Allot Ltd (ALLT) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Allot [Technologies'] Fourth Quarter and Full-year 2016 Results Conference Call.

All participants are, at present, in listen-only mode.

Following management's formal presentation, instructions will be given for the question-and-answer session.

As a reminder, this conference is being recorded.

You should have all received by now the Company's press release.

If you have not received it, please contact Allot's Investor Relations team at GK Investor and Public Relations at 1-646-688-3559 or view the news section of the Company's website, www.allot.com.

I would now like to hand the call over to Mr. Gavriel Frohwein of GK Investor and Public Relations.

Gavriel, Please go ahead.

Thank you, operator.

I would like to welcome all of you to Allot's fourth quarter and full-year 2016 conference call, and thank Allot's management for hosting this call.

With us today on the call are Mr. Erez Antebi, President and CEO; and Mr. Alberto Sessa, CFO.

Erez will summarize the key highlights of the quarter, end of the year; followed by Alberto, who will review Allot's financial performance over these periods.

We will then open the call for the question-and-answer session.

Before we start, I'd like to point out that this conference call may contain projections or other forward-looking statements regarding future events or the future performance of the Company.

These statements are only predictions and Allot cannot guarantee that they will in fact occur.

Allot does not assume any obligations to update that information.

Actual events or results may differ materially from those projected, including as a result of changing market trends, reduced demand or the competitive nature of the security system industry, as well as other risks identified in the documents filed by the Company with the Securities and Exchange Commission.

And with that, I would like to now hand over the call to Erez.

Erez, please go ahead.

Thank you, Gavriel.

I'd like to welcome all of you to our conference call, and thank you for joining us today.

Having just joined Allot, I've been meeting with people in the Company and bringing myself up to speed.

I can share with you that I am impressed with much of what I see, most notably the quality and professionalism of the people.

I look forward to working with the team and taking the Company to the next level.

As you may know, there have been a number of important changes over the past few months.

Yigal Jacoby, a Co-Founder of Allot, took over as Chairman of the Board as of November 10, 2016.

Alberto Sessa took over as CFO on January 1, and I joined the team as CEO on February 1. These changes provide a refresh at the top and enables Allot to execute on the strategy ahead with renewed vigor and focus.

Andrei Elefant, who will remain with us in a strategic role, succeeded in shifting the Company's strategy toward the security market.

We expect this global growing market to account for an increasing portion of our revenue mix in the coming years.

I believe a significant part of the roll of the new management team will be to improve on the Company's execution and to realize its full potential.

I would like now to share with you some of my initial observations and discuss why I believe Allot is such an interesting company, with great long-term growth potential.

As the telecom world continues to evolve, we need to manage the application layer and communication growth with it.

This means that as pure connectivity is increasingly commoditized, the need to identify the users and their applications at a high level of granularity increases.

As we all know, network intelligence and traffic control are the core of Allot's business for years and these enable us to provide and support a growing number of services that are required by cellular and fixed-line operators, as well as large enterprises.

Our ability to gather real-time network intelligence on very broad data types of terabits per second allows us to offer services such as consumer security on cellular networks, prevention of distributed denial of service attacks, as well as network analytics, traffic shaping, application-based charging and others.

Some of the legacy services such as traffic shaping have not grown, but still make up a significant portion of our revenue.

Other services such as consumer security on cellular networks are projected to grow significantly over the next few years, and this is where I see an important growth engine for Allot.

Allot has developed a platform that encompasses both high capacity real-time network intelligence and all the applications I mentioned in a single integrated product.

This capability and product line are an excellent fit for both the current and developing needs of the telecom market.

Allot enjoys a large global installed base with thousands of customers, including hundreds of operators, some of which are top tier.

Additionally, our strategic partnership with McAfee, a leading global networking and network security company with whom we are building a joint product offering, presents a significant opportunity.

I believe that the combination of the right products and technology focused on the right markets, together with our large customer base and the people in the Company, are the foundation on which we will build Allot's future growth.

In the coming quarters, I hope to further elaborate on my long-term vision and execution plans for Allot, with a goal towards solid growth by 2018.

Now, let's move to the results of the fourth quarter of last year.

The Company reported fourth quarter revenues slightly ahead of guidance at $23.5 million and operating income of $1.8 million for the quarter.

