Allot Ltd (ALLT) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allot Communications' Q4 2014 results 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.

Thank you very much and thank you all for joining us on our fourth 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, Shmuel Arvatz.

The press release announcing our fourth 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 adjustments due to acquisitions, expenses related to M&A activity, amortization of certain intangibles, acquisition related expenses and inventory write-offs.

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 fourth quarter results.

Before we begin, let me remind you that certain statements made on the call today may be considered forward-looking statements, which reflect management's best judgment based on currently available information. I refer specifically to the discussion of our expectations and beliefs regarding our pipeline and funnel of potential future business. Our actual results may differ materially from those projected in those forward-looking statements.

I direct your attention to the risk factors contained in the annual report on Form 20-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 fourth quarter of fiscal year 2014, and then I will hand over the call to our CFO, Shmuel Arvatz, for a short review of our financial performance for the quarter and for the year.

Our fourth quarter results came in at $30.6 million, up 12% year over year and 2% sequentially. Our revenues for the full year grew by 21% year over year and we believe that our market share during the year has increased.

In terms of booking, in this quarter, we had a record number of large deals, 26 in total, out of which 11 deals were from new customers, the highest number per quarter so far. Six of the large orders came from mobile service providers, 17 were from fixed-line service providers and, in addition, three large orders were received for private and public cloud deployments.

During 2014, 21 large deals were from new customers compared to nine during 2013. Augmenting and diversifying our customer base will continue to be one of our main goal going into 2015 and our performance on this metric during the fourth quarter is highly encouraging.

Book-to-bill this quarter was slightly above one. As mentioned earlier, booking this quarter was substantially broader and more diversified than in the rest of the quarters this year. In addition, we were able to achieve a book-to-bill above 1 with few seven-digit deals while all of them were below $5 million indicating a very nice diversity.

Gross margin was 77% in the fourth quarter, up 2 points compared with the previous quarter. For the year, gross margin came in at 75%. As we stated in the past, we expect to see our gross margin around 74% to 75% in average.

As we head into 2015, our funnel remains robust consisting of a healthy balance of small and large deals.

During the fourth quarter, we generated over $8 million of operating cash flow and we ended the year with cash reserves over $132 million. Our operating cash flow during 2014 was more than $15 million.

Our VAS business continued to improve during the fourth quarter and represents 37% of our quarterly booking compared to 34% in the previous quarter.

During the quarter, Allot ServiceProtector, which is our DDos protection solution, was selected by five Tier-1 operators to protect fixed and mobile broadband networks.

Broadly speaking, our security services composed of anti-malware, anti-DDos and proactive parental control applications continued to perform well in this quarter, a trend which has been consistent throughout 2014.

Another highlight this quarter is the progress we made with our video optimization solution. This quarter, we received three orders from new customers for this product line demonstrating the effectiveness of having a broad offering on our service gateway platform in order to penetrate into new accounts.

I would like to give you some more color on our value-added services business which is the main driver force behind our growth going forward.

We divide our VAS offering into four groups: monetization services, analytics, security services and optimization services. During the quarter, monetization services category was leading, followed by security and optimization. Monetization and security accounted for 70% of our VAS booking.

Looking at 2014 as a whole, these categories accounted for about 40% each and together representing more than 80% of our VAS bookings.

I would like to note that from a quarterly and annually basis, more than 60% of our VAS bookings are classified as revenue-generating services. In general, accelerated demand for our security and monetization solutions are two of the main trends we felt throughout 2014. Our funnel of opportunities supports continuation of these trends as we enter 2015.

During the fourth quarter, we continued to advance our cloud-access optimization offering for enterprises and data centers. Our solution delivers comprehensive feature sets for securing high performance and availability of the service, enhancing users and network security and delivering deep network and application visibility.

During the quarter, we closed several large deals including a major financial institution in Central America, a leading retail chain in South Europe and a leading consumers electronics manufacturer in APAC. We had also received an expansion deal from a large cloud service provider in North America.

