Allot Ltd (ALLT) 2015 Q1 法說會逐字稿

Good day. Welcome to the Q1 2015, Allot Communications Limited 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.

Thank you very much. And that you all for joining us on our first-quarter 2015 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 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 excludes stock-based compensation expense; revenue adjustment due to acquisitions; reconstruction costs; expenses related to M&A activity; amortization of certain intangibles; 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 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 judgments 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.

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 first quarter of 2015. Then I will hand over the call to our CFO, Shmuel Arvatz, for a short review of our financial performance for the quarter.

Our first quarter results came in at $29.5 million, up 4.4% year over year, and down 3.5% sequentially.

Net income for the quarter was $2.9 million, up [40%] year over year, and down [14%] sequentially. Year-over-year growth, as well as improved margins, were achieved despite foreign-exchange headwinds, on which Shmuel will elaborate later.

During the first quarter of 2015, we completed the acquisition of Optenet, a global leader in the field of security-as-a-service. We have been collaborating with Optenet for the past two years, and gained significant working experience with Optenet as a partner. This solution is fully integrated in the Allot service gateway platform. And this partnership has already resulted in more than 10 service provider wins, half of which are large Tier 1 mobile operators.

The joint activity of Allot and Optenet has generated more than $20 million in revenues over the last two years. A large portion of that were software licenses. During the first quarter we have won another Tier 1 service provider together.

I'd like to spend a few minutes to provide additional color on the deal and the strategic benefit that may stem from the acquisition.

The acquisition will significantly broaden Allot's addressable market by enabling Allot to become leading provider of security-as-a-service solution. With these solutions Allot will help operators deliver security services to their business and residential users. The acquisition provides new monetization opportunities for communication service providers, enabling them to provide value to both residential and enterprise customers.

Optenet products complement Allot's existing security offering especially in the areas of data protection and content featuring. The acquisition expands Allot's install base and opens cross-selling opportunities.

In addition to the above, Optenet's products complement Allot's offering to cloud operators and large enterprises by providing enhanced security on the cloud access point.

In terms of bookings, we continue to see similar and encouraging trends of growing customer diversification, as the number of large deals reached 18 in total, out of which three large orders were from new customers. Eight of the large orders came from mobile-service providers, and eight from fixed-line service providers. In addition, two large orders were received from cloud operators.

Book to bill this quarter was below 1. Booking was weaker this quarter, mainly due to seasonality and the fact that a couple of the large deals that we are involved in require longer time to materialize. Having said that, we continue to grow the funnel, and we specifically see growing opportunities in the areas of monetization and security.

Gross margin during the quarter was 76%, above our typical range of 74% to 75%. We believe that our service gateway solution with the value-added services continue to offer unique value proposition to service providers, which supports the achievement of a healthy gross margin.

Moving on to a short review of our value-added services category. During the first quarter of 2015 VAS represented 38% of our bookings compared to 37% in previous quarter. As a reminder, we divide our VAS category between four groups: security, monetization, analytics and optimization.

During the quarter the monetization and security categories were leading, followed by optimization and analytics, similar to the ranking in previous quarters. Monetization and security accounted for 70% of our VAS bookings.

We continue to view VAS as our main business driver in the coming years with key strengths coming from the security and monetization categories.

Geographical revenue breakdown during the quarter was as follows: EMEA 48%; APAC 28%; and the Americas 24%. We are seeing a nice pick-up in our bookings and final offer opportunities in the Americas.

During the first quarter we have launched SmartEngage, a unique solution designed to help mobile service providers to enhance and better monetize their engagement with their subscribers.

Allot SmartEngage elevates customers' experience management by using advanced traffic awareness capabilities delivered via the Allot Service Gateway to detect specific browsing activity and present the subscriber with offerings that are relevant for him.

With regards to our cloud access optimization solution, we increased our sales in this category by 26% year over year. The main benefit for the cloud operators are the greater visibility gains with the Service Gateway together with their ability to manage and secure the access to the cloud specifically for business applications such as Office365.

