Allot Ltd (ALLT) 2014 Q3 法說會逐字稿

Good day, and welcome to the Q3 2014 Allot Communications earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Rami Rozen. Please go ahead, sir.

Thank you very much, and thank you all for joining us on our third-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, and our new CFO, Mr. Shmuel Arvatz.

The press release announcing our third-quarter results is available on the investor relations section of our website at www.allot.com. All results and expectations we review on the call are on a non-GAAP basis unless otherwise described as GAAP. Non-GAAP net income and non-GAAP net income per share excludes stock-based compensation 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 third-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's 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 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 third quarter of fiscal year 2014, and then I will hand over the call to our CFO, Nachum Falek, for a short overview of our financial performance for this quarter.

Our third-quarter results came in at $30.1m, up 25% year over year and 7% sequentially. We have continued to execute well on all fronts. In addition to revenues growth, gross margin has improved to 75%, up 2 percentage points compared with the second and the first quarter.

Cash balance by the end of the quarter was $125m and no debt, and we generated $3m of operating cash flow during the third quarter. Our [finance] continues to be strong, and the healthy business environment was once again reflected through the strength of our booking, as we reached book to bill above 1 once again.

Our bookings during the third quarter were at record levels, further supported by our largest-ever $50m follow order recorded during the quarter.

We continued to execute well with sales of our Tera platform, launched at the beginning of the year. This platform carries the highest capabilities and is the fastest DPI engine in the industry to date. The integration of the Tera platform with our value-added services portfolio supports the Allot vision of selling the fully integrated solution, which creates a multitude of upselling opportunities.

Value-added services during the quarter represented 34% our booking, and we continue to view this business segment as a key catalyst of our future growth, and we invest a significant part of our strategic thinking, as well as marketing efforts, in this direction. The leading value-added services sold during the quarter were the ServiceProtector Allot solution for protecting against denial-of-service attacks, charging and policy control licenses and the WebSafe product line that includes parental control and URL filtering.

Two of the three most sellable services belong to the revenue-generating category, and we sense that this part is a general trend we think the service providers demand. We continue to make good progress with our security offerings, and we experienced growth demand from service providers for security solutions.

During the third quarter, we had a total of seven large deals, two of which are new customers. Two of the large deals were mobile service providers, and four from fixed-line operators. In addition, we had three large deals in the cloud segment. Cloud deals continue to be an area of focus for Allot, and we are pleased with the progress we have made in this field so far.

During the third quarter, we made further progress with our NFV and SDN offering.

A few weeks ago, we introduced through collaboration with MRV and under the Orange operator a virtual CPE solution enabling application-aware SLA management at the customer premises and network edges. During the quarter, we continued to work and develop new use cases and found new collaborations with leading operators to enhance our position within this category, leveraging our virtual TDF solution.

Moving to geographical revenue breakdown, EMEA accounted for 33%, A-PAC, 51%, and the Americas, 16%. On the year-to-date basis, the split is EMEA, 50%, A-PAC, 33%, and the Americas, 17%.

We believe that year-to-date analysis of our geographical performance reflects our situation in these regions more accurately. We continue to spot many business opportunities in the EMEA region with new and existing customers.

Before I conclude my part, I wish to say a few words about the press release we published this morning in addition to the earnings. As I'm sure you all read, we have appointed Mr. Shmuel Arvatz as the Company's new CFO, replacing Mr. Nachum Falek, who was recently nominated as new CFO of a privately held company in the securities segment.

We feel privileged to have a professional like Shmuel joining our senior management team, and I am sure that his vast industry experience, as well as skills and business leadership, will serve us well and will benefit Allot's shareholders in the future. I wish to thank Nachum for five years of outstanding service directing our finance and investor relations teams and being a vital component of the Allot success story. I wish him luck in his future opportunities.

I would now like to turn the call over to Shmuel for a short statement.

Thank you, Andrei. Good morning, everyone, and thank you for joining the call. I am honored to have been appointed by the Board of Directors to become Allot Communications' new CFO. I look forward to meeting all of you soon, and I am confident we have all of the resources needed to make a smooth transition going forward.

Thank you, Shmuel. In summary, we are pleased with our performance during the third quarter. Revenues grew 20% (sic - see press release "25%") year over year and 7% sequentially. We have recorded a significant improvement in gross margin, generated more than $3m of operating cash flow, and book to bill was once again higher than 1.