We see a good fit between our solution and the need of cloud operators to optimize their cloud access. We will continue to invest in building dedicated channels to this market segment throughout 2015.

During 2014, we released few important product lines which very quickly turned into strong drivers for our business.

I am very happy with the results of our Service Gateway Tera product line that was released at the beginning of the year and was adopted very rapidly and widely contributing to our growth this year. This new platform leads the market with performance and richness of services it can offer. We continue to see healthy demand for this platform.

With our ClearSee analytics solution, we had a nice competitive win in the fourth quarter and we plan to continue and invest in our analytics solution.

During the fourth quarter, we deployed our customer engagement solutions at four Tier-1 mobile operators. This solution helps operators to engage with their subscribers on the fly in order to offer new services.

Before summarizing, I will turn the call over to Shmuel for a review of our financial results.

Thank you, Andrei. During 2014, we made an important progress in many business aspects such as new product launch, initiating and accelerating new and existing business directions such as monetization and security and improve financial metrics.

We expect the positive business momentum to continue and benefit our financial performance during 2015 as well.

Before I begin reviewing the financial results for the quarter, I would like to inform everyone that on this call, unless otherwise noted, I will refer entirely to the non-GAAP financial measures when discussing operational results.

Non-GAAP financial measures differ in certain respect from Generally Accepted Accounting Principles and exclude share-based compensation, amortization of intangible assets, acquisition related expenses and inventory write-offs.

Turning to our fourth quarter results, revenues for the fourth quarter were $30.6 million, up 12% year over year and 2% from the previous quarter. The geographical breakdown of our revenues was as follows, EMEA $13.1 million, or 43% of revenues. APAC, $13.4 million, or 44% of revenues, and Americas, $4.1 million, or 13% of revenues. For full year 2014, revenues in EMEA were $56.6 million, or 48% of revenues, APAC with $42 million, or 36% of revenues, and Americas $18.6 million, or 16% of revenues.

As Andrei mentioned, our funnel of opportunities in all regions is healthy, and many of the RFPs we are involved in include a nice mix of existing as well as new customers.

Product revenues for the quarter accounted for 63% of total revenues, while service revenues were 37%. On an annual basis, product revenues accounted for 66% of total revenues, while service revenues were 34%. This is roughly similar with 2013 breakdown.

Moving on, gross margin for the quarter was 77% of revenues, and 75% for the entire year. The increase in gross margin compared to our typical 74% to 75% area was the result of product mix sold. On a GAAP basis, gross margin was 66% of revenues, primarily due to inventory write-offs in the fourth quarter amounted to $2.9 million due to product cycle replacement.

Specifically, in 2014, we launched the service gateway Tera that supersede the service gateway Sigma and Sigma E, and as a result of the faster than anticipated adoption we reduced the level of inventories related to the old product lines.

Operating expenses during the quarter were $20.5 million higher than our initial plan mainly due to higher referral fees resulting from revenue mix and commission expenses. Typically, we see higher commission expenses in the fourth quarter due to overachieving of quota by certain salesmen.

We believe that the fourth quarter operating expenses level is not indicative to our 2015 plan, and we expect to see sequential decrease in the first quarter of 2015 to a level of below $20 million.

Net income for the quarter was $3.4 million, or $0.10 per diluted share, compared to $3.1 million, or $0.09 per diluted share in the same quarter last year.

Now I will return to the full-year result.

Total revenue for 2014 grew 21%, to $117.2 million. In 2014, we had strong booking, including the winning of our largest ever order of $16 million during the third quarter. In addition, we are seeing an increased demand for our value-added services, mainly in areas such as security and monetization, and we expect this trend to continue in 2015.

Gross margin during the year was 75%, and after a below than average in the first half of the year we were able to improve significantly during the second half of the year, reaching 77% in the fourth quarter.

Our operating expenses for 2014 grew by 10% year over year, totaling $77 million, well below the top-line growth resulting in a significant improvement in our operating margin. As a result, we improved our operating margin to 8.4%, compared to 3.4% in 2013, and this improvement was achieved gradually throughout the year.

