Allot Ltd (ALLT) 2014 Q2 法說會逐字稿

Thank you very much and thank you all for joining us on our second-quarter 2014 conference call. My name is Rami Rozen and joining me today are Allot's President and CEO, Andrei Elefant, as well as our Chief Financial Officer, Nachum Falek.

The press release announcing our second-quarter results is available on the Investor Relations section on 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 these forward-looking statements.

I direct your attention to the risk factors contained in the annual report on Form 20-F 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 like to turn the call now over to Andrei.

Thank you, Rami, and thank you all for joining us today. In today's call, I will highlight Allot's results and share with you some of Allot's achievements for the second quarter of fiscal year 2014 and then I will hand over the call to our CFO, Nachum Falek, for a short review of our financial performance for the quarter.

Our second-quarter results came in at $28.2 million, up 31% year over year and sequentially flat. Business environment is healthy as reflected through our strong booking and funnel of opportunities. The strength in booking flow leads to another quarter of book-to-bill above 1 for the sixth consecutive quarter. I would like to note that our bookings in the second quarter were higher than first quarter. Moving into third quarter, we continue to see a strong funnel.

We are excited with the rapid adoption of our Tera platform during the quarter and in fact, one of our main focuses during the quarter was leveraging the high interest received from our Tier 1 customers into actual booking of Tera Service Gateway. The Tera Service Gateway bookings were more than $10 million for the second quarter of 2014. This is an important achievement for us as the new Tera systems will enable us to provide more value-added services and scalability for these customers.

Gross margin during the second quarter came in at 73%, slightly lower than our typical level of 74% to 75%. This was mainly due to product mix. We always advise to review our results on an annual basis rather than quarterly and firmly believe that gross margin should get back to normal level over the next few quarters. Our funnel consists of a major portion of value-added service projects and we continue to view this segment spearheaded by revenue-generating services such as analytics, network security and application-centric services as key catalysts for our ongoing growth.

During the second quarter, we had a total of 18 large deals, 12 of the large deals were from mobile service providers and three from fixed line operators. In addition, we had three large deals in the cloud segment. The cloud large deals are coming either from large organizations running a cloud environment or from cloud operators offering IT infrastructure services to different organizations. Out of the 18 large deals, three came from new customers.

We continue to see strong demand from service providers for monetization services and seeing that finding new ways for leveraging the service provider infrastructure to create new revenue streams is highly essential for the industry. Examples for these directions are application-centric services such as zero-rate plans and personalized security services. We are seeing an increased demand for such applications from the side of leading global mobile service providers and our offering in this space is gradually becoming a meaningful focus of our overall value-added services suite.

One such example was an order we received recently from a Tier 1 service provider in EMEA, which will use Allot's charging solution to provide its subscribers with application-centric plans to fit their digital lifestyle. Among the application-centric plans, this operator will offer zero-rated plans for video streaming services and social media services such as Facebook at specific times during the day.

Over the last year, we added some cable-related capabilities and combined with our ClearSee offering, we increased our value proposition to the cable market. This made us more competitive in this market and one such example is the multimillion dollar order we received from a Tier 1 cable provider during the second quarter. The operator will use our ClearSee analytics solution and our Subscriber Management Platform to gain deep visibility into cable network traffic to enable pinpointing of congestion in high granularity and to deliver crucial insights into the nature of the congestion. This solution then allows the operator to apply selective traffic-shaping policies in order to avoid congestion and ensure quality of experience for real-time applications, as well as fair distribution of resources between subscribers.

Another area of progress for Allot is NFV. We are working with leading customers on projects that involve shifting to NFV mode, including participation in lab trials and interoperability tests. Having said that, we don't anticipate a full-scale commercial rollout of NFV projects prior to the end of 2015.

Moving on to geographical breakdown, revenue from EMEA were at 62% and booking from this territory during the quarter indicates a continuous pullup from the 2012 lows. APAC and Americas were each 19% of revenues. In the US, we feel that the interest from the side of service providers in application-centric solutions is growing as the industry approaches the final phase of the new net neutrality rules formation. The FCC will vote on accepting the new net neutrality rules during the second half of September once the period of comment submission by industry participants is terminated. We believe that the interest in application-centric solutions will grow thereafter. We note that the progress to win new customers in the US may be lengthy, but might expedite once the regulatory framework is completed.

