  • And generally we think of wireless as driving the growth.

  • So I was wondering if you could provide some color, even qualitatively, on how much of your revenues fixed versus wireless versus other?

  • Second, on EMEA, I was wondering if you could give us some additional color here.

  • Do you think things are bottoming out, or are we going to see some stabilization over the next few quarters in this region?

  • And then third, the 76% gross margin.

  • It's the highest we've seen.

  • I was wondering if you could maybe talk through some of the puts and takes in gross margin as we try and model that going forward.

  • Thanks.

  • Rami Hadar - President and CEO

  • Okay, so fixed versus mobile.

  • If we include all of our customers, then this quarter actually fixed made a small comeback and a small equal, if you analyze our bookings.

  • But if you concentrate on our strategic customers, then obviously it's very much biased towards mobile.

  • So, the [market] is pretty stable, though we are playing in the fixed market as well, and it's an important part of our revenues.

  • All of our top strategic accounts are in our mobile accounts.

  • This is where we are able to penetrate and go up against the big guys and penetrate nicely into these very large networks.

  • And as I said, most of our growth were fueled by the mobile space.

  • In terms of EMEA (technical difficulty) I would say, taking a step back, I'm not seeing any (technical difficulty) on the recovery side.

  • I am seeing stability, so there is no further deterioration.

  • The most positive note I can say is stable at these kind of levels.

  • Again, American jobs were on sometimes obviously we have some -- we have two very large customers there.

  • And so important when we get a big lump of orders for revenues, then they jump.

  • If you noticed in this quarter, because of the Tier 1 USA mobile customer we won and implemented, all of a sudden, America is now 49% of our revenue.

  • So, to answer your question, EMEA is steady, is the best I can manage.

  • On gross margin, 76%, obviously we are happy that we are maintaining our very high gross margin numbers.

  • A 1% up is even nicer.

  • In general, it continues (technical difficulty).

  • We had this discussion in prior quarters.

  • There is things that contribute to our gross margin, like the fact that we are implementing and part of our VAS sales are based on licenses, which obviously has very large gross margin component.

  • Professional services, in case we are needed; our service and maintenance packages all have good gross margins on top our [outage].

  • We like expansion deals because this is an opportunity for us to get good gross margins on existing customers when expansion is said to be less competitive.

  • On the other hand, new deals, new customers, penetrating new accounts, going through an RFP process or even an e-auction process, usually, these are won day-one with much less than our usual gross margins, and then we need to make up for it as we get into expansions, so up-sell value-added service.

  • As also I mentioned on the pure play front, in the past (technical difficulty) none of the pure plays had good worldwide coverage.

  • Each one of us kind of concentrated on their core areas.

  • We are now more spread out and seeing more of each other on new deals.

  • Kiera Kilkowski - Analyst

  • Okay, thanks.

  • Operator

  • Catharine Trebnick, Northland Securities.

  • Catharine Trebnick - Analyst

  • Good morning.

  • Three quick questions.

  • Number one, just for clarity.

  • The $5 million that didn't ship in Q2.

  • Was that in the Q2 booking number?

  • Nachum Falek - CFO

  • Yes.

  • Catharine Trebnick - Analyst

  • Good.

  • Okay, thank you.

  • Number two, the Asia-Pac win over a competitor.

  • Is that -- obviously is that a pretty big replacement opportunity?

  • Or could you give us some details or more -- around why they selected you over the competitors?

  • Or is it a brand-new installation?

  • Rami Hadar - President and CEO

  • First, it was very a tight competition against two other pure play players.

  • The win was a combination of -- the product was tested very thoroughly and got very high marks.

  • The final decision I guess was a combination of both price/performance and pricing.

  • And finally, it's actually a replacement of an existing incumbent (technical difficulty)-based solution that didn't scale and meet their demands, and they felt they'd want to go to a standalone solution.

  • Catharine Trebnick - Analyst

  • Okay, thanks.

  • And then the other thing is, you did notice a new caching customer.

  • And how many caching customers would you have now at this time, and how many have you added since the acquisition of Oversi?

  • Thanks, Rami.

  • Rami Hadar - President and CEO

  • Okay, I don't have the number.

  • But I'll try to give you a ballpark on the sly here.