Going forward, our funnel continues to be strong, and we are entering the last quarter of 2014 with the positive momentum. I would 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 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 third quarter on a non-GAAP basis were $30.1m, up 7% versus the previous quarter and up 25% versus last year. As a percentage of our revenues, service in America accounted for 16%, EMEA, 33%, and Asia-Pacific, 51%.

During the quarter, we had two 10% customers. Out of total revenues during the quarter, products were 69% and services, 31%. Gross margin for the third quarter was 75% versus the 73% we had in the second quarter of 2014. Our operating expenses were $19.6m versus $18.8m in the second quarter. For the quarter, we reported earnings per share of $0.09.

On the balance sheet side, cash balances were $125m. As for our cash flow, we were cash positive, and during the third quarter, we generated $3m from operating activities. Our DSO was 76 days, similar to last quarter. Deferred revenues went up by $1m in the quarter to $16.6m.

Before I conclude my remarks, I wish to make a personal note. After serving as Allot's CFO for more than four years, I decided to move on to my next challenge, as I am positive that I am handling over the CFO role to an experienced and skillful professional such as Shmuel, and I wish him good luck in his new role.

I am a firm believer in Allot future and prospects. I enjoyed working with the analysts and investors that followed us over the years, and wish to thank all of you for your support in the Allot story.

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

(Operator Instructions). Ittai Kidron.

Yes, hi. Thank you, and, Nachum, congratulations and good luck in your next adventure.

Thank you.

I wanted to ask about value-added services. Can you tell us how much of revenue was value-added services and how much of the bookings? I'm just trying to get a gauge, a leading indicator as to gross margin direction.

So, as we mentioned earlier, 34% of our bookings were value-added services during this quarter.

Okay. And the large transaction that you had, $50m in the quarter, can you give us some color on how you expect that to flow into the P&L from a timing standpoint? The concern there would be that's a very big order, and how can you maintain sustainability revenue growth-wise after recognizing such a big order in your P&L?

Yes, Ittai, so I think as we said in the past, while we can see some lumpiness in booking, usually, revenues are more linear, but it takes time to recognize an order and takes time to go to deployment, get acceptance, etc.

Specifically to the order that you are mentioning, it will take us, let's say, probably more than one quarter in order to recognize the product part, and obviously much more than that if we are thinking about maintenance, warranty, etc. So it's not a one-time deal, definitely not in terms of recognition.

Okay. A couple more from me. Andrei, you've talked about Europe as an area where you see a lot of opportunity. At the same time, we're hearing a lot about negative GDP revisions in the region, and some countries have actually fallen back into recession level. What's the level of confidence and visibility you really have in that region? How can you get confidence that, despite the macro background, backdrop, you can still execute in that region?

So from what we see in our funnel now, we have opportunities both with existing and new customers from the region. So we do see that the business at this point continues as usual, at least for us in the last year. We haven't noticed any change recently. We continue to see a healthy funnel, and if we talk specifically about the EMEA region, we see there are also opportunities, both from existing customers and new customers. So we haven't seen any impact in that sense in this region.

Okay, and then lastly, Nachum, on the FX, the dollar is finally moving in your way. Can you discuss the impact of the FX on your operating expenses?

Yes, so as part of our OpEx is obviously we are hedging it, especially the exposure that we have of shekels versus dollar, the improvement that we are seeing lately into our side, I think that we will see it probably toward next year.

Got it. Okay, very good. Good luck, and again, congratulations.

Thanks, Ittai.

Matt Robison.

Thanks, and congrats on the results and the new jobs. Can you guys talk a little bit about year-to-date VAS bookings, and if you've seen -- maybe as a follow-on to Ittai's question, if you've seen any backlog cancellations that might relate to macro? And also, Nachum, the other income went up a bit. Was that a reflection of ForEx?

And I've got a couple other housekeeping questions, too, but I guess start with the VAS bookings number for year to date.

So VAS bookings from beginning of the year, during Q3, we had a little bit higher than what we saw in Q1 and Q2 in terms of the value for the portion of the value-added services, but in general, it's more or less in this range. We normally see around 30% of our bookings coming from value-added services.

Okay, on the ForEx stuff, Nachum, and if you've got any bookings cancellations?

Yes, so in terms of ForEx, no. Most of what you are seeing in financial and other income is really interest that we are getting on our cash balances. $200,000 is the average that we are seeing. Let's say that should be the average run rate at this time.

What about the backlog question?

Matt, we missed the backlog question. Can you repeat?

You've had book to bill steadily above 1 for I think seven quarters now. Have you had any -- is that net of any kind of backlog cancellations? And have you had any customers reverse course?

