Allot Ltd (ALLT) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Allot's fourth quarter 2017 results conference call.

(Operator Instructions) 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 viewed in the News section of the company's website at www.allot.com.

I would now like to hand over the call to Mr. Gavriel Frohwein of GK Investor Relations, Mr. Frohwein, would you like to begin?

Thank you, operator.

Welcome to Allot's fourth quarter and full-year 2017 conference call.

I would like to -- I'd like to welcome all of you to the conference call, and thank Allot's management for hosting this call.

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

Erez will summarize the key highlights followed by Alberto, who will review Allot's financial performance of the quarter.

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

Before we start, I'd like 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 obligation to update that information.

Actual events or results may differ materially from those projected, including as a result of changing market trends, reduced demand and 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 now hand -- I would like to now hand over the call to Erez.

Erez, please go ahead.

Thank you, Gavriel.

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

In the fourth quarter of 2017, we again saw our revenues grow compared to the preceding quarter and for the fourth quarter in a row, our book-to-bill ratio was larger than 1.

2017 was a transition year for Allot.

During the year, we made quite a few changes at the company.

We refocused the company and are rapidly transitioning to become a security-focused company.

We made significant changes to the management team.

We restructured the sales and customer success divisions into customer-facing units or CFUs.

We modified and approved many of our internal processes.

We restructured some of our operations and shut down some offices and we replaced Allot's custom hardware with standard commercial off-the-shelf or COTS hardware in many of our product lines.

This is part of our transition to become a more software-centric company.

While we continue to improve on our execution and operations, the result of what we did are starting to be seen.

We grew revenues quarter-over-quarter.

We met our revenue targets for the full year 2017.

We grew our backlog and we grew over revenues from security by over 40%.

I am convinced that the changes made during 2017 built a solid base for Allot to return to growth and profitability.

I would like to take a step back and examine the relevant security market as we see it.

Think of the mass market of people, consumers and small businesses constantly accessing the Internet.

We access the Internet all the time.

We access the Internet over a wide range of devices be it our mobile phones, computers or tablets.

We have an ever-growing number of IoT devices in our home, cameras, smart TVs, loudspeakers and more accessing the Internet by themselves.

We know the threats on the Internet just keep growing.

More malware, more fishing attempts to steal our information, more ransoms to steal our money and more offensive content we would like to protect our children from.

Who takes responsibility to protect us from this?

Well, actually, it is the responsibility of each and every one of us.

While in our businesses, we have a professional IT department to protect us.

At home, we are individually responsible.

But we, as individual consumers, don't have the knowledge to do this.

We don't know which way is better, what security service is good or how to make sure the camera in our kids room doesn't stream the pictures to someone else.

I believe that the communication service providers or CSPs have a big role to play in filling this void.

Studies have shown that consumers look at the CSP to protect their access and that many of them are willing to pay the CSP 10% or more in addition to client activity charges to do so.

CSPs are starting to realize that providing secure Internet access rather than plain Internet access can bring them significant incremental revenue with very high penetration rates and very high customer satisfaction.

There is a unique potential for CSPs to start offering "peace of mind" with secured connectivity services to the mass market.

Secure access anywhere, anytime from any device.

This is a huge revenue potential.

CSP access revenues in the 18 top ARPU countries alone for mobile devices alone top $270 billion.

If we include consumer fixed broadband access in other countries, the access revenues of high ARPU customers are at least double.

Market studies show consumers are willing to pay 5% to 10% extra for security, leading to a market opportunity that may be worth $40 billion annually for the CSPs.

While some CSPs like Vodafone, Telefónica and others have already launched or are about to launch such services, we believe many more will join and this market opportunity will grow rapidly over the next few years.

Allot is the leading provider of telco-grade, network-based security products for CSPs and we plan to be the leading provider of security technology and products that allow operators to provide secure connections to the mass market.

We believe that Allot can get at least 10% to 15% of the additional revenues the CSPs can make on security, which means we are looking at a total addressable market of $4 billion to $6 billion a year for Allot.

This is a much larger potential than exist in the visibility and control market, which is still currently the majority of our revenues.

As I mentioned before, in this large and growing segment, Allot is the clear technology leader.

With this vision in mind, we have built our Allot Secure platform.

Allot Secure is a unified security service platform that enables CSPs to secure the connectivity of their customers anywhere, anytime and on any device.