In the last quarter we had received two large orders from communication service providers delivering cloud services to enterprises across Europe. These wins came as a result of our carrier-grade proven technology, ease of deployment of these -- into these networks as well as multi-tenancy capability.

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

Thank you, Andrei. During the first quarter of 2015 we completed the acquisition of Optenet which will enhance our offering and market positioning in the security-as-a-service segment.

We continued to improve our gross margin and operating margin on a year-over-year basis as well as generated positive cash flow from operations.

Before I begin reviewing the financial results for this 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 respects from the generally accepted accounting principles and exclude share-based compensation expenses, revenue adjustment, due to acquisitions; expenses related to M&A activity; restructuring costs; and amortization of certain intangible assets.

Turning to our first-quarter results, revenue for the quarter were $29.5 million, up 4% year over year and down 4% sequentially. As a percentage of revenue, sales in the Americas accounted for 24%; EMEA 48%; and Asia Pacific 28%.

During the quarter we had one 10% customer. As Andrei mentioned, we are encouraged by the improvement in our booking and funnel in the Americas.

Product revenues for the quarter accounted for 68% of revenue, while service revenues were 32% compared to 65% and 35% split during the first quarter of 2014.

Moving on, gross margin for the quarter was 76% of revenue compared to 73% during the first quarter of 2014, up 3%. Gross margin may fluctuate on a quarterly basis; however, this result exceeded our target model of 74% to 75%.

Operating expenses during the quarter were $19.4 million (sic - see press release, "$21.9 million"), a $1.1 million decrease compared to the previous quarter. The reduction in OpEx resulted from cost reduction measures implemented in our R&D department as well as lower sales and marketing expenses mostly due to the reduction in referral and similar variable shifts.

Our headcount, including Optenet, has increased to 529 employees, up from 462 employees at the end of last year. Following the acquisition of Optenet we expect OpEx to be in the range of $20 million to $21 million level in the second quarter this year.

Operating results for the quarter were negatively impacted by the currency changes, mostly due to the depreciation of the euro against the US dollar.

On a constant-currency rate, as prevailed in the first quarter of 2014, revenues and operating profit for the quarter would have been higher by about $2.6 million and $2.1 million respectively. On a constant-currency rate, as prevailed in the fourth quarter of 2014, revenues and operating profit for the quarter would have been higher by about $1.4 million and $800,000 respectively.

Net income for the quarter was $2.9 million or $0.09 per diluted share compared to $2.1 million or $0.06 per diluted share in the same quarter last year.

Turning to the balance sheet, our cash reserves comprise of cash, cash equivalents and investments totaled $123.8 million, including the payment of the first installment to Optenet shareholders in March.

We generated $2.1 million in operating cash flow. DSO was 72 days, which is slightly below our target model of 75 to 90 days.

With that I'll turn the call back to Andrei.

Thank you, Shmuel. To summarize, during the first quarter we completed the acquisition of Optenet; we significantly enhanced Allot's offering of advanced security services to operators worldwide.

Revenues for the quarter continued to grow, mainly driven by strong performance of our monetization and security offering.

Despite ForEx headwind, our profitability continues to improve and we are taking additional measures to improve it further on.

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

(Operator Instructions). Matt Robinson, Wunderlich.

I think, focus a little bit on the backlog and bookings, I think this is the first time in nine quarters where your book to bill has been fractional.

Can you give us a flavor of the magnitude of backlog compared to six months and a year ago? And over the past two years can you give us an indication what the range of backlog was in terms of weeks and when it was at the lowest level?

I can give you an indication on our backlog that, because of the book to bill, that is below 1. It's certainly declined from previous quarter.

I don't have in front of me the other -- the answer to the other question that you had.

Shmuel, do you have the number?

Yes. Overall, the backlog went down and it's below the level we had in the end of 2014.