  • I guess [a lock] has a roughly 5 caching customers from the days we outsourced, on an OEM basis our end solution.

  • And over three brought to us in different sizes and shapes, maybe 10 additional ones.

  • (technical difficulty) large ones in these 10.

  • But overall I'd say we have 15, maybe 20, caching customers.

  • Some of them are using our caching as standalone and some of them are joined with our DPI solution.

  • Catharine Trebnick - Analyst

  • Okay.

  • Thank you very much.

  • And then you did notice the VAS was 30%, I believe you said.

  • Can you describe some of -- is that mostly now, or do you expect that to be going forward, big data analytics and/or some parental guidance?

  • And can you speak to some of the demands in Europe?

  • I'm surprised that Europe is down, because some of the rulings and the regulatory rulings coming out of the UK is really calling for more types of your type of technology to help with parental controlling.

  • Can you give me your perspective on that?

  • Thank you.

  • Rami Hadar - President and CEO

  • Thank you, Catharine.

  • You're very much right.

  • I would say the leading value-added service and products has contributed to the growth in our VAS numbers, into the 30%.

  • One of them obviously is parental control, which was a big contributor to our Q1 numbers, with the win, with the big mobile operator in Europe.

  • I guess they saw the announcement coming and got a head start, so definitely there is some correlation.

  • And you're right, I hope that the new regulations that came out, I think a week or two ago, will make our parental control and our WebSafe products more in demand.

  • Already we are getting phone calls from some of our customers.

  • The two others as main contributors to VAS numbers, obviously caching is picking up.

  • And DDOS protection is important.

  • The two other elements that are the main stars of our DAS offering.

  • Catharine Trebnick - Analyst

  • All right.

  • Thank you so much.

  • I appreciate the time, Rami.

  • Operator

  • Sanjit Singh, Wedbush Securities.

  • Please go ahead, caller.

  • Your line is open.

  • Sanjit Singh - Analyst

  • Sorry about that.

  • Thank you for taking my questions.

  • Regarding the $5 million deal one more time, in the press release you guys had mentioned that the deal has been delivered, but revenue recognition has been delayed.

  • What specifically do you mean by the deal has been delivered?

  • If you could be as specific as possible, that would be a help.

  • Nachum Falek - CFO

  • Again, Sanjit, without getting too specific, we can just say that in terms of the delivery, in terms of installation, it's already on the ground.

  • We couldn't recognize the revenues during the second quarter.

  • And we believe we will be able to recognize the majority during the second half of this year.

  • Sanjit Singh - Analyst

  • I appreciate that.

  • Thanks for the color.

  • Regarding the book-to-bill performance, had the deal been recognized, would the book-to-bill still been above 1?

  • I just wanted to get a sense of the health of the overall bookings.

  • Nachum Falek - CFO

  • Yes, for sure, because if you take the note that we mentioned about 20% more from booking level we had a year ago; so the revenue a year ago was $26.4 million.

  • Book-to-bill back then at the second quarter of last year was above 1. So, all in all, it's clear that even if you had $4 million or $5 million to the revenue level this quarter, still book-to-bill would be above 1.

  • Rami Hadar - President and CEO

  • The answer is yes, Sanjit.

  • Sanjit Singh - Analyst

  • Thank you.

  • I appreciate that.

  • And then finally, in terms of the competitive dynamics between the pure plays, you guys are not -- typically don't give metrics on that.

  • But is there any trends which you're seeing?

  • Are you displacing more of your traditional pure play competitors in select deals?

  • You say you're bumping up against them more.

  • I wanted to get a sense of -- is your technology, and the right use cases, displacing your pure play competitors?

  • Rami Hadar - President and CEO

  • Yes.

  • I would say that we do, here and there, end up displacing old installations of competition.

  • But I would say it's fairly rare, typically, a service provider that deploys any type of network equipment, assuming it performs within reason, keeps it there for five years.

  • Us as the incumbent and the longer player of the group, we haven't any old installations, so some of them are very small.

  • Here and there (technical difficulty) some of them might displace up because a customer has a new team on board and shows someone else up.

  • But these are very, very minor.

  • We end up doing it on occasion basis, as well, and we don't make a big deal out of them.

  • I don't think these are a substantial element in the dynamics of this market.