At least from what I know recently, we didn't have any significant cancellation of orders during this year, so we don't have any experience of such events.

And, Nachum, why was sales and marketing up so much sequentially?

Yes, so mostly we are talking about book-to-bill ratio, and you asked about the backlog. So book-to-bill ratio is above 1. The backlog is increasing, and part of what we are paying in terms of the commission is based on booking, which is mostly an advance, not a final payments to our sales team. And the reason why you are seeing an increase in sales and marketing expenses, part of it is due to commission payments, agent and our sales force. Part of it is due to the recruitment of new people.

Is that why accrued expenses were up so much, as well?

That's more of a cash flow issue. That's not necessarily only due to that, but you're absolutely correct that part of it are those payments. Yes.

Thanks a lot.

Thanks, Matt.

Joseph Wolf.

Thanks. And, Nachum, thanks for all the help over the years, and congratulations, I guess. Quick question for incoming CFO, Shmuel, could you tell us about the recruitment process and what convinced you to join Allot coming from the Internet software sector.

So I came not from the Internet sector but from the enterprise software. I served as the CFO of ClickSoftware for 12 years, and the motivation was mostly to make a change. I like the management, the Board members that I met and also the opportunity which is another area of telecom and value-added services, which is I think a very important growth driver. And Allot also has a large amount of cash in the bank, so it will be able -- we will be able also to use the cash for non-organic opportunities, and I am going to focus on this area.

So overall, I think that I am excited about the opportunity and looking forward to working with the management.

Excellent. Thank you. Quick question -- a couple more questions. I guess some of the questions have touched on this, but if you think about what's going into the bookings and the backlog these days and the deployment timings, larger orders, and then specifically you talked about three wins and large cloud deals. Could you just talk about how we should think about revenues flowing through that in terms of bookings backing, what that means for deployment, and then the scale of these cloud wins versus some of your more traditional customers, putting the really large orders on the side?

Yes, I think just in terms of time it takes the order to become revenues, obviously, there is a big difference if we are selling into enterprise or cloud or whether we are going to telco. I think it didn't change dramatically. Three to six months is probably the right timing for an order to become revenues. And as you can see, book to bill is above 1, and revenue is growing.

We are talking about 7% quarter over quarter and 25% that we did year over year, and that's exactly -- and the growth is coming from the book-to-bill ratio, which is above 1.

And to answer the second part of your question, about the size of the cloud deals, typically, they are smaller in terms of the size of the deal compared to the telco deals. However, their deployment is usually quicker, and usually also it contributes to our gross margin, so usually they are more profitable projects.

Okay, that's helpful. And then I guess just on this VAS on the bookings, on the VAS business, has the breadth of the product offering that you're calling VAS changed a lot over the course of the first nine months of the year? Is it still primarily a couple of offerings? Is there a focus from your customers? Are they centralized on one or two of your offerings, or is there some good breadth there across the platform?

So what we are experiencing is that, in most cases, the operators will buy into one or two value-added services at the first phase or in the first project, and then they will add on top of that additional services. The services where we see more success over the last nine months are services related to revenue-generating services that has operated to create and generate more revenues from their customers.

And we see more interest in services around the security space. So as I mentioned in the last quarter, the ServiceProtector, which is our denial-of-service protection product line and the WebSafe product line, which is the parental control and URL filtering, these were two of the top three selling services. And these are around the security space.

Okay, great. Thanks, guys.

Thank you.

Catharine Trebnick.

Thank you. Oh, Nachum, I'm sad to see you go, but good luck in your new position. So I have three questions. One, percentage revenue from the existing customer base?

You mean -- Hi, Catherine. First, thanks. You mean existing versus new or --?

Yes, yes.

We don't have the exact figure for this quarter, but in general, and I think this quarter should be on the same level, it's about 80% of our revenues is coming from existing customers, and then 20% from new customers. And what we experienced over the last few quarters is a similar trend that we follow for the last few years.

Okay, and then the other question is the competitive landscape. Some of the value-added services that you're getting good success with, DDOS, parental control and URL filtering, there are some pretty tough competitors out there. Who do you compete against in the bake-offs, and then why would they select you over one of the competitors?

The main advantage that we have is that the solution is fully integrated, so when an operator is looking for a combination of solutions, if we take, function, the parental control solution, for him, deploying only the parental control solution can be very expensive. When it is deployed on top of our Service Gateway platform that is already connected to the policy engine, and it is well integrated to the charging system and so on, the cost of deployment is significantly lower, and the time to market of the new service is significantly faster.

