Allot Ltd (ALLT) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 2014 first-quarter results conference call.

For your information today's conference is being recorded and at this time, I would like to turn the call over to Rami Rozen.

Please go ahead.

Thank you very much and thank you all for joining us for our first-quarter 2014 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 first-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 exclude stock-based compensation expense, revenue adjustments due to acquisitions, expenses related to M&A activity, deferred tax assets and amortization of certain intangibles.

Please know 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 first-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 these forward-looking statements.

I direct your attention to the risk factors contained in the annual report on Form 20F 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.

Allot, ClearSee and WebSafe are trademarks of Allot Communications; all other trademarks are the property of their respective owners.

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

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

In today's call I will highlight Allot's results and achievements for the first quarter of fiscal year 2014 and then I will hand over the call to Nachum Falek, our CFO, for a short review of our financial performance for the first quarter of 2014.

Afterwards I will make a short personal statement.

Our first-quarter results came in at $28.3 million, up 17% year-over-year and 3.5% sequentially.

We have achieved sequential growth and reached record revenue levels for our first quarter despite seasonal weakness associated with the first quarter.

Book-to-bill during the quarter was once again over one.

We continued to experience strong demand for our value-added service offering mainly in categories such as video network security and analytics.

The demand for our DPI platform as well as for our value-added service offering continues to come mainly from mobile service providers.

However, the booking portion of fixed line service providers continue to grow as well.

During the quarter we have made nice progress in the fixed service provider segment mainly with cable companies and DSL.

The strength in booking as well as encouraging business environment were further demonstrated by the high number of large orders received from service providers during the quarter, 25 in total of which five were from new customers.

During the quarter we had two 10% customers.

I would like to provide some insight regarding new customers won in a given quarter and to quantify the significance of these wins on Allot's booking figures.

In any given quarter we provide information about the number of large deals made by new customers.

The actual number of new customers per quarter is typically higher; however, some of these new customers don't fall under Allot's definition of large deals which is about $0.25 million per transaction.

Our past experience shows that bookings delivered collectively from new customers in a given year is in the range of 15% to 20% of the annual booking.

While new deals tend to be lower than average in gross margins, they are a major contributor to our future growth.

Given the fast growth of data and the desire for new value-added services, typical mobile customer will more than double his orders from Allot within two years from the initial sale.

Those follow-on orders are most software oriented and therefore tend to be with higher gross margins than average.

Gross margins during the first quarter were 73%, slightly below our usual 75%, 76% range.

The main underlying reason is one large deal with a new Tier 1 fixed line (technical difficulty) customer that was highly competitive and where the initial order was more hardware biased versus software.

We don't think this represents a new trend.

We are happy to say that we have already won a follow-on order with this account which carries higher gross margins compared to the initial deal.

During the first quarter, we have continued to make progress with our value-added service business which represented 28% of our bookings for the quarter.

Our funnel of growth opportunities consists of major portions of value-added service projects and we continue to view this segment spearheaded by service generation applications such as video network security and analytics as key catalysts for our ongoing growth.

One such example is our recent video optimization win with a new Tier 1 mobile operator in Asia.

Video optimization was the main catalyst for the deal but the customer has future plans to implement our DPI-based policy and control functionality as well.

We continue to execute on rolling out new products.

During the quarter, we announced our availability of the newest member of the Service Gateway Series, the Service Gateway Tera platform.

The Service Gateway Tera delivers capacity throughput of 500 Gb per second or 0.5 terabit per second, three times more than the Sigma E14 platform and by far the highest in the industry.

The Service Gateway Tera can work in (technical difficulty) or distributed mode and reach 2 terabit speeds, more than enough to address the needs of next-generation LTE networks and fixed operators.

Thanks to its Layer-7 service chaining and load-balancing steering engine, the Tera provides a unified framework for both physical and virtual service deployment across any access network serving as a single point of integration for network and cloud-based services.

The new platform includes real-time (technical difficulty) management, video optimization, policy enforcement, application-based charging and security services such as parental control and anti-DDOS.

In the race to increase value and ARPU by service providers, the Tera's flexibility is a natural point to launch these services in a swift manner with short time to market and minimum disturbance to the network.

I am excited by the fast adoption of the Tera product.

Since the launch, the new Tera Service Gateway Platform has received a total of $9 million orders from four different mobile and fixed line operators worldwide.

Moving on to geographical breakdown, revenues from EMEA were 57% in bookings from this territory during this quarter was also very encouraging.