It is designed for mobile, fixed and converged communication service providers as well as for secure IoT connectivity.

Like all good security measures, it is built with different layers of security, each protecting a different aspect.

All elements work together under a single management layer that allows the CSP to offer similar security to the customer wherever they are under -- all under the CSP brand and control.

This platform has 5 main components: Network Secure, previously known as WebSafe Personal or WSB.

This component delivers the network-based security layer.

Currently, Network Secure is focused on mobile networks but we are expanding it to fixed networks as well.

This is the component that is used by Vodafone and Telefónica and provides security while on the CSP network.

Endpoint secure, this component is based on client endpoint security for mobile devices or computers.

We do not intend to develop an endpoint client software but rather partner with others who are experts in this.

This is what we did in our agreement with McAfee.

This layer of security provides security for customers off net for example when they connect to the Internet, via public Wi-Fi.

Home secure.

This component provides security for consumers at home, protecting home IoT devices, smart appliances and computers in the home.

It is based on security software that will reside in the home gateway.

Netonomy is a company that develops such security software and the acquisition of Netonomy that we announced in January will form the basis for our home secure component.

IoT secure is a network-based solution that is positioned primarily for mobile operators to offer IoT security to the business customers such as connected cars, vending machine, industrial uses et cetera.

DDoS secure is a component that protects the CSP network and the end-user from creating or receiving DDoS attacks.

It resides in the core part of the operator's network.

Comments of these components, Allot will provide a unified security service management system that provides central management for all the platform components.

One of the key advantages of Allot Secure is our customer engagement tools.

Using these tools, we show the consumer that he is protected and periodically report on what malware or other problems we successfully defended against.

This shows the consumer the value he or she are getting for the extra service payment and helps drive penetration and increase customer loyalty.

We believe that these tools and close customer engagement are a major contributor to achieving current security service subscription rates of up to 50% and high NPS scores of 28 and more.

I would like now to add some details about the rationale of the Netonomy acquisition that was announced in January.

Netonomy develops an innovative security software app that can be downloaded to existing home gateways and is centrally managed.

When combined with Network Secure, it enables a fixed CSPs to extend security from within the network into the smart home with additional security capabilities.

The additional security layer provides visibility on the individual connected devices that previously were masked behind the router at the home edge.

Home Secure enables a lot to address the fixed CSP market more cost-effectively and address the growing market of smart homes that require a network-based security.

Since IoT devices are notoriously insecure and many times cannot be protected by an add-on client, we believe that any solution for IoT security and home network security requires an element within the home network.

I would like to point out that in our offering to the CSP security market, we are making significant efforts to change our business model from a one-time CapEx-based model to an OpEx recurring revenue model.

We expect to see the beginning of that in 2018.

Side by side to the deployment of our security strategy, Allot is continuing to be a leading vendor in the visibility and control domain.

Our pipeline is growing in this market as well.

While traditional DPI market is not growing much and has strong competition, Allot is today addressing new and growing use cases in which we are investing efforts.

Among these are: Smart traffic steering to collectively handle congestion and reduce connectivity costs, regulatory compliance to allow governments to block malicious or illegal sites like the U.K. government is requiring of U.K. CSPs, quality of experience where CSPs can understand what the real user experience on their network even on an cryptographic such as YouTube or Netflix, and analytics to enable the CSPs to get significant detail and actionable analytics on their network to properly plan network build and configuration.

I would like now to provide some outlook for 2018.

We expected revenues to grow in 2018 compared to 2017.

Looking ahead, we expect revenues in the $91 million to $95 million range for 2018 with the second half of 2018 better than the first half.

We expect most of this growth to come from our security offerings.

Our goal is to have a similar double-digit growth -- rate of growth to continue into 2019.

We ended 2017 with a backlog of $55.6 million compared to a backlog of $42.3 million at the end of 2016.

In 2018, we expect book-to-bill ratio to be above 1, which means the backlog will continue to grow also in 2018.

As booking in Allot is lumpy in nature, going forward we will be reporting on the backlog number at the end of each year.

As we mentioned in the past, our goal is to bring Allot to solid growth in the coming years and eventually to profitability.

As a result, it is important to invest in these areas that serve our growth strategy.

In 2018, we are going to invest in the Allot Secure platform including further development efforts in Netonomy, our home secure product.

And now, I would like to hand the call over to Alberto Sessa, our CFO.

Please go ahead.