You know, since we give -- traditionally we give book to bill only as a measure of below and higher than 1, and the backlog was not discussed, I will not open now to disclose the exact numbers of the backlog, but obviously it's below what we had in last year.

I understand. You don't -- I wouldn't expect you to get that specific, but I don't think that's an adequate answer. We should know if the backlog is -- obviously, it's lower than it was exiting last year, but is it lower than the prior quarter or the prior quarter before that? How severe should we look at this?

I think in order to provide an accurate answer, we need to look at the numbers, also in the -- with the right currency. So to give the accurate answer, we don't have it in front of us.

So we can say that compared to previous quarter we are down. Also compared to the quarter before that, we are down as we were around 1 in the book-to-bill ratio two quarters ago.

Now, on top of that there were currency impacts, so it's hard to say and to provide an accurate answer on that, on exact -- to compare it to the exact level of the backlog in the different quarters last year.

I think the way that it should be looked at is the seasonality and we had a couple of orders, as I mentioned, that we are still working on them. In general, I would say that we haven't lost a deal, so what we have in the funnel is still in our funnel.

Again, as we always state, there is lumpiness in our business and we can't expect exactly when a specific order will land. In this quarter our book to bill was below 1.

So it sounds like your backlog is maybe similar to what it was actually in September. Can we think in terms -- how does it feel to you compared to the outlook that you had in the back half of 2013?

What Andre said, that the backlog was below the level we had in December, as well as in September. And I would say that the fluctuation and the dependency on large transaction is built in our business model and one negative or positive quarter, we believe, does not indicate a change in the trend in our business.

As Andrei said, we are still negotiating some large deals that were planned for the first quarter and probably next quarter we will know better where we are in terms of booking for the year.

That's why I asked Andrei about comparing it to what it was like back in late 2013, because there was definitely a shift in trend then. So if you could maybe give us a qualitative perspective of how things look now compared to then, Andrei, that would be helpful.

Again, I would repeat the answer. It's -- the backlog compared to December and as Shmuel said and as I said, also to September went down.

Again, to compare based on a specific order or couple of orders, that we are continuing to work in and based on that define the exact trends, I'm not sure that I give a precise answer if I base my answer on this one.

But thanks for a candid response, Andrei. Thank you.

Yes, Matt, take into account that last quarter we had slightly above 1; so practically 1. So obviously if now we are negative, so we are below March quarter, which is also as a result of the slacked quarter or slightly above 1 that we had in the fourth quarter.

Catharine Trebnick, Dougherty & Company.

Could you discuss the competitive landscape? It seems like you're pivoting more to the value-added services specifically, the security-as-the-service.

And typically, who do you compete against and are these new wins that you're winning as a security-as-service, or are they incremental to where your gateway is? And then, are you displacing anyone with the win or is it a totally new win within the operator?

Okay. So first of all, the security additional enhancements that we have on our platform, the security-as-a-service solution, are coming on top of our BPI and the basic service gateway capability.

Some of the wins that I mentioned earlier, together with Optenet, we delivered security services on existing platforms that were deployed in the market with existing customers.

However, we did win some new customers together, leveraging this advantage that we have. In these projects we competed against security providers and not against BPI player, including a major deal that we won last quarter together with a Tier 1 operator; we mentioned that in one of our press releases. That project was purely about security-as-a- service, and we competed against other security providers and not against our traditional BPI competitors.

And then you had said that bookings in the United States or in the Americas have improved. Could you describe at least on where the opportunities are for those bookings and the orders are coming from? Not necessarily the carriers, but what products and services are most interesting to the Americas carriers from your product portfolio?

It's mainly around monetization and security services; I would say security first and then monetization services. These are the areas that helped us to improve our performance in the Americas this quarter.

All right, thank you.

Joseph Wolf, Barclays.

I had a question about the -- a little bit more on Optenet. And you gave the headcount of 529 versus 462. Are all 67 people from the acquisition or has there been some organic hiring as well?

And where is the Company physically located? How are you managing that facility?