We continue to maintain our market leading position in these regions and view the (technical difficulty) regulations proposed by the EU as supportive for our loss value proposition for portfolio.

Similarly in the US, the FCC has introduced a draft open Internet notice of proposal rulemaking last week pertaining a set of new net neutrality rules.

We believe that the essence of these rules adheres to the European one and view them as long-term positives for Allot.

We believe that the proposed changes once become applicable, will allow for business opportunities in areas like application-based (technical difficulty) revenue share data plans.

We are excited by the opportunities that these changes may present but as always note that converting these changes into actual business may take time.

To summarize, in the first quarter we continue to execute well on all fronts and reached impressive achievements in a number of large deals coming out of new customers as well as the launching of our new Tera platform.

Book-to-bill during the quarter was above one and a number of opportunities continue to grow and is healthier than ever.

I will now hand the call over 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.

We 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, deferred assets and amortization of certain intangibles.

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 first quarter on a non-GAAP basis were $28.3 million, up 4% versus the fourth quarter of 2013.

As a percentage of our revenues, sales in Americas accounted for 15%; EMEA, 57%; and Asia-Pacific, 28%.

During the quarter we had two 10% customers.

Out of total revenues during the quarter, products were 65% and services 35%.

Gross margins for the first quarter were 73%.

Our operating expenses were $18.6 million versus $17.7 million in the fourth quarter.

The increase in our OpEx was mainly due to higher commission and wages accruals, higher investment in R&D related to our new analytics tool, and the changes in the exchange rate of the US dollar versus the Israeli shekel and our hedge rate for those currencies.

For the quarter, we reported earnings per share of $0.06.

On the balance sheet side, cash balances were $122 million.

As for our cash flow, we were cash flow positive and during the first quarter we generated $3 million from operating activities.

Our DSO was 68 days versus 57 days we had last quarter.

Deferred revenues went up by $1 million during the quarter mainly due to prepaid invoices which were not recognized yet.

That concludes my remarks and I will now transfer the call back to Rami for a personal note.

Thank you, Nachum.

Before we move to the Q&A session, I want to make a personal note.

As you have already read today after serving as Allot's CEO for the last eight years, I shall retire during the second quarter and will transition my responsibility to Mr. Andrei Elefant, currently Allot's VP of Product Management and Marketing.

I will continue to serve as Board member.

Andrei is a great leader with whom I have worked closely and in whom I have great confidence will take Allot to the next level.

Andrei has been a key player in Allot's exceptional growth and industry leadership over his 14 years in Allot.

With Andrei in charge backed by Allot's seasoned Board of Directors, professional management team, and excellent workforce, I have great confidence in the Company's ability to leverage the many opportunities in the growing broadband data market, continue to deliver great products and solutions to the world's largest mobile operators and continue its rapid growth and profitability history.

All of our growth and accomplishments in the recent years is due to our extremely talented and motivated employees.

I am confident that with Andrei's leadership our greatest achievements are still ahead of us.

Let me also add my personal appreciation for the support and the vote of confidence that you, our shareholders, have given us.

It is a vote which we do not take lightly.

We wake up every day determined to do our best to earn it and continue to build a great company.

The spirit, I am confident, will continue under the new leadership.

Thank you and good luck.

(Operator Instructions).

Ittai Kidron, Oppenheimer.

Thanks.

Congratulations on the good numbers and Rami, it has been a pleasure working with you for the last eight years.

Enjoy your retirement.

Thank you, Ittai.

I wanted to talk a little bit about the gross margin again so it is clear that it was one big deal that impacted that business but is it also again fair then to announce to assume that if there is no other such big deals transpiring in the second quarter, in June, you would expect gross margin to rebound very quickly here?

In general, yes.

To the best of my knowledge and the current funnel we have, we are not seeing any similar deal with the kind of gross margins we have seen on that specific one.

So in general, yes, without giving guidance we expect to get back to our normal 75, 76 range.

Got it.

And, Rami, can you talk about the analytics too, what kind of traction have you had with that in the field, how should we think about the contribution of that value-added service to your business?

Yes, we (inaudible) I'm hearing the Mobile World Congress in Barcelona, lots of interest, a couple of trials are going on mainly with mobile operators and I'm happy to say that we got one first commercial win at the latter part of Q1.

This is a $1 million part of the $5 million mobile Tier 1 EMEA operator that we announced in the recent press release.

So we have now commercial revenues and a couple of trials going on.

Very good.

Then lastly for me, Nachum, on the OpEx side, can you give us some direction on how should we think about the progression of OpEx through the year?

