Allot Ltd (ALLT) 2016 Q1 法說會逐字稿

Good day and welcome to the Q1 2016 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 first quarter 2016 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 defined as GAAP net income after including deferred revenues related to the fair value adjustments resulting from purchase accounting and excluding stock-based compensation expenses, amortization of our provision related intangible assets, deferred tax asset update, and acquisition-related expenses. 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 during 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 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 as 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 US 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 results and share with you some of the achievements of the first quarter of 2016. Before going into the detail of the quarter, I just want to give you an overview of our ongoing strategy and plan. We are executing on our long-term plan to leverage our growth engine, the security services, which continues to validate itself as the growing sector in our industry. On the product front, we continue to invest in our virtualized product line. Earlier in the quarter we announced the launch of our SG-9500, a service delivery platform with switch functionality packaged on a common off-the-shelf platform and efficient and flowing footprint of lines. The SG-9500 platform enable us to expand our addressable market and offer service gateway capabilities to every network.

While we are all aware of the challenges that the communication service providers face today, these challenges provide Allot with an opportunity to enable our customers to deliver innovative services increasing their competitive advantage and create greater value to their customer offerings. After I complete my part, I will hand over the call to CFO, Shmuel Arvatz, for a short review of our financial performance for the quarter. Now, for the quarter's results. Revenue for the first quarter of 2016 came in at $23 million, down 22% year-over-year and 10% on a sequential basis. While these results are somewhat below expectations, they do reflect the breakdown we discussed in the previous call of a slower first half and then picking up as they move into the year. Important to remember, we are still dependent on large projects and while we increased our backlog over the last year, we see slower conversion into revenues.

We expect our strong backlog and funnel to kick in and bring us back to our growth trajectory for the rest of the year. With that in mind, we reiterate our revenue guidance for 2016 and expect it to range between $102 million to $108 million. Gross margin came in at 70%, which is below our average and reflects a greater portion of platform in the revenue mix this quarter. More specifically, it represents two large projects in which we recognized a big chunk of the hardware portion during the quarter. Based on the product mix we see in our backlog and in the opportunities ahead of us, we anticipate gross margin to trend higher during the year. Cash reserves at the end of the quarter totaled $120.7 million with a negative cash flow of $1.4 million from operations. Now, let's look at our bookings. Following record bookings in Q4, this quarter we recorded lower booking resulting in book-to-bill below 1 as timing of large orders impacts this number.

Note that both for the last 6 months and for the last 12 months period, book-to-bill is above 1. This is in line with the lumpiness in booking volatility we see in the industry. As I mentioned, Q1 bookings are often lower than the other quarters in the year, but I do want to point out that this quarter they were higher than Q1 last year. In the value-added services business, VAS reached 30% of bookings during Q1 with security taking the lion's share. To remind you, our VAS category is divided into four groups or categories; security, personalization, analytics, and optimization. To clarify, what we now call personalization includes our monetization category and engagement tools, which facilitates personalized services. The security segment alone reached 62% of VAS bookings and personalization accounted for 30%. Last quarter we introduced a new method to measure and analyze our bookings.

We allocated the dollar value of each order to the main catalyst that initiated the transaction. This analysis assesses product orders only. Based on this new classification, security bookings for the quarter were 48% of total product bookings compared to 30% in all of 2015. As security represents our main growth opportunity, we continue to invest in this segment both in R&D and sales leveraging our core technology and enhancing the offering. Large deals reached 11 in total; 6 of which came from mobile operators, 4 from fixed line service providers, and 1 from a cloud operator. On the OpEx side, we continue to keep a close watch and maintain tight control on expenses while investing in our growth engine. Going forward, we expect to see these levels throughout the year.

Now, for some product updates. With the introduction of the SG-9500, we are capable of providing services including visibility, security, and personalized broadband experience to millions of users. While it [transmits] in a common off-the-shelf platform, it does not compromise carrier grade requirement and it delivers industry leading throughput, resiliency, and additional carrier grade functions. As I mentioned, the SG-9500 extends proven service gateway capabilities to every network thereby increasing our addressable market, which offers us growth opportunities with enterprises and cloud operators. We started shipping SG-9500 towards the end of Q1 and have already shipped to six customers. In addition, last week we launched the Allot Secure Dome, which enabled mobile service providers to extend security beyond network boundaries. This extends our security and service platform capabilities.

The products, WebSafe Personal and WebSafe Business, now protects broadband users from malware, ransomware, and other online security threats anywhere anytime. It protects users as they cross any mobile, fixed, or WiFi network. The Allot Secure Dome is a significant addition to our security portfolio enabling service providers to increase customer loyalty and engagement by providing end user a consistently secured experience over any network. Moving on to 2016 guidance. Although the year started off slower than expected, backlog remains strong and our funnel includes interesting growth opportunities in our growing sector, the security. We reiterate revenue guidance and expect revenue to be in the range of $102 million to $108 million. We anticipate security and personalization segments to continue to lead the growth. And finally, we expect second half revenues to be higher than the first half.