For the full year of 2016, revenues were $90.5 million and operating income was $0.4 million.

Value-added services were 42% of booking during Q4, with security representing 42% of total value-added services bookings.

The number of large deals in the fourth quarter was 19; 10 of them came from mobile operators, seven from fixed-line service providers, and two from a cloud operator.

Out of the total, two deals were from new customers.

Five of these deals were over $1 million each.

Looking ahead, we anticipate revenues in the $80 million to $84 million range for 2017, with the second half of 2017 stronger than the first half.

My goal for 2017 is to bring the book-to-bill ratio to above 1 and position the Company for a return to solid growth in 2018.

I further expect that quarterly operating expenses in 2017 will be at a slightly higher average rate than in the fourth quarter of 2016, while total OpEx for 2017 should be below the OpEx for 2016.

We intend to closely monitor these expenses going forward.

And now, Alberto will take you through the financials, and then I will sum up.

Thank you, Erez.

I'm also pleased to be joining Allot and look forward to working together with the team to take Allot to the next level.

I'd like to note that unless otherwise stated, I will be referring to 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 activities, amortization of certain intangible assets, and changes in deferred tax.

Revenues for Q4 2016 were $23.5 million.

This compares to $25.7 million in Q4 last year.

For the full 2016, revenues were $90.5 million compared to $100.3 million in 2015.

The geographic breakdown of revenues was as follows: Americas at $4.1 million, or 18% of revenues; EMEA at $11.8 million, or 50% of revenues; and Asia Pacific with $7.6 million, or 32% of revenues.

Product revenues for the quarter accounted for 61% of revenues while service revenue were 39%.

This compares to 60% and 40% split, respectively, in Q4 2015.

Book-to-bill ratio in the quarter was below 1. Gross margin for the quarter was 71% of revenue as compared to 74% for the same quarter last year, and 70% in Q3 2016.

I'd like to point out that gross margin fluctuates on a quarterly basis depending on the mix.

Operating expenses for the quarter were $14.8 million compared with $18 million in the fourth quarter last year.

The decrease in OpEx was mainly due to the headcount related expenses, resulting from the cost reduction measures implemented in the middle of 2016.

Operating income for the quarter was $1.8 million compared to $900,000 in Q4 2015.

Net profit for the quarter was $1.2 million, or $0.03 per share compared to $0.7 million, or $0.02 per share in the same quarter of 2015.

For the year, net loss was $0.73 million, or [$0.02] per share compared with a loss of $0.13 million, or $0.00 per share last year.

Turning to the balance sheet, cash reserves including cash, cash equivalents and investments totaled $113.7 million, up $2.8 million compared to the previous quarter.

During the quarter, we recorded positive operating cash flow of $4.2 million.

DSO was 95 days, down 23 days from the previous quarter.

And now, Erez will sum up, and we will open the call for questions.

Thank you, Alberto.

I see Allot as a company with much potential, and I believe that it will establish itself as an important player in the communication security market in the coming years.

As I said before, I believe the combination Allot has, of the right products and technology, the right people, and the large customer base, is a strong foundation on which we can build Allot's growth in 2018 and beyond.

I'd like to open the call for questions now.

(Operator Instructions) James Kisner, Jefferies.

Welcome, Erez and Alberto, to the Company.

I guess I just want to start with you the comments about driving book-to-bill of greater than 1 this year.

I'm just curious kind of what gives you the confidence you can achieve that.

Are there early indications that this is achievable, or is there a lot of work that must be done to fill the sales funnel?

Are there any particular geographies where you expect that recovery to come from?

Thanks.

Well, as you can appreciate, from the time we're with the Company, we're still in the learning curve.

But we have spent the time, as I said, talking to people, going through the funnel, understanding what the opportunities are, who the customers are.

And as a result of that, I think that although we have a lot of work ahead of us definitely in terms of the execution, like I said, I think that we can achieve this target.

So, I guess a couple things.

First of all, traffic shaping, can you give us again an update of what proportion of the business you think that is?

I assume that refers to optimization with prior disclosures around optimization business.

And then, just related to the net neutrality, so in the United States, we're seeing some really big changes to the FCC in terms of leadership with the incoming Trump administration.

I was just wondering if there's any early indications of new interest from US customers in optimization or other applications as a result of changes to the government here?

Thanks.