So as I mentioned, many this quarter (inaudible) are coming from the OpEx side was coming from a few different places, the currency, the exchange rate, higher revenue in booking than planned, and obviously the investment we did into R&D and as (inaudible) mentioned, our new analytics tool.

You know we are not giving any guidance but I think that OpEx from that level will stay kind of flat going forward.

Obviously we are seeing very nice opportunities and we will continue to build out and in fact, I am sure that at the end of the day we will see some minor increase in OpEx as well.

Very good.

Congratulations and good luck.

Tal Liani, Bank of America Merrill Lynch.

This is actually Kiera calling in for Tal this morning.

Just a few quick ones.

First, I think I may have missed the percent of value-add services that you mentioned.

If you could just repeat that.

Second, if you could maybe talk about -- there seems to be a big differential in terms of the product growth versus the services growth so if you could just provide some color on what is causing that large differential, that would be great.

Thank you.

So I think the percentage again, products was 65% and services 35%.

In general services includes both the maintenance and warranty which is kind of steady growing quarter over quarter due to the installed base and the [new ones] we are getting from customers and it changes from quarter to quarter (inaudible).

In this quarter for example, it is coming mainly from professional services, large deployments and charges we are getting from our customers usually for large (inaudible).

And to your first question, Kiera, the value-added services were 28% of total bookings.

Thank you and good luck.

Thank you, Kiera.

Matt Robison, Wunderlich Securities.

Thanks for taking the question.

Rami, it has been great working with you going all of the way back to CTC Systems.

Can you give a little color on what -- on the timing for the transition?

And I've obviously got some follow-ups on this quarter.

Thank you, Matt, and it has been a pleasure working with you over all of these years.

The timing is simple, as we noted in the press release, over the Q2 timeframe I will be overlapping with Andrei.

Obviously Andrei knows the Company very well, both inbound and outbound, but nevertheless the transitioning during Q2 timeframe and he will be in the hot seat starting July 1.

I guess I was looking for a little different context of timing but I will skip that for now.

So when you get these deals where you are looking at sort of a price forward pricing scenario, are you doing anything in terms of commission's comp that makes them a little bit better for the economics later on, or maybe a thinner amount of commissions for those sorts of deals?

No, I am aware of these arrangements.

I am a big believer in simple commission plans because as you make them more sophisticated, intelligent, there is always exceptions and considerations.

I mean does the Company want to take on an aggressive deal and price or doesn't it?

Is it the salesperson responsibility that the environment is competitive, is that the company?

We don't have such a deal, it wasn't a big issue up until now.

I hope it won't be a big enough issue to consider such arrangement.

Is this the kind of customer that can be a 5% plus customer this year?

It was a multimillion dollar deal already so for them to take 2 points away from our gross margin so you can imagine that it is a several million-dollar customer.

Can it be a 5% customer over this year?

Probably on the very, very high end but if that does happen, it will be good news as we stated.

We already got a (technical difficulty) order with improved gross margin.

We had here a double whammy.

One, it was a competitive environment.

I am proud that Allot team prevailed and won the deal.

It is a very large telco in Asia-Pacific.

So we first won the deal on the competitive environment.

We then had to meet the price target, that was one element and the other is this is a very large territory and that is the need for a more than usual hardware platform.

So the mix was also hardware oriented.

I think the prior question was a very good one about the relative growth of services versus products.

It looks like products was in single digits whereas services like more than 40% growth if my quick arithmetic is right.

Was the professional services piece a factor in the margins this quarter?

(technical difficulty) math about marginal and professional services.

Remember that it is part of new deals that we recognize so it is not like saying that renewals were growing faster than products or something like that.

The growth was coming from all over the place.

In terms of margin, yes, on renewals we are getting better margins than on professional services, supporting general has better margin than sales deployment.

Okay, I will yield the floor.

Thanks.

Mark Sue, RBC Capital Markets.

It seems Mr. Sue has stepped away.

I will proceed with the next question.

Catharine Trebnick, Dougherty & Company.

Thank you for taking my question and, Rami, we will miss you.

But I'm looking forward to working with the next one.

So the quick question is America was down 15% for total revenue, can you give us any color on how you are doing in North America and why that was only 15% and where you think it might go in the next year with the net neutrality changes?

Yes, it is a fairly slow quarter for Americas on a relative basis to other regions.

As you can figure out, (technical difficulty) the large deals came in other territories.

We certainly hope to continue our success with penetrating Tier 1 mobile operators in the US.

So I would not read into one quarter of fluctuations between the regions.