In summary, during the second quarter, we continued to execute well on all fronts, enjoying the tailwind of a strong booking environment. We are impressed by the rapid adoption of the Tera platform launched at the beginning of 2014 and expect to make additional progress with our extensive VAS offering over the next few quarters. Once again, book-to-bill was above 1 and our funnel of opportunities continues to grow compared to previous quarter and involves multimillion dollar opportunities. I will now hand the call over to Nachum for a short financial review. Nachum, please go ahead.

Thanks, Andrei 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 the impact of share-based compensation, revenue adjustment due to acquisitions, expenses related to M&A activity, deferred tax 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 second quarter on a non-GAAP basis were $28.2 million, flat versus the previous quarter and up 31% versus last year. As a percentage of our revenues, sales in Americas accounted for 19%, EMEA 62% and Asia-Pacific 19%. During the quarter, we had one 10% customer. Out of total revenues during the quarter, products were 66% and services 34%. Gross margin for the second quarter was 73%. Our operating expenses were $18.8 million versus $18.6 million in the first quarter. For the quarter, we reported earnings per share of $0.06.

On the balance sheet side, cash balances were $124 million. As for our cash flow, we were cash positive and during the second quarter, we generated $1.4 million from operating activities. Our DSO were 76 days versus 68 days we had last quarter. Deferred revenues went down by $1 million during the quarter. That concludes my remarks and we will now open the call for questions.

(Operator Instructions). Ittai Kidron, Oppenheimer.

Thanks. Hi, guys, it's Ittai. A good quarter and bookings, very good on the booking side. Andrei, can you talk about the concentration of your business? I am just trying to get a sense within your bookings how spread out is the activity orders, one or two kind of real big orders that are making the book-to-bill quite strong? I'm just trying to get a sense of how broad is the demand patterns that you are seeing?

So I will say that overall we see it fairly well-spread between the different customers and as I mentioned, we had orders from 18 different customers when we calculated the large deals that we had. Each one of them is a separate project, goes into a separate operator. So we have quite a diversified booking and even if we look at EMEA, we saw that we succeeded to penetrate also into the cable operator and some other operators. So we have some fairly nice diversified bookings in this quarter.

Okay, you've talked about some confidence in Europe that even though the region has been clearly very strong for you in the first half of the year, you still expect it to be strong in the second half of the year. So maybe first, you can give some color around that, what you are seeing in that region, number one. And number two, as we look into the past, the third quarter historically just given the summer months has always been a complicated quarter from a bookings standpoint. Should I read into your Europe comment that there's actually an opportunity for you to have a positive book-to-bill ratio above 1 that is also in the September quarter?

So I will start with the second question. So we cannot give guidance for our booking in this quarter; however, as I mentioned, we have a strong funnel and we feel very positive with the funnel that we have. It's too early to say what will happen in Q3 and what will happen in Q4, so I would say that we are very happy with our funnel as we see it today.

Going back to the first question regarding what we see in Europe going forward, I think that what we saw in the first half of the year in terms of the projects and the requirements and the types of projects that we see continues also in our funnel going into the second half of the year. So we see demand for the Tera platform, as I mentioned. We continue to see demand for the value-added services that I mentioned. I mentioned the analytics, I mentioned the security services, I mentioned the application-based charging. These other type of services that we see also on our funnel going forward.

Okay. And then lastly before I open it up to others, your confidence about your ability to bring gross margins back into the mid-70%s, is that something you have confidence because when you look at your bookings, you see the mix changing towards value-added services? Is that the main driver there?

Yes, I think that, as you said, in general, it's really up to the product mix and as Andrei mentioned at the beginning of the call, this quarter, it was a little bit below our average due to product mix, moreover Tera sale at day one and an opportunity for an upsell if we are thinking about our value-added service proposition. At the end of the day, looking at the funnel, looking at the booking and the backlog, surely there is an opportunity for our gross margin to get back to what we saw let's say six months ago. It is very hard to predict on a quarterly basis, but longer term it's clearly -- the last two quarters were below the average that we are seeing right now.

Very good. All right. Good luck, guys.

Thanks, Ittai.

Matt Robison, Wunderlich Securities.

Thanks. My first question is on these cloud service providers you are starting to do work with. Were they existing customers or are they part of the additions? And on the margin topic, I think, if I remember right, last quarter there were some comments about heavy hardware mix for some large deals involving some volume pricing. Is that a similar kind of a situation for the second quarter or one might tend to conclude that the Gateway Tera concentration had some impact on margins? And maybe you could set me straight on that. And then in the past, you have provided some metrics for value-added functions versus platform revenue. Can you give us a little bit of that color as well?