Okay. I will start with the second question, the headquarter of the Company is in Madrid. They have some additional offices in some other countries, but most of the people are in Madrid.

What we are going over, the last year is that we are shifting resources from areas, certain areas that we see less traction in, into the solutions where we see the main growth engine; namely, the monetization and security.

So part of the increase in the headcount is a result of the transitions that we are doing, both internally and through the acquisition.

So how many people were added by the -- can you just go through the terms of the deal? You said there were, I think, in the press release it was $5.5 million with a $26 million earn-out. Then in the cash flow statement it looks there was a $10 million payment.

Could you just go through some of the terms of the deal and how you expect the earn out and the cash flow to happen?

Yes. The deal has about a EUR5.5 million upfront, an additional amount that was deposited in escrow for covering future payments, so it's not in our control so we put everything as a cash payment. Overall in the cash flow statement you see about $10 million that were paid in the transaction.

Now, to your other question, this quarter the increase in employees and headcount was totally because of said acquisition. It's about 80 people. Actually, the headcount for the core business was down by about 5 employees.

Okay, that's helpful. And you gave some guidance on OpEx, $20 million to $21 million in 2Q. Is that the level we should be thinking about for the full year? How should we be thinking about OpEx in comparison to the revenues going forward?

Yes, you should assume maybe same level for Q3 and in Q4 we may exceed the $21 million.

And then just one last question. Andrei, you were talk -- we were going back and forth on the backlog with the first question. Can you give us a sense of the deal size with the security and monetization? How long are deals sitting in backlog?

If we're trying to do any analysis of what the outlook for 2015 looks like right now based on a combination of currency and the funnel that you're describing, how should we be thinking about how long things sit in backlog, the timing it takes to close these deals, the size of these deals? Anything we can use to think about growth rates for this year.

I believe the security projects are similar in nature to what you saw in the past. Meaning with existing customers that already rolled out the service, we have deals with them where we sell additional licenses or expansion on security offering. And these projects are typically deployed very quickly, sometimes even within the quarter.

When we talk about new customers, then it's a longer process. It requires the deployment of the Service Gateway into the network, the integration into the infrastructure of the operator or the cloud provider. And this may take three to six months on a typical project.

Okay, thank you.

(Operator Instructions). Alex Henderson, Needham.

A couple of quick just housekeeping questions. Can you give us roughly what the services were as a percentage of revenues?

Yes, the services in the quarter as a percentage of revenues were 35%. Sorry, product work was 68% product and the product in the same quarter last year was 65%. The remaining to 100% is through the services.

Right, and the -- any comment about the enterprise piece as a percentage of revenues or whether you saw any traction in the enterprise and what are you doing on the spending to support enterprise growth?

As I mentioned in my previous statement, the cloud vertical increased in terms of revenue by 26%. So it's growing faster than some other parts of the business and we continue to invest in that direction.

As I mentioned in previous calls, we identified the cloud access as -- private and public cloud access optimization as a vertical that makes sense for us. We have, we believe, a very good solution for that aspect and there is a demand for solutions in that area.

We are investing mainly in sales and marketing, in order to expand our reach to that vertical. The result, as mentioned, was a nice increase by 26% this quarter. It's still not representing the bigger part of our business, but it's growing quite nicely.

Are we talking about approaching 10% of revenues with this or no?

It's over 10%; it's on a typical level. Last year it was around the 20% and, of course, as mentioned, it's growing faster than the other parts of -- some other parts of the business.

So if I strip out the cloud growth, if it's 20% of revenues, that 5% contribution to revenue growth implies that your non-cloud business is actually declining year over year. Is that accurate?

It was -- if I take only that -- again, there are some areas that are growing faster like value-added services; some areas that are even declining.

But you're right, if we take based on revenues there is a big contribution of our -- of the cloud access solution. Again, as mentioned earlier, the security and monetization services also contributed to the growth.