And we do see a long waited net neutrality proposals as a positive for Allot probably more in the mid- to long-term but definitely a positive.

So as I said in the presentation, I think to analyze Allot's regional positioning, I think one needs to look at the past four quarters an average out over a year and not in a single quarter that one large deal can skew from one region to another.

And then the other question on net neutrality is, what types of revenue sharing would an interconnect agreement -- let's just use this for example -- between Netflix and Verizon which was announced this week, what type of equipment hypothetically would they need from Allot and then what would you hypothetically expect them to do for revenue sharing on that?

Good question.

On one hand, the way I see it, having seen service (technical difficulty) content providers strike deals even if it is on the interconnection points of the network has to do with net neutrality despite some opinions of service.

Because at the end of the day what we are seeing for the second time, content providers willing to step up and incentivize and pay service providers to provide a better quality of service whether it is because they are investing more infrastructure, whether it is because they are giving them high priority, whatever the case may be.

But I see it as very encouraging to see service providers and content providers come together with a business arrangement.

It could be simple (technical difficulty) Netflix paying Verizon.

It could be (technical difficulty) data or the content provider pays for the users, the traffic on their content or website, or it can be some kind of a revenue share on a pure let's say a music streaming application.

We have been talking about that for several years and it is finally coming together.

Now from Allot's point of view, we sit more toward the customer side of the network between the core and the access portion of the network.

So we are not sitting in transit points.

So we are -- our policy control provisioning ability to do application base charging is on the other side of the network, not at the transitioning point.

However, I think it is more about simple outright run rate but more at the access side of the network and we have yet to see deals happen there.

Sponsored data will happen on the access side when it happens.

All right.

Thank you so much.

Thank you, Catharine.

Alex Henderson, Needham.

Thanks.

I just wanted to go back to that gross margin issue for a second.

The $9 million in chassis-based product, is the embedded gross margin in that order lower than the corporate averages, therefore as that plays out over the next couple of quarters on deliveries that there would still be a little bit of a bias to that to gross margin pressure?

Or is that really only a one quarter phenomenon?

And you did say that you had a follow-on order from the large customer that caused some of the margin pressure in the quarter.

So is that at higher margin or is it back to normal margin on the second order?

I'm happy to say that the $9 million order associated with Tera with good gross margins and in line with our usual form of business both on the pricing we have and also from the ratio between the amount of hardware versus software.

So the large deal I was referring to in Asia-Pacific is not relating to the $9 million order of Tera units.

Having said so, to give you a broader understanding, in every deal we have a combination of hardware and software.

Obviously we like the software content to be higher.

The specific deal that we talked in Asia-Pacific was (inaudible) because of a large geographical distribution.

Finally, the expansion order we got is net positive because here there was a more software bias in the margins with this customer already improved.

We expect moving forward that once they buy into our value added services and features like analytics, our gross margins will improve even further.

And then just wanted to ask a general question about conditions.

Is it your sense looking at the RFP activity and the deal sizes in the pipe that business is starting to accelerate as a result of a combination of net neutrality commentary in the US, improving conditions in Europe and more activity in Asia?

Am I hearing that correctly?

It is more related to European economies stabilizing and some of our key customers getting back into growth modes and expansions and LTE rollout.

I believe that we are having preliminary discussions based on the new net neutrality regulations but I think that these discussions will turn into commercial value only within a couple of quarters.

These are not things that happen overnight.

But the point is that there is an acceleration in RFP activity that you are seeing in the field?

Is that correct?

Yes.

Rami, thank you for your service.

Thank you very much.

It has been a pleasure working together.

Peter Misek, Jefferies.

This is Jason North for Peter Misek.

Sorry, hey, Rami, it is Peter Misek.

Just wanted to congratulate you for all the years that you have been with Allot.

Thanks for that.

I am sure it has been a fun ride.

Wanted to ask about value-added services, it was 28% of total bookings this quarter, 36% in Q4.

How should we think of the dynamic going forward as a percent?

Wanted to chat about commissions, how should we be thinking of commissions and scaling for sales and marketing in terms of revenue?

And then what was the loan provided to the third-party of $2.6 million and as it relates to working capital, you guys obviously had really good DSOs this quarter wanted to try and understand how we should be thinking of that going forward as well?

Thank you.

I will take the first question and Nachum will take the question about the commissions and loan.

So value-added services, our clients very quickly to the range of being 30% plus or minus of our business.

So I think moving forward you can assume that maybe in general one third of our business will come from value-added service, services.