Before summing up, I will turn the call over to Shmuel to review our financial results.

Thank you, Andrei. As Andrei mentioned, revenue came in below our expectations. However, we are encouraged by the fact that a greater portion of our business is generated by our security solutions. During the quarter, we made good progress in the security segment as well as with launching new innovative solutions that we believe will enable us to increase our addressable market. Before I begin reviewing the financial results for the quarter, I'd like to inform everyone that on this call unless otherwise noted I would refer entirely to the non-GAAP financial measures when discussing operational results. Non-GAAP financial measures differ in certain respects from Generally Accepted Accounting Principles and exclude share-based compensation expenses, amortization of acquisition related intangible assets, deferred tax asset changes, and acquisition related expenses.

Turning to our first quarter results. Revenues for the first quarter were $23 million, down 10% sequentially and down 22% year-over-year. Our book-to-bill ratio this quarter was below 1 resulting mostly from a slow start to the year in our telco related business. As Andrei mentioned, it is worth noting that in the first quarter of 2016 we had a record booking and measuring the booking over the last 6 or 12 months, our book-to-bill ratio was above 1 for each of these periods. The geographical breakdown of our revenues was as follows. EMEA $12.2 million or 53% of revenues, APAC $7.2 million or 31% of revenues, and Americas $3.6 million or 16% of revenues. Product revenue for the quarter accounted for 63% of total revenues while support and service revenues accounted for 37%. This is compared to a 68%, 32% mix in the first quarter of 2015.

Moving on. Gross margin for the quarter was 70% of revenues compared to 76% in the first quarter of 2015 and 74% in the previous quarter. The reduction in gross margin was mainly attributable to lower gross margin generated by two large projects due to higher content of hardware and timing of recognition. We expect to improve our gross margin in the upcoming quarters. Operating expenses during the quarter were $18.1 million, similar with the previous quarter and 7% down year-over-year. We expect this level of quarterly OpEx to prevail throughout 2016. Net loss for the quarter was $1.8 million or $0.06 per diluted share compared to net income of $2.9 million or $0.09 per diluted share in the same quarter last year.

Turning to the balance sheet. Our cash and cash equivalents totaled $120.7 million. During the first quarter, we recorded a negative operating cash flow of $1.4 million. DSO was 91 days, which is in line with our typical range. We continued to execute on our buyback program. During the first quarter, we acquired approximately 225,000 shares for a total of approximately $1 million. We plan to continue with the buyback program in line with our initial plan.

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

Thank you, Shmuel. To wrap up, our security strategy is proving itself both in the interest we are seeing in the market and in the segment's growing share of our business. We continue to maintain tight control of OpEx while shifting resources to our growth engine. SG-9500 sales are picking up as we anticipated enabling us to deliver certain gateway functions into more networks. And lastly, we continue to execute on our 2016 plan and reiterate our guidance.

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

Thank you. (Operator Instructions). James Kisner, Jefferies.

So you said that you saw a slower turning backlog into orders. Do you have insight into why that slowness occurred and was the slowness more pronounced in any particular region versus your expectations?

Referring to the slower conversion of our bookings into revenues, we talked about it also in the previous calls. We have few large projects and one particularly large in our backlog from new customers that we won last year and the nature of these projects is that the first initial deployment can take 6 to 12 months and we are in line with the progress in this project. We anticipated that this project will take some time to turn into revenue, but as we progressed during the quarter it seems that we are on track with the progress in this project and as we said, we expect that this project will materialize in the next quarter. In general I would say that over the last year, we are seeing that executing the projects take longer mainly with the large projects and mainly with new customers. In most of the cases, it's mainly because of the internal resources in the carrier's side.

On gross margin, I appreciate your comments there. But I just want to verify that pricing isn't having any impact or did you say that the hardware recognition is the primary factor, again I want to verify that pricing has really changed. And I guess I'm also just wondering that given that you're recognizing a lot of hardware revenue upfront, does that mean you might see a quarter where you might see above average gross margin remaining softer as these deals are recognized without hardware content?

