Allot Ltd (ALLT) 2015 Q4 法說會逐字稿

Good day and welcome to the Q4 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 Mr. Rami Rozen. Please go ahead, sir.

Thank you very much and thank you all for joining us on our fourth quarter 2015 conference call. My name is Rami Rozen and joining me today are Allot 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 exclude the stock based compensation expense, revenue adjustment due to acquisition, expenses related to M&A activity, amortization of certain intangibles and inventory write-offs.

Please note that all earnings per share amount 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 will refer specifically to the discussion of our expectations and beliefs regarding our pipeline and final potential future business.

Our actual results may differ materially from those projected in these forward-looking statements. Certain material factors or assumptions are also applied in drawing the conclusion or making the forecast or projection and reflected in such forward-looking information. I direct your attention to the risk factors contained in the Annual Report on Form 20-F filed by Allot with the Securities and Exchange Commission, and those referenced in today's press release, most 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 result and share with you some of the achievement in the fourth quarter and full year. Before I delve down into the quarterly results, I would like to take a moment to say that and share with you what we identified as a larger opportunity for Allot, and how we are leveraging it.

Let's start with industry trends and their impact on service providers and cloud operators. On one hand, we have seen businesses and consumers increasing spend on security services. Businesses are transitioning to solutions on the cloud while also looking to address the security needs of their mobile users. On the other hand, our customers, the communication service providers and cloud operators are challenged by the traditional services becoming a commodity.

Security services and their increasing demand creates an opportunity for service providers and cloud operators to differentiate themselves and improve profitability. To respond to this growing demand and large market opportunity, Allot leveraged its core technology and now provide a superior solution that enables our customers to gain a competitive advantage in their market. Since identifying this industry shift in mid-2014, we have made significant progress with our security offering. We completed the acquisition and integration of Optenet, which helped us deliver security related bookings to around 13% of total product booking and positions us a leading player in this domain.

We believe that our vision of leveraging our technology into security services for end-users and enterprises is gaining traction as evidenced by the 10 million end-users we are already serving (inaudible) we're seeing in the market. Our security monetization and analytics offering go hand-in-hand and are key drivers for growth going forward. We are entering 2016 with a positive momentum with bookings in the fourth quarter at record level.

After I complete my part, 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.

Now for the quarter's results. During the quarter we continue to execute on our growth strategy. Q4 was a record quarter for our value added services, accounting for over 50% of bookings with strong bookings on security and monetization services. We landed more than $7 million follow-on expansion order providing (inaudible) visibility and enhanced monetization opportunities for tens of millions of subscribers. We announced this win at the beginning of the quarter.

Revenues for the fourth quarter continued to grow sequentially and came in at $25.7 million with net profit of $0.7 million or $0.02 per share. 2016 revenues came in at $100.3 million and net income was zero. Looking at the topline, annual revenues were at the low end of guidance, mainly impacted by forex headwinds, which Shmuel will discuss in further detail. Gross margin during the quarter was a healthy 74% and 75% for the entire year, which was in line with our expectations. Net cash was positive with a cash flow of $1.5 million during the quarter.

Now let's look at our bookings. As I mentioned, in Q4 we reached record bookings. Book-to-bill was above 1 for the quarter and above 1 for the entire year. That was stronger than a year ago, which we believe will support growth in 2016. Large deals in the quarter reached 22 in total, three of which represent new customers, 13 came from mobile operators and nine from fixed-line service providers.

In the value-added services business, we had a record quarter with VAS contributing 52% of overall Q4 bookings, continuing the positive trend. For the entire 2015, our VAS business contributed 44% of our overall business compared to 31% in 2014.

In absolute figures, we reached 20% growth year-over-year. To remind you, our VAS category is divided into four groups; security, monetization, analytics and optimization. In Q4, security and monetization continued to dominate with monetization reaching 59% and security, 25%. For the entire 2015, monetization accounted for 48% and security, 31%.

Recently, we decided to add an additional layer to how we measure our business drivers by breaking down our product bookings both the platform and the VAS into the four key groups I just mentioned.