  • What was the second part of your question again?

  • Sanjit Singh - Analyst

  • I think actually I said displacement.

  • What I really meant was in terms of bake-offs or win rates.

  • Has there been any noticeable changes or trends?

  • Or how would you characterize your win rates versus your pure play competitors?

  • Rami Hadar - President and CEO

  • I would say our win rate remains healthy.

  • Obviously we don't win all of the deals.

  • We do note that it does happen that, at least once or twice in the past 12 months, that our product scored very high on the technical merits, and we got very good feedback that we scored as number one in some very strategic deals.

  • But then when the pricing got too low for our taste, we walked away or refused to decline further.

  • And a great testimonial of this strategy is our ability to keep up 76%, or 75% on average gross margin, which is a very high number for a product-based company.

  • Although all of our value-added in software, our product -- a networking based company.

  • So, yes, as coverage improves on all three pure plays, we run into each other more.

  • And as I stated, on day one, when there is competition, and obviously many telco customers are looking for ways to save CapEx, the deal goes through an RFP process and occasionally through and e-auction.

  • And, therefore, on day one we might need to compromise some on the gross margin and hope to catch up and more.

  • But overall, our win rate remains healthy.

  • I wish we could play and win 100% of the deals, but that's not practical.

  • Sanjit Singh - Analyst

  • Thank you so much for the color.

  • Operator

  • Ittai Kidron, Oppenheimer.

  • Mike Salai - Analyst

  • Hi, this is actually [Mike Salai] on for Ittai.

  • Most of the questions I had have been answered, but are you willing to give us a sense of how much the two acquisitions added in revenue in the quarter?

  • I know in the past you've given some guidance there.

  • Rami Hadar - President and CEO

  • Yes, we are now (technical difficulty) integrated, it gets a little bit more tricky since we are already seeing deals when there is a joint win.

  • And part of the initial delivery, is right now, video caching.

  • And then it's very artificial to differentiate since we might give different discounts to different portions of the solution and the deal.

  • But in order to give you some part of the indication, I did say that this quarter, 5% of booking was attributed to our video caching solution.

  • None to -- maybe very marginal to video optimization.

  • There was some, but very marginal.

  • And I did say that video optimization is now going through three Tier 1 trials, which I hope at least one or two of them will translate into deals further down the road.

  • Mike Salai - Analyst

  • Okay, thanks.

  • Operator

  • Dov Rozenberg, Clal.

  • Dov Rozenberg - Analyst

  • Hi.

  • Thanks for taking my question.

  • First, a general one on the market, and we sort of touched this before, but with 26% of bookings value-added services and two of the big deals that you won were fixed-line, another were of few with mobile operators, but it was more value-added services.

  • I was wondering, any view on let's say core DPI at mobile DPI?

  • If you see any change in the market or just lumpiness of one quarter with, one quarter without.

  • Nachum Falek - CFO

  • Yes, no major change.

  • You note right, that we got the two large deals on the fixed-line side.

  • One is the $5 million, which is fixed, and the other is the one we discussed is a nice competitive win.

  • Most definitely the larger deals belong to the mobile, but here we see a tactical example that in one quarter, two big deals shift the results totally to the other side.

  • Dov Rozenberg - Analyst

  • Okay.

  • Maybe also just on the market.

  • It used to be, or my impression was that it used to be that you would win a deal, let's say, based on DPI.

  • Then later on you maybe you would add on value-added services.

  • Is that changing?

  • Do you see orders typically going first for value-added services or together?

  • Is there any change in that sense?

  • Rami Hadar - President and CEO

  • Yes, as I mentioned on the script, now that we are gradually getting tighter integration with value-added services, suddenly the two video positions we made, we are able to offer some of these value-added services immediately and out of the gate on day one.

  • And that is kind of new for us.

  • And on the other, and we keep going back to the [sol] base, and obviously offering them existing and new value-added services.

  • It's interesting to note that different carriers believe in different value-added services.

  • So, starting last quarter we got a huge order for parental controls.

  • This quarter, it was for different value-added services.

  • So we're building the funnel and experience and how these VAS's are being implemented.

  • Dov Rozenberg - Analyst

  • Okay.

  • And then I was wondering if you could give us any color as to, let's say, what percentage of the revenue or the run rate is not related to big deals?

