Allot Ltd.
Q1 2018 Earnings Call Transcript

Published: 9 May 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Allot's First Quarter 2018 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 view it in the News section of the company's website, 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, please?

[Gavriel Frohwein:]

Thank you, operator. Welcome to Allot's First Quarter 2018 Conference Call. 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 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 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 will now hand the call over to Erez. Erez, please go ahead.

[Erez Antebi:]

Thank you, Gavriel. I'd like to welcome all of you to our conference call, and thank you for joining us today. Our revenues in the first quarter of 2018 were $21.7 million, up 18% from that of the first quarter 2017. In addition, our book-to-bill was greater than one for the fifth quarter in a row. While Alberto will later go through our results in detail, I wanted to start with these because I believe they show that we are executing on our plan to return Allot to growth. During this quarter, we saw revenue growth and pipeline growth across both security and DPI segments. The operational changes we made last year, such as reorganizing our sales and customer success departments into customer facing units, or CFUs, changes in management at various levels and changes in internal processes are working. We are seeing new operator wins and an increased pipeline of opportunities across the different market segments, product lines and geographies. I will start with a few words on the visibility and control domain, another market in which our pipeline is growing. While the traditional DPI market is stable, as I shared with you previously, Allot is addressing today the growing use cases in which we are investing efforts. As a reminder, these include

[Alberto Sessa:]

Thank you very much, 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, change in tax-related items and change in deferred tax. And now with regard to the financial results. GAAP revenues for the first quarter of 2018 were 21.7 million, up 18% compared to $18.4 million in the first quarter of 2017. Now, I would like to give some detail regarding the revenue breakdown and the diversification. The geographic breakdown of revenues for the first quarter of 2018 was as follows

[Operator:]

Thank you [Operator Instructions]. The first question is from Joseph Wolf of Barclays.

[Joseph Wolf:]

I have a couple of questions about the competitive landscape and your customers in the security market. There was a customer who got the Vodafone Mobile and Family Security contract. I know it was just -- it was in Czechoslovakia, but I'm just wondering how you're looking Vodafone as a partner across its regions? And if you could go through some of the -- or do you think they're looking at different approaches maybe technology-wise or application-wise, compared to Allot? And that also looked like it was a subscription deal. So -- you made a comment about subscription so I'm wondering if you could just put all that together.

[Erez Antebi:]

Look, Vodafone is by far a major customer today for security services. And they're continuing to grow across, I think, 10 geographies that we're installed in today. As they are looking at various other alternatives, of course, as I would expect that they have to do their job and check alternatives. But I -- at this point, I still see them -- the massive growth of security services in Vodafone is with us.

[Joseph Wolf:]

And then -- and this was late last year so maybe it subsided a little bit, but there were some customer complaints about the additional -- I guess, there's a pound or euro charges for some of these security offerings and I'm wondering how you feel about that impacts. You mentioned the OpEx opportunity for Allot. Is that playing a role in terms of your customers' ability to pass-through cost and your dialogue with them about moving to a subscription-based model?

[Erez Antebi:]

No. I don't think it's a major issue. Yes, you'll see -- I mean, if you look at the complaints levied by consumers to operators, you'll see a whole wide variety of things. And some customers complain that here they are, they're paying extra for security or something. But I don't see it as any major trend or anything that has a significant impact on either the operators' business or on ours to the best of my understanding.

[Joseph Wolf:]

And then just on the positive commentary on the book-to-bill being greater than one for the duration of the year. Just -- can you make any comments about the components of your backlog? How long it lasts? Most of the growth is coming from security. Is there a pretty good pipeline of security in the backlog? And then, I guess, if you look at the gross margin, should we be thinking about that the transition to software is what the -- is the reason for the uptick this year in the quarter, in the 1Q versus 1Q? And should we expect similar results across the year?

[Erez Antebi:]

I need to remember what was the first question.

[Joseph Wolf:]

Comments on backlog and what's in there and gross margin implications, I guess, is the summary.

[Alberto Sessa:]

Yes, maybe, I can take this at least partially. First of all in terms of the backlog, book-to-bill is above one. We said that. We're excited to be above one for the whole year. We are not giving right now any breakdown between security -- I mean, what parts of the security. What I can say is that generally, we are able to recognize approximately, I would say, 80% of our backlog during the first 12 months. We disclosed at the beginning of the year that we started 2018 with approximately $55 million of backlog which gave us quite a good visibility for this year. In terms of the gross margin, this quarter was better than what we did actually last year. The main reason actually is because we were able to recognize order with a bigger portion of software, mainly last year. I'm sure you remember that we did recognize a significant portion of the order that was sent to Telefónica which added some impact in our margin and actually in Q1. But this portion was lower than that.

[Joseph Wolf:]

Is that going to be the trend? Or it's hard to say at this point?

[Alberto Sessa:]

It's hard to say at this point. It will be very much depending on what kind of deal will come in and what kind of deal we will be able to recognize. Again, a deal with a bigger portion of order will impact our -- negatively, our -- I'm sorry, our gross margin. So it will be very much depending on what kind of deals will come in.

[Operator:]

The next question is from Alex Henderson of Needham & Company. Please go ahead.

[Daniel Park:]

This is Dan Park on for Alex. So just starting with the housekeeping item, could you just let us know what the post-quarter ending headcount was?