Thank you, Erez.

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 measure when discussing operational results, which is what we use internally to judge the performance of our business.

Non-GAAP financial measure differ in certain respect from the generally accepted accounting principle and exclude share-based compensation expenses, revenue adjustment due to acquisitions, restructuring expenses, expenses related to M&A activities, amortization of certain intangible assets and change in tax-related items.

Now with regard to the financial results.

Revenue for the fourth quarter of 2017 were $23.2 million, growing sequentially by 11% compared to $20.9 million in the prior quarter.

Revenue for 2017 were slightly over $82 million compared to $90.5 million in 2016.

I would like to give some details regarding the revenue breakdown and diversification.

Security revenues that are defined as revenue-related to our Allot Secure platform were $24.2 million in 2017 compared to $17 million in 2016, a growth of more than 42%.

Revenue recognition create a lumpy curve during our revenue breakdown.

We will be reporting on the Allot secured revenue on a yearly base only.

The geographic breakdown of revenue for the fourth quarter of 2017 was as follows: Americas with $3.1 million or 13% of revenues; EMEA with $15.6 million or 67% of revenues; and Asia-Pacific, with $4.5 million or 20% of revenues.

Product revenues for the quarter accounted for 57% while service, maintenance and professional services revenues were 43%.

This is compared to a 65% and 35% split in the previous quarter.

CSP revenues were 80% in the fourth quarter compared to 84% that's reported in the prior quarter.

It is important to note that revenue breakdown, whether geographically or by product segment or other, may fluctuate from quarter-to-quarter depending on the specific revenue and deals recognized in the specific quarter.

In terms of customer concentration, our top 10 customers made up 62% of our revenues.

Book-to-bill ratio in the quarter was above 1 for the fourth consecutive quarter.

Gross margin for the quarter was 68.4% compared to 68.2% in the prior quarter.

While we saw a slight improvement versus the previous quarter, the current level of gross margin reflects an increased weight of hardware in our revenue mix, as the initial order from the subsidiaries of Telefónica Global tend to be mainly hardware-related.

Operating expenses for the quarter were $17.1 million, compared to $15.5 million and reported -- as reported, sorry, in the prior quarter.

Our higher level of non-GAAP operating expenses was due to changes in headcount including the addition of some more experienced employees as well as the impact of the very strong shekel, which represents a large portion of our expenses.

During the quarter, we made a comprehensive analysis of our tax position, including the impact of debt regulations.

As a result of that, we're doing 2 things: First, we're changing in 2018 and beyond, the operating boards in some countries to work more correctly going forward; and second, we reported on a GAAP basis during the fourth quarter 2017, a one-time noncash charge in connection to the changes in tax-related items of totaling $1.5 million.

Non-GAAP operating loss for the quarter was $1.3 million compared with an operating loss of $1.3 million in the prior quarter.

Net loss for the quarter was $1.5 million or $0.04 per share compared to a loss of $1.3 million or $0.04 per share in the prior quarter.

Net loss for 2017 was $8.6 million or $0.24 per share compared to a loss of $0.7 million or $0.02 per share in 2016.

Turning to the balance sheet.

Our cash reserve comprise of cash, cash equivalents and investments as of December 31, 2017, totaled $110 million.

The company recorded a positive operating cash flow of $1.1 million during the fourth quarter.

In terms of guidance, as Erez mentioned, we expect revenues to be in the range of $91 million to $95 million in 2018, representing continued year-over-year revenue growth throughout 2018.

We also expect our book-to-bill ratio to be above 1 for the year.

We expect our gross margin in 2018 to be similar to that in 2017.

Our OpEx in 2018 will grow compared to 2017 for 3 main reasons: one, additional investment in R&D; two, additional investment required in Netonomy for the home secure product; and three, significant changes in the foreign exchange rate.

We expect our OpEx in 2018 to be approximately in the range of $70 million to $71 million.

I do want also to note that we plan on opening an R&D center in a low-cost location to help curb the effects of the additional R&D investment and foreign exchange rates in the years to come.

That concludes my remarks.

We would be happy to take your questions now.

Operator?

(Operator Instructions) The first question is from George Iwanyc of Oppenheimer & Co.

Looking at full year 2018, can you give me a sense of the visibility you have into the second year, with the increased growth that you expect then?

Yes.

First of all, our growth in 2018 is based on 2 main things: First of all, the backlog.