Looking into 2015, we expect this trend to continue and we expect additional expansion in our operating margin.

Net income for the year totaled $10.5 million, compared to $4 million during 2013.

Turning to the balance sheet, our cash and cash equivalents reserve total $132.5 million. During 2014, we generated about $15.8 million from operations, about 50% of this amount in the fourth quarter alone. DSO was 70 days, which is below our typical range of 75-90 days.

In summary, we are happy with our achievement and financial results in 2014, and looking forward for productive 2015. With that I'll turn the call to Andrei.

Thank you Shmuel. To summarize, in 2014, we returned to growth while improving all major financial metrics. Our revenues grew by more than 21% and we increased our market share. Operating margins improved as well as strong cash generation. We expect to grow our revenues in 2015 while continuing to improve our operating margins during this year.

We start 2015 with more comprehensive product offering as well as more substantial client base. We expect the trends of strong demand for monetization and network-based security solutions will continue to drive our growth going forward.

With that, I will open the call for Q&A session. Operator.

(Operator Instructions) Matt Robison, Wunderlich Securities.

Congrats on the quarter, especially the cash flow and bookings, and congratulations to your salesmen who seem to be doing really well these days.

So first question is linearity. Can you comment a little bit on that and its effect on DSO?

And then the second question is your remarks on OpEx and especially sales and marketing expenses, the last quarter, the third quarter I should say, you had quite a sequential move because of bookings, and it sounds like in the fourth quarter there was some bonus accelerators apparently with folks in specific territories or with specific customers.

Given the way your compensation plans or your sales and marketing plans, expense plans look for 2015, what is going to change that's going to enable that level of spending to moderate?

Okay, so first of all, this is Shmuel. I didn't hear well the first question, but regarding the selling and marketing expenses, as we grow and we expect the same people, relatively same people to generate more revenues, we become more effective in terms of commission expenses, and therefore in Q4 we had also, beside the high commission, because of the accelerators, as you mentioned, we had also referral fees that are connected to certain revenue mix. Overall, I would mention that we expect the Q1 operating expenses to be below $20 million. And we will return to -- we will start the year with a much lower operating expenses.

There is no change in the method, the way we compensate salesmen. But we expect -- while we expect to continue to grow the top line, we are not growing the number of the quota carrying people and the other efforts respectively. So we plan to become more efficient, and therefore also to generate, as I mentioned, better a profit margin in 2015.

Okay, so the first question was about linearity, and the effect it had on your days sales outstanding. And then I guess I'd like a little further explanation on what you mean by referral fees. Who gets paid now those referral fees? And ill yield the floor.

We have two kinds of partnerships in our business. One is resellers that buy and sell, and the other are referral partners that we do the transaction direct but we pay a certain commission to -- as a referral fee to a partner in certain countries.

So overall, it depends on revenue mix. Sometimes you see the expenses in the gross margin in terms of buy and sell transaction, and sometimes you take the 100% in the top line but you allocate some expenses in the selling expenses. So depend on the revenue mix we have different model. And overall the operating expenses and mostly the selling expenses contain a variable amount that varies from one quarter to another and from one transaction to another.

The referral partners are what we might call manufacturers' representatives?

No, it may be, let's say, an agent in certain countries that assist us to sell or to get the right people in the introduction. But other than that does not operate in the full capacity of buy and sell, let's say, it is usually small operation that does not want to take responsibility to buy the product and resell them to the end users.

Okay. Then the linearity?

Now, linearity, so we expect going forward linearity in terms of a commission we pay to our internal sales force with the exception of Q4 that sometimes has a big accelerator and all that. And in the referral phase we cannot usually expect the product mix and therefore there may be some fluctuations from one quarter to another.

I gave indication of the third quarter total OpEx which I expect to be less than 20. So we will start the year lower than the fourth quarter. Also beyond commission and selling expenses we made some efficiencies, we took some steps in order to improve efficiencies mostly in the R&D and in other departments and I think that in Q1 the starting point will be lower than what we see right now in Q4.