Unfortunately, I don't know to address your question on traffic shaping specifically, how much it was and so on.

We can certainly take a note and try and get back to you on that.

With regard to the expected changes in net neutrality in the US, we're obviously monitoring it closely.

As far as I understand, it's not done yet.

It's expected, but it's not done yet.

And this could perhaps be an opportunity, but I don't really have a solid view right now of how large or small of an impact this may be.

Okay.

That helps.

Just one last one, just a general question on just your new revenue management team, I guess I'm curious on, perhaps -- I know you've only been there a little while, so -- any early thoughts on new areas of focus or major changes in direction or just new areas of emphasis from your perspective versus prior leadership?

Thanks, and I'll pass it.

No, I think from what I've seen, I think that the emphasis is on going into the security market and providing network-based security to cellular operators and, hopefully, also to fixed-line operators and so on.

I think that's an excellent direction.

I think there's -- I mean we know that Vodafone is doing this very successfully.

They have 15 million paying customers today that are paying for this service in, I think, quite a few countries, more than 10 countries that they're operating this.

So, we've announced that we've done this here in Israel with Pelephone and there are other operators that are looking at this.

I think this is the right direction.

This is something that the operators should be able to materialize on.

This is something we're seeing penetration rates with somebody like Vodafone, that's doing this.

Penetration rates are in the 10s of percent, depending on the country.

So, it's something that is required, it's out there.

Allot has the right product for it, and I think this is a very good direction we should continue on.

And we have some challenges ahead of us, basically I think on execution and we'll work hard on it.

I think we'll be successful.

Joseph Wolf, Barclays.

Thank you.

And, I guess, welcome to everybody new.

I guess just as a sort of a follow-on, as you think about the kinds of data that you've -- that the prior management teams of Allot have provided to investors, are you thinking at all about providing a little bit more transparency, especially as you look at some of these newer business line opportunities?

And in line with that, could you give us a little bit more granularity on the other things that are within the VAS?

You said it was 42% of bookings and security was 42%.

What else is going on in the value-added services of interest right now?

We're definitely going to look at -- take a fresh look at what exactly we're reporting and what we do not report, and we may change something in the next quarter.

Right now, we've simply stuck to the same format -- same reporting format and the same metrics that were provided by previous management, and those are the details that we have right now.

I'm not sure I can give you much more than that at this point, but we'll be taking a fresh look over the next couple of months on the metrics that we think are more valuable to the investment and analyst communities, and we will be talking about that in the next conference call.

But can you give us any granularity on the value-added services?

I think you used to talk about -- or when you say security, is that the -- can you break down parental control or anything else that you may be seeing some interest in right now?

I can't provide granularity on it, and I'm not sure that we actually track it in the Company.

Forgive me if I'm not that knowledgeable on exactly what we're tracking right now in the Company or not.

I'm not sure that we actually track dollars on each and every use case, but -- and I can tell you that I know that in different operators they have different use cases; some of them are more interested in parental control and some of them are more interested in other types of security, but I don't have any further granularity that I can really provide at this point.

Okay.

And just final question, as you think about gross margin, I don't want to push you into giving guidance for the year and where the breakeven is right now.

You generated cash flow from operations on around that -- on the $23.5 million number.

What should we be thinking about in terms of mix, margin and breakeven as we think about 2017 as sort of a rebuilding year?

This is Alberto.

Regarding the gross margin, as I said, I mean, it fluctuates very much depending on the deal mix.

I mean, right now, we are looking to that.

We do believe that, in 2017, we will be able to be approximately -- I mean, what we give this year, what we reach for this year.

I mean, we will have to look much further on that.

I mean, it's very too early.

It's much too early, I mean, for us to give any guidance regarding gross margin 2017.

Matt Robinson, Wunderlich.

Can you comment on the backlog level exiting 2016 versus the level of -- you had at exiting 2015?

Yes.

I mean, as you can see, I mean, the backlog exiting 2016, as you can notice, is much lower than 2015, and this was mainly due for a very large deal that was booked actually in 2015 and was inside of backlog in -- at the end of 2015, which does not appear any more in 2016.

Okay.

And what gives you your sense of order level for 2017?

Again, I think I addressed it, but maybe I wasn't clear.

We've spent the time not just talking to people internally in the company, we spent a lot of time with the sales force -- with the sales people, sorry, going through the various accounts, understanding what's in the funnel, what is close to closing, what is not, where are the large opportunities.