The breakdown is done based on the main catalysts that initiated the transaction. We believe that this will provide another way for the market to analyze the specific contribution of security in our overall yearly bookings going forward. Based on these new measurement, security bookings for the year accounted for about 30% of the total product bookings.

Moving into OpEx. We continue to maintain tight control on expenses and intend to continue efficiencies across the business. This resulted in 12% improvement in OpEx compared to the same quarter last year even after integrating the Optenet team. As part of our overall strategy and in line with market trend of our legacy business, we are realigning our spends into faster growth areas.

During the quarter, we decreased our investment in the optimization product line, which may impact our topline in the near and the short-term while increasing our investment and strengthening our security and monetization portfolio.

Now for some product updates. On the product front, we are continuing to invest in our virtualized product line. During the quarter, we launched the Allot Service Gateway Virtual Edition. This revolutionary concept enables operators to further accelerate rollout of new services in an NFV environment. The Service Gateway Virtual Edition can run in any virtual environment while maintaining top performance. In addition, we are launching today a new service gateway platform, the SG-9500, which leverages the service gateway feature set and high performance metrics while running over a common off-the-shelf platform. This is an important milestone for us, and this will help us to expand our (inaudible) market for the service gateway.

Moving on to the 2016 guidance, we expect revenues to be in the range of $102 million to $108 million. We expect the security and monetization segments to contribute and to lead growth while optimization segment may slowdown overall growth. And finally, we expect our efficiency measures to drive higher operating leverage to our bottom line. Important to remember, we are still dependent on large projects and while we increased our backlog, we see slowed conversion into revenue, which is in line with industry trend.

Currently, we have one mega project in our backlog, which we are in the process of delivering. We expect to recognize revenues over the second half of 2016, which will raise H2 revenues versus H1. Before summing up, I will turn the call over to Shmuel for a view of our financial results.

Thank you, Andrei. During the second half of 2015, we had a nice pick up in our booking, reaching a record booking levels during the fourth quarter. We have completed the integration of Optenet and are very pleased with the progress we made in the security segment. We continue to invest in developing new product and launch a range of Advanced Virtualized Service Gateway Edition to enhance our standing in NFV world. We are seeing increased demand for our value-added services, mainly in security and monetization and we expect this trend to continue into 2016. 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 respect from the generally (Technical difficulty) changes in deferred tax and certain tax charges.

Turning to our fourth quarter results, revenue for the fourth quarter were $25.7 million, up 9% sequentially and down 16% year-over-year. The geographical breakdown of our revenues was as follows; EMEA, $13.3 million or 52% of revenues; APAC, $5.3 million or 21% of revenues; and Americas, $7.1 million or 27% of revenues. For full-year 2015, revenues in EMEA were $48.9 million or 49% of revenues, APAC with $28.8 million or 29% of revenues and Americas, $22.6 million or 22% of revenues. Product revenues for the quarter accounted for 60% of total revenues, while service revenues were 40%. On an annual basis, product revenues accounted for 62% of total revenues, while service revenues was 38%. This compares to 66%, 34% split in 2014.

Moving on, gross margin for the quarter was 74% of revenues and 75% for the entire year. On a GAAP basis, gross margin was 48% of revenues and was impacted by an impairment charge of $5.8 million resulting from the write-off of intangible assets connected with our Ortiva and Oversi acquisitions. This is in line with our current estimate that future revenues from video optimization and caching product will be minimal and our decision to minimize future investments in this product line.

Operating expenses during the quarter were $18 million, a $2.5 million reduction year-over-year and similar to the previous quarter. We continue to streamline our operations into 2016 as well. During the fourth quarter, we recorded a tax expense on GAAP basis of $3 million. This amount includes $2.6 million on account of deferred tax assets and prepaid tax expenses write-off. The tax assets write-off was a result of our estimated utilization of this asset is not expected in the foreseeable future. Net income for the quarter was $700,000 or $0.02 per diluted share compared to $3.4 million or $0.10 per diluted share in the same quarter last year.