Alright. I guess what I meant by linearity was the pace of shipments between the first, second and third months of the quarter as it relates to DSO?

You mean about the DSO?

Yes, the percentage of revenue in the third month versus first and second months.

I think the quarter was quite difficult with that regard and the DSO specifically went down due to the fact that the collection was very strong in the quarter resulting also the very strong cash flow more than $7 million in operating cash flow.

Great. Thanks a lot.

Joseph Wolf, Barclays.

First of all thanks for the extra granularity on the value-added services side. Just when you start answering the question could you just repeat, I got three out of the four categories, I think I missed one.

If we look at the 37% of bookings I think I saw that number, could you just walk us through the average amount of time spent in the backlog of the value-added services versus the core business? And what we can expect for mix and margins from that?

I guess in another way you had very high gross margins, you guided back to the 74% to 75% I guess as a long-term or an annual kind of a number but could we see that drift higher or are you kind of peaked out at where you think VAS is as a percentage of your overall bookings?

Okay, so let's start with the four categories that we monitor. So we monitor monetization services, analytics, security services and optimization services, these are the four categories.

Now, with most of the services that I mentioned or many of the services that I mentioned are software-based services. And typically the deployment of these services are in shorter cycle versus the hardware and the platform deployment. In some cases, we do need additional hardware for the deployment and then the deployment cycle is longer. But if I take the average it should be shorter in term of time. And you asked about?

Given the high level of mix in the short-term would that translate to higher gross margin or continuation of the strong fourth quarter and to the beginning of 2015?

I think first of all it helps us reach the 77% this quarter. And as I stated, in the long term, we believe that will continue to be around 74%, 75% in terms of growth margin. There might be, depends on the product mix, there might be quarters that would be higher than that, there might be quarters lower than that as we experienced over the year, and of the last year. And we think that we will continue to see a same trend going into 2015.

Some of the high level of bookings that we had on the value-added services translated into revenues already in this quarter and some of that also helped us reach the 77% gross margin.

And just one final on this topic, if you look at the mix, which is I think 80% for the year fell into that, the two buckets of monetization and security. Is that based on your product portfolio and availability or is that based on customer readiness and used case right now?

I think it is both. There is a demand from what we are seeing from our customers for these type of solutions both for monetization and security. And I would say also on analytics sometimes is a strong element in the demand and our strengthening these offerings in order to meet the demand and this is why we have more offering in this space in order to meet the demand that we see from the customers.

Okay, great. And just a housekeeping question, what kind of tax rate should we expect in 2015?

I expect the tax to be 5% and below.

Perfect. Thank you.

Thank you, Jo.

Catharine Trebnick, Dougherty & Company LLC.

Mine has to do with the monetization and security, could you just say again was it 40% of the revenue was just for housekeeping, please? Restate what the quarterly value was, I didn't catch it.

So for the entire year, for the entire 2014, on the VAS category, we had 40% coming from the security services and about 40% comes from monetization services.

Okay, perfect. And then the other question is, with the FCC coming to a vote on the 26 I guess, you know on this quarter your revenues were obviously down from North America, what is the plan for growing revenue outside North America or how do you plan on attacking this whole FCC issue in North America? Thank you.

Okay, thanks. Good question. So as you can see, the value-added services that are leading and dragging our business today are around monetization and security. And these services are not affected by the new rules coming out of the FCC.

We do see also opportunities in North America for these services. So from our point of view, we can continue and sell in North America. This year, we didn't have large deals coming from North America. However, previous years we sold into Tier-1 operators in North America value-added services that are not impacted by the FCC regulation. And we continue to see opportunities in this area I guess specifically around this to service offering that I mentioned.

Alright, thanks. And then I will come back in later for more questions. Appreciate it.

Thank you very much.

Alex Henderson, Needham & Co.

So I assume you expect the VAS percentage to continue to increase over time, is that reasonable statement?

You are referring to the percentage of the value-added services?

No, I said, is it reasonable to assume that value-added services increases as a percentage of revenues over time?