  • In other words, if there is big (inaudible) come on, and you'll have some sort of base or maintenance or some sort of base that's ongoing.

  • Rami Hadar - President and CEO

  • So, first, not completely to jump in here, we had two 10% customers this quarter.

  • Anything else you can add?

  • Nachum Falek - CFO

  • I think that in general, the order -- what you call the order revenues were kind of flat within previous quarters.

  • These small deals, some of our enterprise businesses, and Tier 2, Tier 3, are carriers.

  • Rami Hadar - President and CEO

  • We can say that these two 10% customers are 10%, but it's not like they were 50% or even 40%.

  • So, they are a big part of our revenues, but it's not like we are extremely concentrated.

  • Dov Rozenberg - Analyst

  • Okay.

  • Then on bookings, I was wondering, maybe even excluding the $5 million pushed out deal, would you say it's spread over a long period of time?

  • In other words, if typically bookings would -- would you expect to recognize them within, I don't know, 12 months or nine months.

  • Is it longer now?

  • Was there any change?

  • Rami Hadar - President and CEO

  • No.

  • 9 to 12 months is very typical.

  • Sometimes you get lucky; the customer is under pressure, and they go over bureaucracy and execute well on their side as they accept us.

  • And you could achieve -- you can move from booking to revenue in 3 to 6 months.

  • But in most cases, it's more like 6 to 12 months.

  • Dov Rozenberg - Analyst

  • Okay.

  • Last question for me, if I may.

  • I was wondering, on operating expenses, if revenues do, I don't know, decline -- and, again, no guidance -- but if we're -- or let's say the growth is slower or et cetera, do you think you'll book more -- you'll slow down the growth and expenses, or you continue -- same as?

  • Rami Hadar - President and CEO

  • It's certainly enough to know we consider very seriously.

  • If you note that in the past two quarters we maintained our operating expenses as flat versus the previous years and quarters that, as we grew, we obviously invested part of the growth back into the business, mainly R&D and sales.

  • Right now, we've maintained our OpEx flat, and are inclined to maintain this way until we resume growth.

  • If, God forbid, we see further decline, obviously taking some OpEx out of the business is a valid option.

  • Dov Rozenberg - Analyst

  • Okay.

  • Thank you very much.

  • Good luck.

  • Operator

  • Joseph Wolf, Barclays.

  • Joseph Wolf - Analyst

  • Thanks.

  • As kind of a follow-on to the last question, if I look at the value-added services -- and thanks for giving that bookings number of 26% -- does that portion of your bookings have a different life cycle or vintage than the traditional or the core hardware product?

  • And then should we be thinking about that as your mix going forward, in terms of overall sales?

  • And then, finally, as I think about the value-added services, is that a reason for the higher margins?

  • And how much of the value-added services is a lot product?

  • And how much of it are you OEMing from other providers?

  • Rami Hadar - President and CEO

  • Okay.

  • This is a four-part question.

  • The life cycle tends to be on the longer side, because it is always, say, to service providers.

  • Most cases, it's to large service providers, but not exclusive.

  • So these VAS deliveries do go through acceptance process and [so] process and so on.

  • So, yes, they do tend to be on the longer path from orders to revenue.

  • VAS, an element of value-added services do tend to be with high gross margins, maybe not that they (inaudible) they are sold with initial delivery.

  • But in most cases, we sell them as expansion to existing customers, and there we get good gross margins.

  • Also, in many cases, we sell them as the license, and therefore obviously it is 100% gross sale, or near 100% gross sale -- our margin.

  • In terms of the source of the technology, it's a combination of homegrown solutions, for example like WebSafe.

  • It's a combination of acquisitions, like video caching and video optimization.

  • And also we are very much open in ecology of partnership.

  • For example, with parental control, is based on our partnership with a company that specializes in these kinds of solutions, where we integrated their product.

  • We are the focal point to redirect relevant traffic and relevant opt-in subscribers to that service, and we acted as the system integrator as well.

  • Joseph Wolf - Analyst

  • Okay.

  • And just the array right now of value-added services -- you mentioned 5% on the video caching.

  • Are there other ones that are that big?

  • Or is there a certain variety right now within the package that you offer?