Now I will return to the full-year results. The revenue for 2015 decreased by 14% to $100.3 million. This came in at the lower end of our guidance, mostly due to FX effects. During the second half of 2015, our booking recovered significantly compared to the first half and we reached a record booking level in the fourth quarter. The strong performance of our booking during the second half enabled us to open 2016 with higher backlog than a year ago. However, it is noted that our backlog includes in part large deals also from new customers that will take longer period of time to convert into revenues.

Gross margin during the year was 75%, in line with our expectations. Our operating expenses for 2015 decreased by 4% year-over-year totaling $74.3 million. The reduction is despite the acquisition of Optenet during the first quarter, which increased our expense base. As a result of our efficiency measure, we were able to return to positive operating margin in the fourth quarter. Net income for the year was about zero compared to $10.5 million during 2014.

Turning to the balance sheet, our cash and cash equivalents reserve total $123 million. During 2015 we generated about $4.4 million from operations. DSO was 86 days, within our typical range of 75 days to 90 days. Upon receiving the Israeli court authorization, we began to buy back our shares. So far we have purchased about 73,000 shares and we continue to be active in the market.

To conclude, while 2015 financial results came below our expectations, we continue to execute in accordance with our strategic plan. We are encouraged by the progress we've made in the security segment and looking forward to productive 2016.

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

Thank you, Shmuel. To summarize, bookings continue to grow significantly, reaching record levels even with the challenges of longer sales cycle. VAS represented over 50% of overall booking, while security and monetization continue to be the prime drivers for our business. Security contributed 10% of 2015 total booking and we finished 2015 with book-to-bill above 1. Moving into 2016, we expect to achieve topline growth as well as improved profitability.

With that, I will open the call to Q&A. Operator?

Thank you. (Operator Instructions)

James Kisner, Jefferies.

Hi, thank you for taking my questions. So I guess, first to just comment on the overall environment and whether you've seen any increased cost from customers recently, obviously the equity markets are showing investor concerns. And what does your outlook for calendar 2016 assume in terms of the spending environment?

So in general, what we see in the market is that the investments done by service providers are moving from investing in solutions that optimize the network into solutions that help them to bring additional value to their end-users and generate additional revenues, of the new trends of revenues from their customer base. We are aligning our offering exactly into that direction with the security offering where they can sell security as a service, they achieved all those things that I mentioned, both increasing the value-added service that they provide and in many cases they increased the ARPU per user. And this is exactly the areas where operators and mobile operators mainly, are looking to spend their money. So overall, it might be that they are overall reducing spend, but in certain segments, they are actually investing more and we are aligning our offering to those areas.

But to be clear, you haven't seen any sort of broad deterioration in the environment or an increased investor caution of late in any of your regions?

So we're seeing less investments on the optimization side, and as I mentioned, we are decreasing our investments in those product lines. On the other side, as I mentioned, we see an increase on the security offerings and on monetization offerings because this is in line with their strategy and there we don't see any decline, in fact we see (inaudible) an increase in investments.

Okay. So thank you on that and so just another one here on gross margins, they were down sequentially. I know inside your -- I guess roughly inside your target range, but that was despite a high proportion of VAS bookings. I am just wondering what drove this sequential decline, are you seeing any incremental pricing pressure, are there any sort of mixed factors that are missing?

Okay. So as we mentioned last third quarter, the result of Q3 was exceptionally high due to one specific deal and I think that the Q4 results more typical within the range we expect. There are some price pressures in certain territories, but I wouldn't say that this is the main parameter for Q4. As I mentioned, Q4 is within the expectation and Q3 was a very high and exceptional in our business model.

Okay. Last one and I'll pass. Just recently, India banned Facebook's Free Basics service, and that was to support their net neutrality policy. Was this a surprise to you and can you comment on your exposure to India, and do you expect any impact to your business in India or other geographies from changes in the regulatory environment?

So regulation in some countries supports us, the use cases that we have and in some cases, it blocks some of the use cases. As you mentioned, India just recently announced the fact that they won't allow Facebook and similar services. However, in our portfolio, there are many services that can help operators. Like for example, in many countries, the regulator will demand different security offering to be offered by the operator. So this service actually goes in line with our offerings. We have projects also (Technical Difficulty) and many other countries, but we have a big variety of use cases, so we are finding diverse use cases per territory based on the regulation in that specific country.