Yes, we expect to see it growing.

Faster than overall Company, right?

It will get to a certain balance of about 50% versus 50% in the platform. This is where we think it will more or less balance. And if I look at the trends over the years and also this year, we continue our growth percentage wise of the VAS category.

So given that VAS is predominantly software related modules that are being turned on on top of the hardware platforms, one, it's my understanding that you are only registering those software modules in that calculation, you are not registering the hardware platforms that they are running on, so it's not comparable to what other companies sometimes use as their revenue generating services calculation, is that accurate?

There are pieces of hardware that we do calculate to the VAS category. If it's hardware that is purely related to that specific VAS it would be calculated as part of that VAS.

But VAS often runs on the hardware platforms that are generic platforms for other that can be used for the full range of your service capability, correct?

Right. Some of the value-added services are just software licenses that we activate, some of them are combination of software and hardware. In general, the gross margin on the VAS category is higher than the average.

So bias is to VAS increase as a percentage of sales, should we anticipate a continuation of the improvement in your gross margin or is there something that's offsetting that?

I believe that the hardware part of the product part will offset that increase in gross margin and this is why I expect to keep the gross margin on the 74% to 75%.

Okay. And then the other question I wanted to ask you was on the ForEx side of the equation. What was the impact of the strong dollar weak shekel relationship in the quarter and as you see it over the course of the year, shekel was down about 11.5% since the middle of July versus the dollar?

The impact on Q4 compared to Q3 was marginal. And the reason is that our hedging transaction lagging, we are doing it for 12 months rolling, so we don't have the full impact on or almost do not have any impact on the increased shekel in the fourth quarter. We will start to see some positive trend in Q1 but not to the extent that we see now currently on the screen. So it will be gradually improvement during Q1, Q2 and thereafter.

Okay, and then can you talk about whether there was any 10% customers or how many there were in the quarter?

We had one 10% customer in this quarter.

Great. I'll see the floor. Thanks.

(Operator Instructions) James Kisner, Jefferies & Company.

So I think you said the book-to-bill was slightly above 1, last year in Q4 it was above 1, I guess the change in language, were there any pockets of weakness within your bookings regionally? I think you also said that, if I heard right, that linearity was difficult. So I assume it was a backend related quarter. I was wondering your original expectations perhaps regionally or by application was there any weakness?

In general I don't think we see weakness. I think this quarter is best to be characterized by the fact that we didn't have a very large order that in some of the other quarters we do see, orders that are above $5 million. And even without seeing this kind of order, we did see a very nice amount of large deal this quarter, in fact the highest ever.

So even though we are just slightly above 1 in terms of booking, we are encouraged by the diversity of the booking coming from many customers including the fact that we had many new customers during this quarter.

That's helpful color. So gross margin, I just want to verify, I don't think somebody said it, again the gross margin strength was due to the VAS strength, is that fair? There were no other factors that really drove the gross margin strength this quarter?

The high gross margin is mainly about the product mix that we sell. And, yes, the product mix that we had this quarter was such that generated this high gross margin.

Okay. Anything about the mix, I mean it was more [line cards] or was it more software, can you help us out there?

There were bigger portions of pure software licenses this quarter.

Okay, that makes sense. And just finally on this inventory charge, any color there on why you guys take that charge? Was that transition to the new platform just faster than expected or any detail on that charge? Thank you.

We believe the beginning of the year the Service Gateway Tera platform which supersedes the Service Gateway Sigma and Sigma E that we originally had. We exceeded the plans that we had with the rollout and the adoption of the platform which resulted in the fact that we need less inventory to support the Sigma and Sigma E platforms and this is, as Shmuel explained, this is the main reason that we did it.

Thank you.

Thank you. As there are no further questions in the queue, that will conclude today's question-and-answer session. I will now hand the call back over to your host for any additional or closing remarks.

Thank you, operator, thank you everyone for attending this fourth quarter 2014 earnings call and we look forward to seeing you again soon.

Thank you very much.

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