  • Rami Hadar - President and CEO

  • Beyond that, parental control is the -- obviously had a big quarter last quarter, and analytics is growing and is a big part of value-added services as well.

  • Caching is growing, so it's a healthy combination of these four [Top A] offerings.

  • On a quarter-to-quarter basis, it might be that we land a big deal around the [softening] -- that, and therefore in that quarter it's biased towards one versus the other.

  • Joseph Wolf - Analyst

  • Okay, great.

  • Thank you, Rami.

  • Operator

  • Alex Henderson, Needham.

  • Alex Henderson - Analyst

  • Thanks.

  • I was wondering if we could cut at this a little bit differently.

  • You talk about value-added services.

  • But actually a lot of the value-added services are actually related to what I would describe as network optimization, as opposed to revenue generating part of their management decision.

  • When you look at the mix of your business in terms of orders over the last six months, what portion of your revenues are generated as a result of optimizing the network for the service provider, as opposed to revenues generating or sales that are generating new revenue opportunities for your customers?

  • Can you break it out along those lines, please?

  • Nachum Falek - CFO

  • I don't have quantitive numbers off my head, but let's have a qualitative discussion for a second.

  • There is elements that are clearly on the optimization side.

  • For example, doing traffic shaping of (technical difficulty) of various types of traffic, preventing peer to peer to uptick a disproportionate amount of bandwidth and reduce quality of experience.

  • Obviously more about optimization there and CapEx savings.

  • On the other hand, things which are [fill] related very much to DPI, like application-based charging, which is based on our DPI technology and application awareness function, we don't count that as a value-added service because it's so much part of the PCC world, policy and control, and more related to the core DPI function.

  • Although, obviously, application-based charging is directly related to revenue generation.

  • On the value-added service side, there is mix again.

  • Parental control obviously is a revenue generating function.

  • The customer we sold to last quarter is charging anything between EUR1 to EUR3 per month on customers who opt-in into the service.

  • On the other hand, video caching and video optimization can sometimes go both ways.

  • Obviously there is a saving element in these two technologies.

  • But then we are hoping to see some of our customers use these technologies as a qualitative experience differentiator, and offer video services at a premium experience in a premium price.

  • So there's crossover functions as well.

  • Same for analytics -- analytics can be used for network information to be aware of what's going on in your network, to optimize the network, and whatnot.

  • But it can also go towards marketing campaigns and insight to advertising statistics and whatnot, as well, which is more a revenue generating.

  • So the line is not very clear.

  • I hope I gave you some clarity.

  • Joseph Wolf - Analyst

  • Okay.

  • So, one more question, maybe, if I could.

  • As you're looking at the position of the Company, the amount of activity you're chasing, the deal sizes you're looking at, the customers that you've penetrated -- as you move from 2Q 2013 into the back half of 2013 and into 2014, and you were to compare that to where you were in Q2 of 2012, are you more or less optimistic about the trajectory of the Company's bookings and revenues now than you were last year?

  • Or how would you describe that?

  • Rami Hadar - President and CEO

  • Very hard to quantify in a direct yes or no answer; but, again, if we hold a small qualitative discussion, contributing factors to our, let's say, improvement in the second part of 2013 versus the second part of 2012, is the fact that we added one major mobile operator to our growing list of Tier 1 operators.

  • As I said it on the script, that's key for us to achieve revenue growth and predictability in our business.

  • So that's totally positive.

  • Europe is stabilizing.

  • Not improving yet, but stabilizing, so we'll probably see more or less of what we've seen in Europe versus last year.

  • APAC is showing signs of improvement in the higher deal funnels than it was last year.

  • And Americas I hope will enjoy the fact that they have won this very large Tier 1 operator, and the team there will manage to pull off more expansion deals that are being discussed.

  • Also, finally, now a year later we have the two new video acquisitions tucked in.

  • Caching is starting to help.

  • And I hope that optimization will come in as well.

  • So these two video products I hope will be positive contributors versus last year.

  • Joseph Wolf - Analyst

  • Thanks.

  • Operator

  • That will conclude the Q&A session.

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

  • Rami Rozen - AVP, Corporate Development

  • Thank you very much, all, for joining us today.

  • We look forward to meeting you in person soon.

  • Thank you.