Matt Robison, Wunderlich.

Thanks for taking my question and congrats on the progress of your transition. First of all, if you could comment on how much impact as far as the year-over-year decline and the headwinds you expect for the optimization, how much of that relates to the transition of general web traffic to encryption?

You're right, Matt. One of the reasons why we are seeing decline in the optimization product line is related to the impact of the encrypted web traffic. It reduces the value of (inaudible) specific use cases. We (inaudible) some projects in that domain, but overall we see a decline in the demand for that. One of the reasons is encryption that reduces the value or reduces the amount of savings that we can provide. And I would say also in general operators are less keen to find ways to optimize the network, in general they are, and they did their investments, and they are now looking for ways to deliver additional services (Technical Difficulty) network.

But to answer your specific question, yes that impacted also the demand on the optimization product line. This is one of the reason why we are reducing investments in that area.

For the optimization outlook that you have, is there a regional component where you're expecting more sales, simply because the traffic is not yet encrypted in those regions or is it pretty uniform globally?

We see the fact that there is a bigger proportion of encrypted traffic globally. Usually what makes the business case to buy the optimization solution is the cost of bandwidth even with the encrypted traffic, we still provide a certain level of optimization and it really depends on the cost of bandwidth for that specific country or for that specific operator and that will be the main criteria for whether it makes sense for them to deploy an optimization solution or not.

Does the encryption impact your value-added or your -- I should say more specifically, does it impact your monetization or security sales?

With significantly less expense, in fact on the security side, in some cases, the end-users are enabling or permitting the security solutions to open the encryption in order to (Technical Difficulty) the traffic. And this is a typical way that all the security products are working and we will do the same. So actually with the security product (inaudible) and there are some use cases that there is certain impact, but most of the impact, I would is on the optimization protocol.

Joseph Wolf, Barclays.

Thank you. I had a question, and thank you for the more transparency on some of these bookings, on the VAS pricing model, can you talk about the security? It's mainly a mobile application still and is there any movement on the ability to perhaps allow you some sort of per user fee from some of your customers rather than a flat fee from the operator or service provider?

So let's start with the first part of the question. So we are offering two types of solutions, one we call the network-based security, which includes mainly our (Technical Difficulty) offering and content filtering that protect their network as a network, and we can increase some demand on that part as well. The other part of our security offering is what we call security as the service where we provide web security to the end users. And there the pricing model that we have is based on a fee per subscriber that is using the service. We are moving now from perpetual licenses into term licenses in our model because we see the value on this service and we know that once we win a customer, they will stay with us for longer time. So we are transitioning in that sense. We already have some initial bookings with the term licenses and I believe that going forward we'll continue with that trend.

Thank you. Question on just the new option or the option reprising. You gave some details in the release, but were the employees -- what kind of milestones and who qualified for the reprising of the options, was it simply a question of price of the option rather than -- or seniority with the Company rather than on milestones?

It's not milestone, it's for certain employees in certain territories, they call the option with an exercise price above $7 and we exchange basically those option to no option, we've new investing period which is two years, which will serve also the purpose for retention as well as compensation, which is now almost zero with the high exercise price.

Okay. And then finally, with this new product launch today, and you mentioned that as part of a virtualized platform, can you talk about -- is it available as an appliance and can you talk about the difference, is this enterprise and a service provider model and what's the different -- what's the difference in both of those scenarios in terms of what you're selling and how the progression of taking this new product looks for a customer?

Okay. Service Gateway 9500 is part of our move into the virtualized environment and common platform. We spent the last year and half (inaudible) software into Intel-based platform in order to make it available on different platforms, not only on our hardware. And we have two offerings, one is the pure software virtualized version of our Service Gateway that we can sell in environment which -- on any common framework, and we are offering also the Service Gateway functionality as an appliance and this is what we released today.