So these are the main advantages that we have. We typically -- we want to compete in a project that is only about, for example, denial of service attack protection. We will add that as an additional service on top of our platform.

And this is the value of the Service Gateway platform, the fact that it brings together many services and all of them are fully integrated.

All right. Thanks. And then the other question that I have is North America has been down year to date. What do you see in general as far as your pipeline and this coming back to be more of a substantial part of your revenue and growth strategy?

We had better years in the Americas, and year to date, the performance there is not in the level that we expected it to be. However, we continue to work with the tier-one operators there.

We believe that, once the FCC will get to a final resolution about net neutrality, it will open the doors for large-scale projects with our type of technology, and we're starting to see over the last few months more interest coming from them. We are in direct touch with them, doing trials, but nothing yet that has materialized to a project.

All right. Thank you.

Thanks.

Alex Henderson.

Thanks. I was hoping you could give us a couple of data points. First off, what the headcount was?

Yes, so headcount at the end of the quarter was 453 employees.

And you mentioned new hires. Could you give us some sense of what rate of new hiring you were doing during the quarter and what you expect for the upcoming quarter?

Yes. I think that looking at what we recruited in the last let's say six months, most of the people are going to sales and marketing, whether it's support or salespeople in the territory, putting more toward EMEA and A-PAC.

Yes. I was just hoping you could give us some sense of how many you've hired.

Actually, put it less than 10 people let's say in the last quarter, and again, around 10 six months ago, etc. That's the rate. And we are seeing the opportunities. We are seeing the momentum and demand for our product. We want to give good service to our customer, and therefore, we're putting both salespeople and support people to support the equipment that is in the field.

So can you talk a little bit about the impact of the 8% to 10% decline in the shekel versus the dollar since July 20th or so, when it peaked at a three-year high and what the impact on the quarter was and how that'll impact you going forward? I was a little surprised to see better-than-expected top line and gross margin. And then, given the swing in the shekel, where your shekel-based cost structure overage on the OpEx line relative to our forecast, which was not the mix I was expecting. So can you talk a little bit about that?

So I would say that most of the exposure that we have shekel versus the dollar is hedged by forward deals, etc., so you will not see the impact of this change immediately. As I mentioned, I do think that we will see an improvement going into next year in terms of our OpEx due to the reason of exchange rates. But to answer your question specifically, the increase that you saw in OpEx in general, specifically into sales and marketing, is due to accruals that we have for commission, whether it's for employees or whether it's for agent, because part, or an advance of what we are paying is based on booking and not necessarily based on collection.

Again, it's an advance. That's why when book to bill is above 1, and you can imagine that we booked more than you saw on the top line, it means that we are paying more in terms of commission. So most of the increase in our OpEx was due to commission and to new hires.

Yes, on the book-to-bill comment, you've made the comment that book to bill was around 1 several times in answers to questions, yet you've said that your book to bill was above 1. Can you give us a little bit closer qualification of what that is? Is it slightly above 1, and that's why you keep calling it around 1, or is it decently above 1? Can you give us any more color on that because it's a little confusing.

Yes, so we are not giving specific numbers into the booking. We try to share as much of the information as we can. We mentioned book to bill above 1, and as Andrei mentioned on his comments that we had very nice booking this quarter, which was obviously on one hand above 1. But I don't want to get into the specific numbers, and sorry, but we cannot share more information about that.

But it is above 1. It's not 1, right? Just to be clear.

Yes, it's above 1.

It's above 1, and as I mentioned earlier, in terms of booking, it was a record quarter.

Okay, and then the two 10% customers, can you give us a sense of how much those combined equal in terms of revenues?

We share this information only on an annual level, and we probably can share it in the next quarter and on our filing of the 20-F. So far, I can just say that we had only two above 10% customers.

Okay, and the service as a percentage of revenues?

Again?

Services as a percentage of revenues?

One second. Services were 71% and 69% were products.

Thank you, and finally, just can you give us some sense of what you think the tax rate might look like next year? I know it's a little early, but we still have to forecast that out, and don't want any surprises.

Historically, we always said 5% to 10%. We try to be at the lower range. As you said, it's a little bit too early for next year, but I don't think that we should have a major change at this point.

Okay. I'll cede the floor. Thank you.

Thank you.

(Operator Instructions). As there are no further questions, I would like to turn the call back to the presenters.

Thank you very much, everyone, and have a nice day.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.