Hi, Matt. I will take the first question and then I let Nachum answer the second one. So regarding the first question and the cloud opportunity that we see, so, in the past, we saw business coming from that segment; however, in terms of focus that we had, we haven't put any significant resources there. We see the development in that segment and we identified an opportunity there. We decided to put more efforts and more focus on that segment, which is a growing segment and we see that, with our existing technology, provides a good fit and answer some of the requirements that we see there.

But were they -- you added three customers and you had a similar number of cloud customers. I just was wondering if those customers were cloud operations within your existing customer base of service providers or if they are new customers.

Some of these cloud projects were new and some were existing customers.

Thanks.

Yes, Matt, to follow on on your gross margin question, so it's true that, in the first half of the year, the gross margin was the same in the first quarter and the second quarter, but in regards to the first quarter, we mentioned one specific large deal that we already got the follow-on orders with better margin and that was the main cause for the lower-than-average gross margin in the first quarter. While in the second quarter it was I think a matter of product mix and as you mentioned a little bit maybe more Tera, which are not fully populated in blades and an opportunity meaning more hardware at day one and an opportunity to upsell with better gross margin in the future. So it's two different reasons in the first and the second quarter, but, as you mentioned, gross margins stayed the same and it was below our Company average.

As you pursue some of these new customers, like these cloud providers, do we expect an acceleration in sales and marketing expenses to address that pipeline?

So I think that in regards to OpEx, we talked about it in the past, we will obviously see the opportunities in the market and see the reason to recruit more people. We will invest more in R&D and sales and marketing, but we usually want to see a pickup in booking and revenues as well. As you saw, second-quarter revenues were kind of flat versus the first quarter. Although we are experiencing a 30% growth versus last year, we kept OpEx kind of flat versus the first quarter, but we've got the people on the ground already. We don't need more people in order to support the cloud opportunity that we've already got right now. And as you know, operation really support the booking level and booking are higher than revenue. So it's not 1 to 1 and it's not (inaudible) for us to get more people onboard at day one.

Thanks.

Joseph Wolf, Barclays.

Thanks. My first question is more general. Andrei, I think it is your first quarter, I don't even know if it is a full quarter in your role, and I am wondering though you have been with the Company for a long time and have been involved, what specific opportunities or changes you think you can make at the outset to reshift, refocus to make your influence felt on the Company?

So okay, as you said, I am with the Company for many years and I was part of Allot's senior management for many years and I played a key role in defining the Company's vision and strategy. I am a very strong believer in the mobile market and the value that Allot can bring to this market. I think that we saw a Service Gateway concept and the value-added services I think we can bring real benefit to mobile service providers around the world. And as I see the market there, this trend will continue as we move forward.

I also think that our technology can serve as a key solution to other markets and one of them is the cloud market that we discussed. We are constantly looking where we can take our technology and use that to other solutions and once we identify that, we will invest resources in moving also into that direction and this is on top of our main focus, which will continue to be delivering Service Gateway solutions to the mobile market.

Great, thank you. I think this is just another way of looking at some of the other questions, but if we look into the backlog, the bookings and the margin trends and you talk about a strong funnel, have things changed? I mean we've talked about larger orders with larger customers and extending the lease time there and how long that stays in your backlog. Is there a shift going on there? Can you give us some sort of percentage if we look in the backlog of the mix between value-added services and hardware and maybe tie that into, if you look at some of these new offerings, how close are you to the customer, if you can tell us, if you look out to the next 12 to 18 months, what percentage of your wins do think will be based on your customers providing these application-based services or solution on zero-based Internet kinds of services?

So if I understand correctly, the question you are asking about the mix between the Service Gateway platform and the value-added services that we deliver. So we believe that today we see between 20% to 30% of our bookings coming from the value-added services compared to the platform bookings. And I believe that, as we move forward, I think that percentage will increase. However, I believe they will balance at a certain point as the operators continuously upgrading the platform in order to support more applications, more services and more subscribers and more bandwidth as part of the natural growth that we see in the mobile space. So today, we are between 20% to 30%. We believe that trend will grow the value-added services portion a little bit, but at a certain point they will balance and they will be probably half and half.

Right. So you are saying it could go to 50-50?

Yes.

Okay. And then just in terms of the leadtimes and what you are seeing from the customer deployments with some of these music-only or Facebook-only or these onlies, how much of a direct line do you have into seeing what your customers are offering and how much of your business do you think is being driven by these new packages being offered?