So we released today a platform that is an appliance, which is an Intel-based appliance running our Service Gateway functionality on that platform. The advantage of this platform is that it can (Technical Difficulty) expand our addressable market because it's a smaller form factor and allow us to get into additional type of customers, it can be enterprises, it can be cloud operators, very small service providers, any type of customers that -- for them the Service Gateway was a novelty and they are looking for the Service Gateway functionality, but packaged in a smaller form factor. So they are getting now everything packaged in a small form factor and by that we extend our market reach with even greater functionality.

And the initial sales are moving in which direction?

Most of the opportunities that we have for this product line, our customers that they -- at first they bought the AC product line, the NetEnforcer product line, but those product lines were lacking some of the Service Gateway functionality. Today they will get more features, including security capabilities and they will be able to -- we will be able to deploy that in those enterprises or smaller service providers.

(Operator Instructions) Catharine Trebnick, Dougherty and Company.

Thank you and thanks for taking my question. Can we just go back to some of the headwinds and get more detail, especially within the different regions, North America versus EMEA? Just this is persistent that seems for the last 24 months that we've had -- we've had in the last three quarters actually good book-to-bill, but you still have these persistent headwind. So can we have a little bit more maybe detail on, is it CapEx, is at the pivot to NFV with the carriers, et cetera and by region?

So Catherine, just to make sure that we understood correctly, you are asking about the -- what we mentioned (inaudible) impact on our revenues and what we -- did we see that or your question more generally about the --?

Yes. That.

So let me try to address that and you can ask follow-on questions if I'm not covering that correctly. So in general, at the beginning of the year, the first half we talked about the forex impact on our revenue. And since we gave guidance after the second quarter, we expected to see revenue between $100 million to $105 million. And we did see an impact of forex headwinds also on the second half of the year, and doing a calculation from the point of that we gave the guidance through the end of the year, we saw that there was an impact of about $2.5 million and that is contributing to the changes in currency since we gave the guidance based on the actual revenue that we achieved. So I believe that without that impact we have been in the -- exactly on the point, even slightly above the point that we targeted.

In general, I would say, I think your question maybe model that on the more economical impact. We do see that in certain regions the power of buying reduced due to the currency change, and we discussed that in the previous calls, we are adjusting today the expectations for next year based on what we see (Technical Difficulty) so the numbers that we are giving today is based on the power of buying that we are seeing today in the market.

Okay, I get the foreign currency, but are there a different -- there is a shift obviously because you're pivoting to the subscriber base and you're pivoting to your security as a solution and the monetization over optimization. But isn't that also driven by the shift by the big carriers to also move away from traditional architectures to more cloud-based NFV and has that caused you some pains also with some of your larger carrier customers?

Okay. So we do see a shift in what operators -- where operators are willing to spend. Yes, they are looking for solutions that can be deployed on their cloud or on their network and to deliver different services from their network. And we see our security as a service is a perfect fit for that specific trend. They are looking for solution that is a pure software, can be deployed on their cloud and they can deliver through their network security offering, among other offerings that (Technical Difficulty) trying to help them monetize the network.

And this is exactly the area that we are investing. We are seeing less deployments of solutions that are there just to optimize the existing networks, they are looking for more software oriented solutions running in virtualized environment and delivering services that they can monetize and this is exactly what we are doing and this is exactly where we see the growth.

Okay. And one final question. You had announced last quarter that Check Point relationship and I assume that was for more enterprise growth. Can you update us on that relationship?

Yes. So exactly as I've just mentioned, this is exactly a great example of how we are building our solution to help operators deliver services from their network. What we've done with the integration with the Check Point firewall solution that we demonstrated how a traditional enterprise service can run in an NFV environment at the service provider cloud, leveraging our Service Gateway Virtual Edition. We took our Service Gateway Virtual Edition, put on top of that the Check Point firewall that is running in a virtualized environment, and by doing that integration, the firewall functionality is now available as a service to all the customers of that operator. And what we are doing in that part of -- in that solution is that we are helping the -- connecting the Check Point functionality into the infrastructure of the operator connecting it to the policy control, to the OSS, to the NFV infrastructure, and by that align the operator rolling out this specific service in no time.

That was presented in one of the trade shows in Q4 and we are continuing to work together on opportunities in that area.

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

Thank you.