Remember that value-added services usually come somewhat in the early -- when we penetrate a customer and more when we do the first installation so many of them are actually follow-on deals.

Will this continue to grow beyond that?

It will again be a combination of new customers versus the current one.

These tend to be more (inaudible) oriented, new deals are first to get into -- you need to buy in to the infrastructure and then you get into value-added services.

For now, for the next few quarters, assume it is 30% plus, minus a couple of points.

But again a very important part of our business.

We deepened our penetration, it is stickiness.

These are usually strategic initiatives.

We talk about monetization and creating a new revenue stream for the service providers which is a very good part of the business you want to be on with the customer.

Regarding commission and loan, I will hand off to Nachum.

In terms of commission, we have -- I think (inaudible) plan.

It is basically shares are variable so the manager has his own quota and he is getting his own (inaudible) based on reaching that quota.

We can either advance versus the booking but at the end of the day (inaudible) based on collections, sometimes especially in the first quarter when people can do a (technical difficulty) quarter and therefore you are paying higher commissions accrued versus other quarters, and in total based on our internal plan, meaning (inaudible) doing better than the plan, obviously our expenses will increase.

(inaudible) shows probably no more than three years along as we get to our business partner.

We usually don't tend to do it but at this time, we felt that it makes sense for us to keep the relationship close and help business partners.

He already by the way started to repay it.

Perfect.

Thank you.

(Operator Instructions).

Sanjit Singh, Wedbush.

Congratulations, Rami, on your retirement.

It was great working with you.

A couple of questions.

The number of large deals, 25 large deals, that is the most I have seen in almost a couple of years now.

So I wanted to understand what is driving that.

Is that just improved general economic activity in Europe?

Is it better sales execution, better sales coverage?

And the mix between fixed and mobile, it seems like we are seeing a lot of momentum on fixed.

When does mobile start to come back online?

So regarding the number of large deals, you are right, I think this was a record number and especially a nice surprise in the Q1 quarter which is sometimes susceptible to seasonality.

Now having said that, I think I cannot see anything -- a comment thread just good execution in many regions by the sales teams and a couple of nice deals coming together.

Like I always say with Allot, one quarter doesn't make a trend so I would like to see that new number achieved in the following quarters to announce a victory.

But certainly a good start and a testimonial to a good business environment into 2014.

Regarding a vertical split, what we mentioned on the script is that mobile remains the majority portion of our business and wins yet fixed is an important part, roughly it is between 20% or 30% of our business in a given quarter.

I did mention in the script that we have seen a nice uptick actually on the fixed side.

This large customer in Asia-Pacific which had challenging gross margins was actually a fixed customer of DSL and we are seeing some interesting funnel develop on the cable side as well.

I will share the news with you when things come together.

So Allot has always been about both fixed and mobile.

Again mobile is exciting (technical difficulty) growing but fixed is holding its own in terms of percentage.

Great.

I had one follow-up question regarding competition.

Both with respect to this Asian fixed line deal as well as kind of overall, was the Asian service provider deal was that -- was there a bake-off between your traditional pure play guys that included some integrated players?

Are you seeing F5 out in the market?

It has been about a year now since they came out with their DPI solution.

Can you just talk about the overall competitive environment and maybe some pricing dynamics versus the last couple of quarters?

Okay, so that specific deal was indeed competitive and there was a bake-off process.

All pure play players showed up and one or two integrators say as well and we prevailed.

And I want to emphasize that not because of pricing, it was first a technical decision on the merits of the product.

And only then pricing negotiations which is a habit in the way they do business in Asia-Pacific so it is not like we bought the deal.

Regarding the second question, we haven't seen them in any pure DPI RFP.

Now having said that, I caution, we don't have perfect worldwide coverage so it could be that they are showing up in certain locations and we are not aware of it but we haven't ran into them in a straight out RFP.

It seems to me standing on the sidelines that F5 is now more focused on doing a good job on the security front and it seems that they are (technical difficulty) progress in DPI and quality control and charging functions.

It could be just me but this is me watching their statements and public discussions.

So overall, nothing too (technical difficulty) competitive environment.

I would say subjectively that in deals that we show up and in deals that there is a fair competitive bake-off process, we tend to do very well.

I wouldn't say that we win 100% of these deals but we tend to definitely win more than we lose.

Note that we as promised, delivered on one new platform and two new very relevant value-added services.

I think our competitive position has improved.

Thank you very much and best of luck to you.

Thank you, Sanjit.

It was great working with you.

Ladies and gentlemen, that will conclude today's conference call.

Thank you for your participation.

You may now disconnect.