So in terms of our visibility into what our customers are offering, I think we have a very good visibility. Actually, as part of our selling process, in many cases, they are consulting with us as we gained a lot of understanding and a lot of knowledge in this environment. We have the know-how, we know what works and what not. So in many cases, they work with us also on the thinking process of what to roll out and how to roll it out. So this is one part of the answer. The other aspect is that the operators -- I think that part clarifies the answer, right? Or do you --?

Well, I was just wondering in terms of momentum and how those kinds of new offerings are driving bookings or if they are in any way yet.

Yes, so in terms of momentum, I think that this concept of Service Gateway drives our sales. So typically operators that are interested in offering more services that relate to the applications that their subscribers are using, they will tend to buy our Service Gateway concept because they want to roll out services related to the application. So when we have -- when there are operators that want to offer those zero-rate applications and they want to offer in general our services that are related more to the applications that the subscribers are using, they will tend to buy more our Service Gateway. So there is a strong correlation between the two.

Okay, thank you.

Catherine Trebnick, Dougherty.

Yes, thanks for taking my question. A clarification question first. Did the three cloud providers, was that part of the 18 orders you received or is that in addition to? I wasn't sure.

It was part of the 18.

Okay, great. And then the gross margins, in your commentary, you indicated they were 74% to 75%. I thought a year ago or was it a year and a half ago when the margins rose to 76% that going forward that we were going to expect 75% and above gross margins. So can you clarify, is the 74% to 75% a reset or lead me around that?

Yes, hi, Catharine. So again, looking at what we did in the past, we were at 75%, 76% and sometimes even better. The last two quarters, we talked about specific reasons why gross margin were below the average that we experienced in the past. In the first quarter, it was a large order. Let's call it a penetration phase that we already got follow-on orders with better margins. In the second quarter, it was more of a product mix and as we indicated in the past, for example, the ratio of value-added services versus product and hardware versus services obviously can impact the gross margin. At this point, we do not see any major trend that can change the margin from where they were in the past. Hopefully, looking in the next couple of quarters, we will be able to return to what we did in the past.

Now remember there are also factors that can influence the margin even to improve. For example, increasing the top line and part of the COGS is obviously fixed can even improve the gross margin. The ratio between value-added services and other can also increase the gross margin. So first, as you know, we are not giving guidance, but I think what we are trying to indicate that we do not see any major change to our business that should take the margins down.

Okay, perfect. Thanks. And the other question has to do with -- the majority of your customers are Tier 1 customer and what is really -- since you are the -- this is your first quarter as the CEO, Andrei, what is your outlook for temperament for perhaps driving a faster book-to-ship revenue from Tier 2s and plans to aggressively go maybe after the Tier 2 market?

So I think that we have a fairly good mix between the Tier 2, Tier 3 operators and Tier 1 operators. We do have some key Tier 1 operators, as you know; however, we have also a fairly large deployment of Tier 2, Tier 3 operators and we continue to sell to them either direct or through a channel infrastructure that we have. So it's not like we are focusing only on Tier 1. We have people focusing on the Tier 1 operators while we have part of the sales organization focusing on Tier 2, Tier 3 operators. Typically, we do that through channels.

Okay. And then one last question is what percent of your mobile operators and cable operators now have adopted value-added services?

We do not provide specific details into that, but I think that obviously if we are looking at the installed base, value-added services take only a very small part of it. So the opportunity for Allot is selling new boxes with value-added services, but also returning to our installed base and upsell the value-added services to our existing customers.

All right, thanks much.

Alex Henderson, Needham.

Thanks. Just a couple of quick ones. First, can you just give us the headcount number?

Sure. Again, at the end of the quarter, we were at 445 people.

45. And can you talk a little bit about the impact of the shekel? I know it hit a three-year high at the end of the June quarter. It has backed off a little bit. How is that impacting your cost structure?

So usually we are hedging our expenses shekel versus the dollar and also shekel versus the euro. As you know, some of our revenues and some of our expenses are also in euros, while it is clear that we are reporting in US dollars. So most of our expenses are already hedged to the current shekel dollar exchange rate. So due to that, you do not need to see any major change. We did have an impact, but it was already taken into account in the first quarter of this year.

So looking at the impact of the Tera launch, obviously with the product launched in March and bookings usually taking a little longer -- billing taking a little longer than bookings, how much of the Tera product actually shipped in the quarter? I would think that would be a fairly small piece of the June quarter given the timing of that product launch? And how much of it is more in the future period? And can you talk a little bit about how large a delta there is in the cost or the gross margin of those products versus the rest of your productline?