We've looked through the numbers on this.

We've made our estimates; and based on that, we've reached our estimates on where 2017 should end up.

What was capital spending in 2016?

Where do you expect it to go in 2017?

And where is headcount, where do you expect that to go?

Capital spending for -- in 2016 was approximately $1.5 million, $1.6 million.

We do not expect any substantial change looking forward in 2017.

And on the headcount?

As you know, I'm sure, in 2016, there was -- sometime during the year, there was -- previous management did a cost cutting effort that resulted in reduction of headcount.

I do not expect, right now, that the headcount itself will materially change in 2017.

Because, like I said, we intend to keep a very close watch on our expenses so that the operating expenses for the Company in 2017 will be lower than those in 2016.

George Iwanyc, Oppenheimer.

When you look at your visibility into 2017, how much of the year-over-year pressures in March do you expect and potentially another decline in the June quarter?

And then, can you also give us an update on the pricing environment?

I think I'll make two comments maybe on that.

One is that, again -- at risk of being repetitive, we are still learning of it and getting a better feel for what's going on, what will go on.

I don't think that we can give you any kind of real color on a quarter-by-quarter basis.

I think the quarters will fluctuate based on the specific timing of any specific deal and the revenue recognition of those specific deals, especially in the large [one with] operators.

I do, however, expect based again on the funnel review and going through where the opportunities are and so on, I do expect that the second half will be better than the first half.

Okay.

And just on the current pricing environment, is it relatively stable?

I don't know to say anything different, but as you can understand, I don't really have much of a historic perspective right now.

So, I have not heard anything to the contrary.

All right.

And just on the McAfee partnership, how is that integration going and just the general feedback you're getting from McAfee as well as customers?

Again, I've had limited visibility to it.

I've met with McAfee, but I've not yet met with customers on it.

I think the integration here is going well, it's going per plan, and we're continuing with that.

And, I think, McAfee is fully committed to this and they're investing the resources and efforts that are required, and they have very high hopes for it and so do I.

Marc Silk, Silk Investment Advertisers.

Thank you for taking my questions, most have been answered.

But, Erez, my question is kind of can you maybe [expand and share] your management style just so we can see how you do going forward?

And how did you come to the Company, did the Board search you out?

Just a little bit of background as far as that's concerned would be appreciated.

Okay.

How I came to Company.

Yes, the Board had a search committee and they interviewed various candidates and they decided to choose me.

My management style that's -- I'm not quite sure how to answer that, but I tend, I think, to be very hands on.

I tend to spend a lot of time with the customers and I tend to be very open.

I hope to do the same also with investors and shareholders in the Company.

And lastly, I know you've expressed a prediction as far as where expenses are going to go.

Can you -- you've been there not that long.

I mean, could there be a shot three months from now, you basically are able to say, well, there is a layer of management of this and that that doesn't make sense.

So will you -- will it not shock us if we see some more cuts as far as overhead line up with your revenues going forward?

I apologize, I'm not sure what the question was.

Again, you've only been there for a month or so and you've talked about expenses, but I think you need to be there longer.

Could we expect you -- as time goes on, you might see some inefficiencies or maybe some dead weight there, because as your revenues have come down, it's always good to see that you can continue to generate, let's just say, profitability by making sure your expenses line up with your revenues before the revenue start taking off again.

So meaning, could there be some more open areas that you could look to see where you could cut some overhead?

Look, I think anything could be.

But to be honest, I think previous management did a very serious cost-cutting effort in 2016.

I do not see any very significant redundant layers of management or things like that in the Company right now.

And I would -- like I said, Alberto and I will continue to take a very serious look at the expenses.

We may decide that we need to shift expenses, change them, do some other things.

It's too early for me to make any serious comment on this at this point.

And just to be accurate, I have not been on board for nearly a month.

I have started last Wednesday.

So, we're quite new.

And last question, I know everyone is focusing on your business strategy going forward back to net neutrality.

So, if net neutrality ever gets reversed in the United States, as an investment thesis, now deep packet inspection instead of being like a middling technology, this could really turn out to be a growth driver for Allot, would that be accurate?

There is a possibility of that.