Is the cloud and security piece heavily skewed to the Americas and that's part of why you're seeing strength in the Americas geography? It seems like that's the primary driver of it.

We see that the pickup both in the Americas and EMEA. These are the main areas where we see strength in this category.

The other question I had for you, again, it's a little bit of bookkeeping, is can you give us the 10% customer number for the quarter and if there was any customer solidly above 10%? Was there anybody that was particularly large?

There was one customer, one 10% customer, in the quarter.

Thank you very much.

Michael Leonard, Oppenheimer.

Back to the growth in the quarter. You guys saw a big slowdown and it's actually your third straight slowdown in year-over-year growth and I just want to get a sense of why that is. Is that simply a function of more difficult comps and where is that slowdown primarily coming? Are you seeing that more in value-added services or DPI? I just want to get a better understanding of this slowdown in growth that has kind of persisted now.

Can you repeat the first part of the question?

Yes, I'm just trying to understand the -- you have this slowdown in year-over-year growth rates that we've seen for three consecutive quarters now. I just want to understand what's driving that and how much that is difficult comps versus demand-related issues.

Well, year-over-year growth, just to maybe update the rest of the people, in 2013 we have -- the first half of 2013 was a challenging two quarters for Allot. Therefore, you saw, once we rebounded, you saw a year over year a very significant increase in terms of revenues.

We started after the second quarter of 2013 -- going into Q3 in 2013 we got back to our normal growth space and since then we continued to grow in a more moderate way.

I would say again, given the ForEx headwinds that we saw, I believe that we achieved a nice growth in Q1 and we also improved our profitability this quarter. I believe that the directions that we were taking and we talked about them over last year, are showing that these are the right directions, these are the growth engines for us.

Okay, and your -- I assume a lot of the issues came from EMEA and FX. Can you give me any idea of what your growth or revenue, how it would have been -- how it would have looked in EMEA on a constant-currency basis? I think you mentioned a $2.8 million number. Is the majority of that in EMEA?

Yes, in constant currency, so year-over-year growth could have been 9% compared to 4% actually achieved by us, mostly because of the erosion of the euro against the US dollar.

The overall impact on the financial operating results was about $2.1 million, because we had some benefit in expenses, mostly because of the euro and the shekel that was weakening against the US dollar.

Okay. Thank you. Last question. You mentioned some larger deals that are taking a little bit longer to close. Are those larger deals than you typically have or are deal closing times extended on deals in the past might have closed sooner?

These are types of deals that we typically have and, as we mentioned in previous calls, there is lumpiness in our business and this is natural. Sometimes it takes more time to close a deal; not everything depends only on us.

In this specific quarter, we have two of the deals that we expected to close in Q1 moved and it takes us longer to close. Again, as mentioned earlier, we haven't closed any deal and we continue to see the opportunities.

Okay and the longer deal times were not a competitive -- you would not characterize it as competitive issue?

No, in these specific deals, no.

Okay, awesome. Thank you, guys. Good luck.

James Kisner, Jefferies.

Jason North for James. Two questions on the cloud. First, did the -- the mix shift towards cloud, was that a factor that helped gross margins during the quarter?

And secondly, the number of large cloud deals per quarter have been about two to three for the last four quarters. Do you see that ramping up throughout the course of the year or do you expect that to continue around this level? Thank you.

In terms of large deals, you're right, we have between two to three deals per quarter. However, in many cases, some of these deals are smaller than our large deal barrier. And in general I would say that when we are selling into cloud operators our solution, typically the gross margins are higher than the average, however, it depends on the specific deal.

But on average, I would say both in cloud access optimization and in the other growth factors like security and monetization, value-added services, in these areas, our gross margins are higher.

It many times depends on the exact mixture of the product that the cloud operator purchases and how many value-added services are deployed on top of our basic Service Gateway.

Great. Thank you.

Thank you. There are no further questions at this time.

Thank you, everyone, for joining us on our first quarter 2015 conference call. Thanks. Bye.

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.