Yes, so if we are talking about shipment and booking, I think that we got the orders for the Tera. When we launched the product, it was ready. It is not like we are launching a future product, etc. So we launched the product and it was ready. We got the orders. We already started -- during the second quarter, we already shipped Allot Teras in terms of the mix versus smaller boxes or our old Sigma box. And again, in terms of the margin, it should be fairly with the same margins that we got on our old boxes. So the change that you saw in the gross margin was more toward the mix of product and mix of value-added services rather than just for the Tera. And as we said, more value-added services in the future can contribute for margin to improve.

Has there been any change in the pricing environment at all?

We don't feel any changes there. Again, the main impact was due to the product mix.

And is there any difference in the pricing of cloud products versus your traditional service provider products?

So the structure of the project is slightly different in those projects. Usually the platform is sold in a high gross margin; however, the value-added services are lower. So at the end of the day, we get more or less the same level that we see in the other verticals.

And one last question on cloud. Can you talk about what the mix of cloud sales is public versus private, SaaS versus infrastructure as a service and the type of customer we are talking about here?

Yes, so we see mainly two types of customers, as I mentioned, with private clouds and public clouds. Public clouds are operators and many times, they are operators that we are already selling to for the other business lines where they provide these cloud services as a service to IT organizations for enterprises. In this case, since we already have the connections with the operator, it is easy for us to work also with that division and typically we sell there larger units that serve multiple organizations.

On the private clouds, we sell usually through our channels usually to big organizations. It can be a government or a university or a big bank. Typically, they have thousands of branches with a centralized cloud operation. And there, we sell our units doing also similar solutions as we are doing in the public cloud. Typically, it is around SLA management and analytics and some security services.

Just to be clear, the traditional service providers that are doing cloud versus companies like Amazon Webservices, Microsoft Azure, Facebook, people like that that are what I would describe as next-generation service providers or not your traditional players, can you talk about whether you have penetrated those additional new type of customers within this context?

Yes, so we have a few examples where we sold to a cloud operator that is just a cloud operator and provides only cloud services. Again, typically, the focus is on cloud that provides services to enterprise.

Thank you. I will cede the floor.

(Operator Instructions). Matt Robison, Wunderlich Securities.

You might have answered my question after I requeued, but my initial question I asked for the metric on the value-added mix and then I heard later something 20% to 30%. But is that just a general comment on what it has been in past quarters or what is more specific for the first quarter and the second quarter of this year?

Matt, we didn't provide specific for the quarter. Sometimes we are selling it as a bundled offer and it's very hard to split it and obviously, on a quarterly basis, it will not give a real information or a real information about the Company. I think that maybe for next quarter we will try to review and talk a little bit about the trends that we are seeing of value-added services, bundled versus standalone, etc.

So should we look at it -- it sounds like we are not going to really get that metric anymore, so are we going to think of those things, that value-added function as a discriminator versus the competition that becomes just something that helps you get the business and not really becoming a margin driver? Is that the way we should look at it?

No, I think that our strategy is to upsell on the Tera platform that we are selling. So you are right that these value-added services are helping us also to penetrate and helping us on the competitive front to differentiate ourselves versus competition. This is one angle of the story. The other one is definitely upsell on the platform that we sold. This is a key part of our strategy.

So the first quarter, we had a big customer that we had to be -- we had to fight a little harder with price and then this quarter, we've got a product transition where we have got less software content as we shift configurations that are to be upgraded in the future. So are we looking at a situation where we have expanded into some lower margin type of customers, plus we have got a product cycle and as we work through these transitions, we improve on this foundation or is that the way we should look at it?

As you said, it was two quarters. It's true that it was in a row, but it doesn't mean anything and again, when I am looking at the funnel, I don't see any change to what we saw in the past. So it is not -- looking at the funnel and the backlog, I can't see an indication that will say, you know what, the product mix for the third quarter should be the same as it was for the second. Hopefully, we will improve, but we are not giving guidance and it is very hard to predict, especially when we are talking about 73% to 74% or 75% or 76%. It is hard at this point to predict the exact gross margins that we will have in the third quarter. Although, again, looking at the funnel, looking at the backlog, we are seeing deals, which have much better margin than the 73% that we had in the second quarter.