We mentioned we are starting the year with a backlog of approximately $55 million.

Generally, we are able to recognize our backlog over -- I mean 80% of our backlog over a period of one year and on top of that, the second reason is the way that we are looking at our pipeline, we do believe that our pipeline first of all is helping and it comprises of quite a lot of opportunities with -- in different same cycle but based on those 2 elements, backlog and the pipeline, we do believe that we can achieve our goal in terms of growth in 2018.

Okay.

And with all of the changes that you've had with the sales force, can you give me a sense of productivity levels that you're getting from the new additions?

And with the new alignment of all the teams?

I'm not sure I have a fixed parameter for you off of the top of my head but I think you can understand that if book-to-bill in 2016 was under 1 for all the quarters while we build backlogs throughout 2017, then you can understand their bookings weren't up significantly and since we didn't change the headcount itself by March, I would say the productivity in terms of booking per headcount definitely went up.

Okay.

And the new R&D, so, I know that you're looking at adding -- is that included in the $70 million to $71 million OpEx number for the year?

Or would that be additional headcount additions that -- given the timing?

I'm sorry, I didn't get, the new -- I didn't get the start of the question.

The new what?

The new R&D center that you were investing in, is that fully included in the OpEx guidance for the year?

Yes.

As I mentioned before, the main reason, one of the main reasons for the increase in OpEx in 2018 is additional investments in R&D, so yes, the answer is yes, it is included.

(Operator Instructions) The next question is from Alex Henderson of Needham & Company.

This is Dan Park on for Alex.

Just wanted to clarify a few things, first of all just wondering what the headcount was, first quarter?

Yes, the headcount at the end of the first quarter was 477 (inaudible)

Perfect.

And also sorry if I missed this but if you could just repeat what the service provider versus enterprise breakdown was for the quarter as well?

Yes, service provider was 8% in last quarter compared to enterprise, which was 20%.

Okay.

Sounds good.

Also, in regards to some of the OpEx investments that you're going to be making in 2018.

So the right way to think about it, I guess it should be more back half-weighted versus front half?

It will be somewhat more back half-weighted.

It's -- I think, yes, the answer is yes, but by some measure.

The next question is from Marc Silk of Silk Investment Advisors.

The first question is obviously in the U.S., they're thinking of eliminating that brutality, I know you're doing a company shift but can you comment on that if that becomes a reality, what that could mean for Allot going forward?

Okay.

I think at this point the decision was already made and basically in terms of regulation, net neutrality, as to my understanding, is behind us in the U.S. I think that right now, we're talking to the major operators, the Tier 1 operators in the U.S., they are still not looking at doing any dramatic change in term of the services that they provide their customers.

So I think that right now they're still treading lightly.

There was very, very significant discussion in the U.S. on what could potentially be bad about reversal net neutrality.

And I think that from what I see that Tier 1 operators are still hesitant to go ahead and show that they're making any differential treatment either to different sources or customers or applications or what not.

But that may change in the future and if it does change it could present nice opportunity for Allot.

We were not -- we're not in any way shying away from the visibility and control segment.

It's still a majority of our revenues.

We plan to go ahead and continue to invest in that and to the extent that the market allows for us, we would like to try and grow that piece of our revenue as well.

So yes, if the U.S. operators decide that they do want to take advantage of reversal of net neutrality and start doing things differently, and there will be place for our technology, we will be more than happy to provide that.

Having said that, our focus on -- our focus growth is really on the security like I said before.

That's a great answer.

Also, since the U.S. has changed their tax code for corporations, have you seen any, maybe difference as far as interest from customers?

Maybe increasing their spend?

I think the sales cycles was large operators, typically take from 1 to 2 years.

So I think that we haven't seen anything in that, that we acted that fast to the change of the tax code.

It may come, I hope it will, but at this point, I can't tell you that I've seen it.

Okay, and my last question on Netonomy.

Were there revenues involved with this?

Or was it just to enhance your offering?

Number 1 and number 2 is will we ever know the price you paid?

Do you have to file that eventually?

We -- I understand that we do not have to file that and there were no significant revenues involved.

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

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

On behalf of the management of Allot, I want to thank you for interest and long-term support of our business and I look forward to talking to you in the next quarter.

Thank you very much.

Bye-bye.

Thank you.

This concludes the Allot fourth quarter 2017 results conference call.

Thank you for your participation.

You may go ahead and disconnect.