We expect to see the gross margin increase. So, this low level from our point of view is a point of event. In general the main reason for that, as I said, it's because of a greater portion of how we recognize in this quarter and in the backlog the average that we had is higher than that of course and we attribute that mainly to this factor. In general I would say even if you look back into last year, you'll see that gross margin changes based on the product mix in a particular quarter. So I don't think that you can derive from this particular quarter a trend. Overall I would say in a high level we see two main trends on the gross margin. One is the fact that we sell bigger pieces or bigger part of our revenues coming from software, which increases the gross margins. But on the other hand, we are involved in larger projects and we are selling more services, which typically has a lower gross margin. So, there are two trends working here and on a very high level. Specifically for this quarter, it's a very unique event of the product mix.

Just a last follow-up on that. Do you still think that your full-year gross margin will be in that 74% to 75% range? I believe that was the prior guidance, but would service have any impact at all? Thanks and I'll pass it.

We are not giving guidance on the gross margin. What I can say is that we expect it to be higher in the next quarters compared to this quarter.

Okay. Thank you.

Joseph Wolf, Barclays.

It's Brian Zarahn on for Joe. Just a quick question on the bigger picture and about your expectations on customer spending. Has that changed at all since the start of the year and then are there any regions that you're seeing particular strength or weakness that's worth noting?

In the high level we don't see any significant change in the environment and I think that saying based on one quarter whether there is a significant change, I think it's too early to judge. We had our best quarter in bookings in Q4 so naturally we could get in more orders in Q4 and probably it's a matter of timing between the quarters. So, I wouldn't take the low booking in the first quarter as an indication of something that's happened in the industry. In terms of geographies, I would say that EMEA continues to be a strong region for us and continues to execute well; both on revenues and on bookings, we had a strong quarter there. We had a fairly good or okay quarter in APAC and we had a slower deleveraged quarter in the Americas. We do see opportunities in the Americas, mainly we sell security, but it hasn't yet matured into significant orders.

And then just a last question on cash. How should we think about potential for M&A versus discontinuing with the buyback and then what level of cash are you comfortable sort of running the Company at? Thanks.

In order to run the Company in all environments, I believe that we need between $40 million to $60 million and we are doing the buyback program as we discussed. On the M&A front, we are very cautious about that. We do look into different opportunities, but we are patient to identify a good opportunity. I believe that the acquisition that we did last year contributes very nicely to our business and to our strategy and if we identify a potential acquisition that can serve our strategy, we have the cash to do that, but we are not in a hurry to do that.

Thanks, guys.

Matt Robison, Wunderlich.

How much backlog do you have?

I would say that the backlog that we have today compared to the same point last year is significantly higher. We are not disclosing the exact number, but we do have a nice backlog based on the fact that our book-to-bill over the last 12 months and also 6 months was above 1 and we feel comfortable with the guidance that we provided.

Is your backlog more than two quarters of revenue at the first quarter rate?

Again we're not giving indications on the backlog. I would again say that it's higher, even significantly higher than it was at the same point last year.

The European business dropped more than overall revenue, your largest customer are they no longer purchasing your products?

Actually we had a very good quarter with our key customers and we had very nice orders coming from them. And overall, we had a good quarter on the booking side in EMEA so I don't see a slowdown there.

Okay. Shmuel, what was the non-GAAP adjustment for other income about?

Other income? What do you mean?

Just what I said.

The main adjustment in the non-GAAP is the stock-based compensation, amortization of intangible assets, and adjustment for the deferred tax this quarter.

Thanks.

George Iwanyc, Oppenheimer.

Just looking at the bookings questions again. Given the book-to-bill below 1 for the last quarter, do you believe that your visibility into order trends allows you to have a bookings level higher exiting this year than you did coming into the year?

You mean whether our bookings in this year will be higher compared to last year?

Yes. Exiting 2016 going into 2017, do you believe it's possible that your bookings level will continue to increase your backlog level?

Yes, we believe that it can increase. We said that bookings in Q1 this year compared to Q1 last year, we had high bookings this year. It's still early to judge whether we will be above the number, but we definitely believe that we can be there.

In which areas do you think you have the most confidence in building momentum this year?

I believe that the security segment we see very nice traction, we are involved in multiple processes around that so we see a lot of interest on that front. These processes take time with the carriers to mature to orders and revenues. But in terms of interest, we do see that the interest from the security services that we offer today and I believe that most of the growth will come from there and from the personalization of services that we deliver. These are the two main areas where we definitely expect to see growth this year.

And looking at your OpEx level, how should we look at that ramping through the rest of the year?

I believe that over the year we expect to see more or less the same level that you see today. This is our plan for the rest of the year. We believe that we have to support our growth engine and build-up our bookings and revenues.

Okay. And just one last question. Was there much of an FX impact during the quarter?

The FX year-over-year on revenue was about zero and in the OpEx, it was positive about $0.5 million year-over-year.

Okay. Thank you very much.

(Operator Instructions) As we have no further questions, that will conclude today's call. Thank you for your participation.