Your comments on the US were a little bit more definitive than they have been in the past. I am not sure if you really meant it to be that way, but are you close enough to your customers in the US to really get a sense of their timing or are you mentioning the regulatory environment just as maybe a rationale for things not moving too quick because it sounded like, when you commented, that there is an event in September that people are waiting for to confirm their direction and shortly thereafter, they might start becoming more deliberate and investing in your category. Or do you mean to say nothing is going to happen till September and maybe sometime in the future after that something could happen?

So first of all, we already have projects, Tier 1 operators in the US and this is something that we won two years ago and we have some very nice customers in North America. The comment that I was making is mainly to explain that we believe that the environment is going to look better for us because of the recent changes that we see. It doesn't mean that we are not expecting to see anything until this clears up. We have already proven that we are relevant even before this new trend started. So we believe that the trends and the direction is positive and we just wait for that process to complete. I believe after this process will complete, the situation will be even better than today. It is not to say that today the situation is not good.

But you have projects that are -- that you have been working on that give you some degree of visibility for incremental activity later in the year after that regulatory event or into next year?

Again, sorry, can you repeat --?

You have projects that you have been working on that you think could generate additional activity in the US after this regulatory event in the third quarter potentially for fourth quarter or maybe next year business.

We have some projects in the pipeline and I don't think that they are specifically waiting for that event to happen. Again, my comment was a more general comment that the environment will be a better one for us. We do have some opportunities also in North America. They can be developed and they can happen regardless the process of the FCC. And again, it's proven in the past. We already demonstrated that we are relevant and we can penetrate into a Tier 1 operator in North America and offer solutions. So I just wanted to explain that, in the future, we see that the environment will look better for us. Again, we have today opportunities and regardless the FCC process we can close some of them.

Okay. Thanks a lot.

Alex Henderson, Needham.

Hi, yes, just a broad question. Juniper Networks went out with some comments earlier in the quarter basically indicating that they thought industry consolidation, M&A activity in a number of locations, not just in the North American market, was negatively impacting the outlook for spending. So far, we haven't heard anybody else confirm that and I was wondering if you had any read on that.

I think it really depends on the operators. In fact, some of our customers, the fact that they are going through these mergers actually helps us because it gives us more opportunities to sell into other parts of their organization. They are getting bigger and there are new opportunities for us to expand. So it depends really on which side of the fence you are. Some of our customers are actually in expansion mode and they are acquiring additional business lines and this gives us opportunity to sell into those businesses.

So is that a yes, no or indifferent?

So for us, actually that trend works in our favor.

So it is a slight positive? And then the second question, can you just parse the value-added services between network optimization and revenue-generating opportunities, defining revenue-generating opportunities as services that are being used by the service provider to generate new revenue opportunities for the service provider?

So I would say that the trend in general is that the more interesting services are the revenue-generating services and this is what operators are looking for these days. I really believe that going forward this trend will continue. And also based on that observation, we are focusing more on the revenue-generating services as we believe that they will take a bigger part of the value-added services that we can sell.

Well, I agree totally with that statement. That still doesn't help us parse it. Can you give us some sense of what portion of the value-added services that you are selling are going to network optimization versus value-added services that are going to revenue-generation opportunities?

Typically, we are not giving a breakdown of the different value-added services and the exact breakdown between optimization services and the services that generate revenues is not something that we provide. Again, the trend is in the direction that I mentioned. This is what we can tell.

And remember, Alex, some of our solutions, which can help the operator to optimize the network, they can also sell it as revenue generation. So it's the same.

Yes, some of the services are -- it's very hard to break into these two categories.

But is it possible to give us some sense of what portion of your overall revenues, even if you don't even look at value-added services, how much of it is just going to installations that are creating new revenue-generating services? It is a metric that I think is important to the industry.

I believe the Service Gateway in general, mainly if you look at Service Gateways in the mobile network, are there mainly to help operators generate more revenue. So it can be in the form of launching application-centric services. Even zero-rated service, sometimes they offer it for free. So the question whether it generates additional revenue or not. In many cases, the way that the operator sees that is that, for him, it gives them a competitive advantage and by that, he can gain more revenue. So it's, again, very hard to pinpoint exactly the percentage to each side.

I would say that in general the services that we are deploying today are more around security-related services, security services that are offered as a service to the end-user, services around different service plans like the zero-rate plans and similar service plans. And also, we see that our analytic solutions are taking part on top of providing information on the network side and helping the engineers better plan the network, we noticed that this type of information that we generate is used more and more by the marketing department to help them understand what their customers are doing. So again, it is very hard to break it down exactly, but in general the trend is going into the more -- mainly on the mobile side, it is more about the revenue-generating services.

Thanks.