But before I can responsibly answer that, yes that's a possibility, I would have to look at things like, okay, what do the operators currently have, what -- should net neutrality be reversed, what exactly will be the regulations in place then?

How long will it take the operators to adapt to them?

What will be the schedule?

Since I have not looked at all these and the reversal has not yet happened, I don't feel it will be responsible for me to say something definitive in this direction at this point.

Alex Henderson, Needham & Company.

Yes, going back to the headcount question from earlier, what was the ending headcount?

I don't think that we are providing that number.

You've historically given it, it was 450 last quarter, is it flat?

It's about 450, it's around that area.

Okay, thanks.

Second, can you give us some sense of what you think is going to happen on the tax line?

It looks like you're going to be producing losses over most of the quarters.

Should we be using a couple hundred thousand dollars in the tax line based on your international exposure, or how do we think about that?

Okay.

Most of the tax that you can see are withholding tax, which are due to the fact that we work with many countries in which we are not able to recover.

And one of the things that I will take it for myself is actually to look to the tax regime and try to minimize those without the tax as much as we can.

Is it reasonable to think it's in the $1 million to $1.5 million range, what we need to hold out?

It's really too early to say that.

I mean, I will have to learn what is the structure of the Company and what are the opportunities that we have to reduce these numbers.

Certainly, a lot of work is needed there.

I'm not in a position to say right now what is reasonable and not reasonable to forecast.

All right.

So, I realize that you guys have a lot of constraints on how you want to talk about the guide, but it does look like you're talking sub $20 million numbers for the first half of the year, particularly if you're at the lower end of the range.

And it looks like you're probably down year-over-year on the top line in each of the four quarters, as well as producing operating losses on a non-GAAP basis at least three out of four of the quarters.

Is that a reasonable way to think about the year at this point?

And if so, do you expect to burn cash over the course of the year?

Look, on the overall level, we said that 2017 is going to be down versus 2016, and the second half is going to be stronger than the first half.

So, I think the numbers turn out in the ballpark no matter what -- no matter how you look at it.

I think this is a year where we expect to take a very, very serious look at both our clients and our operating expense and how we execute, and then really grow the Company into 2018, and that's what we plan to do.

Beyond that, I'm afraid that, really at this point, we can't give you much more guidance than that, because that's really the level at which we can understand it right now.

All right.

And one last question, obviously M&A is a potentiality for the Company.

How do you think about M&A in terms of the willingness to take dilution and how much of your cash would you be willing to engage in to change the Company's architecture based off of an M&A move?

You've got a very high percentage of your costs going into R&D and the cash balances is holding the stock up.

So, how do we think about those two elements?

We're definitely looking at the cash and what we can do with the cash for the Company.

We don't have any specific plans right now, and that's really all I can say at this point.

Cobb Sadler, Catamount Advisors.

Most questions have been answered, but just [look on] the cash balance and you got $150 million cash.

Why wouldn't you just buyback $60 million -- do $60 million buyback stock.

If you really think you can grow the Company, produce increased operating income, I mean, why wouldn't you just buy a lot of stock back, it looks pretty cheap.

Thanks.

As you know, there was a buyback program that was approved by the Board and has expired.

And, like I said, we're aware that we have the cash, of course, and we're looking at what to do with it.

And that's one of the options and that will have to be looked at and decided.

Okay.

All right.

It sounds good.

And it just seems that if you do believe in your strategy, if you do believe you can grow the Company, and you do believe you can increase operating incomes meaningfully, like how much cheaper is the stock going to get, why would you wait, why wouldn't you do it now?

That would just be my question.

Thanks a lot.

Okay.

Thank you.

Thank you.

(Operator Instructions) There are no further questions at this time.

Before I ask Mr. Antebi to ahead with his closing statement, I would like to remind participants that replay of this call is scheduled to begin in two hours.

In the US, please call 1-888-269-0005.

In the UK, please call 0-800-917-1246.

In Israel, please call 03-925-5921.

Internationally, please call 972-3925-5921.

Mr. Antebi, would you like to make a concluding statement?

Yes.

I just want to thank everybody for joining the call and for your interest in Allot, and I look forward to talking to you in the next conference calls and hopefully meeting, at least, some of you over the next few months.

Thank you very much.

Thank you.

This concludes the Allot [Technologies'] fourth quarter 2016 results conference call.

Thank you for your participation, you may go ahead and disconnect.