[Erez Antebi:]

The headcount at the end of the quarter were 490 people.

[Daniel Park:]

Okay. Great. And speaking about the step-up in OpEx investments for the year, should we think about this as being back-half weighted as you've noted on prior calls? And also as a follow-up, at what point should we expect some greater operating leverage as you step down the elevated investment levels?

[Alberto Sessa:]

I think that in terms of investment, operating expenses in the second quarter will be a bit -- a little bit high…

[Erez Antebi:]

The second half.

[Alberto Sessa:]

The second half, I'm sorry. It will be a little bit higher that the first one. Also, in terms of revenue by the way, we said that the first half would be better than…

[Erez Antebi:]

The second half.

[Alberto Sessa:]

The second half would be better than the first one. In terms of profitability, I mean, we anticipate the operating expenses this year to be in the range of $70 million to $71 million. That will bring the company to a loss in 2018, a lower loss than we had in '19 -- in '17, I'm sorry. Regarding 2019, I think that it's a little bit too early to make any projection for that year.

[Erez Antebi:]

I think we can say, Alberto, and we've said that the -- maybe we -- while we expect significant double-digit revenue growth into '19, we don't expect that kind of expense growth. So we'll see a lot better leverage in -- on the bottom line for '19.

[Daniel Park:]

And just one more, if I could. With the acquisition of Netonomy closing during the quarter, have you seen any material impact to revenues, given your flat revenue guide for full year '18?

[Erez Antebi:]

Netonomy has no revenues and we don't expect any material revenues from -- specifically from the Netonomy software that we acquired during '18. I'm not sure what you referred to flat revenue guide. Because we've guided upwards on revenue. So maybe I didn't understand the question.

[Daniel Park:]

I meant, reordering your prior expectations. Sorry about that.

[Erez Antebi:]

It's fine. We just reiterated our prior guidance.

[Operator:]

[Operator Instructions] The next question is from [Eric Jarvis] of Jarvis Consulting.

[Unidentified Analyst:]

It's actually Derek Jarvis. Question from the past I think this [previous year] but there's some [indiscernible] some years ago about that partnership with Intel and McAfee. Did anything ever come off that? Or is that fallen by the wayside?

[Erez Antebi:]

Actually, it still exists. We have a -- maybe remind in a sentence that in order to provide a holistic security solution for customers, anywhere, anytime on any device, then we also need to solve the problem of what happens when a consumer is connecting via Wi-Fi, for example, I don't know, he's in a coffee shop or something. And then he's not going through necessarily his operator's network. So in order to enable protection in those instances as well, we require an application that needs to be downloaded to the phone that will protect him in those cases. In order to do that we partnered with McAfee and we provide, together with McAfee, a complete solution that is integrated and allows the operator to provide the same level of protection whether -- should the customer is on -- the mobile devices are on the network or off the network. So that's what we've done with McAfee. This is something that we've been offering. And I think, it's interesting to some CSPs. It's less interesting to others but we do not have any significant revenues from this at this point.

[Unidentified Analyst:]

So is that something that you would envision selling through the CSPs as well?

[Erez Antebi:]

Yes. Yes. For us, for Allot, as a strategy, we are the enabler or as if you like, the technology partner of the CSP. And we enable the CSP to offer a CSP-branded security service to their customers. So everything we do on the security, whether it's the network security part or the endpoint security, for example, with McAfee; or it's the home router security like what we acquired with, like what we bought, when we bought Netonomy; or an IoT-type security or anything else. All of this falls under the umbrella of enabling technologies that enable the operator, the CSP, to offer a CSP-branded security service to its customers.

[Unidentified Analyst:]

Okay. And then what about the enterprise side? Does Netonomy play into that? Or this partnership with McAfee at all, if you're an enterprise that needs to secure your own internal network?

[Erez Antebi:]

I think that the McAfee partnership is not relevant for the enterprise market. And the Netonomy acquisition or that software app will have very limited appeal in the enterprise market. I mean, I can think of some outlying cases, but as a general concept and market, no. Not relevant for the enterprise market.

[Unidentified Analyst:]

Okay. Also, you had alluded to opening, perhaps a new R&D center outside of Israel. I think for -- not just because you needed capacity, but also to provide sort of a natural hedge for some of your cost. Is that in the numbers? Well, first of all, do you still intend to do that in -- is that in your OpEx guidance for this year?

[Erez Antebi:]

We do intend to do that. It's in the OpEx guidance for this year. We're still investigating where to do that. The main motivation for us to do this is to enable ourselves to grow on our R&D capabilities with some minimal impact on the OpEx. Because this will be a low-cost location. So I think, we're pretty much advanced in looking at the various alternatives. But we have not yet opened this center. We do expect to do that during this year at some point. And it is in the OpEx guidance numbers.

[Unidentified Analyst:]

One more, quick one here. Netonomy, was that based in Israel? And did you keep the employees? And how many of them were there?

[Erez Antebi:]

We kept, I think, almost all of the employees. And yes, it's in Israel. It's based in Tel Aviv. I don't have the complete number so it isn't -- it was a single-digit number of employees. So under 10.

[Operator:]

There are no further questions at this time. Mr. Antebi, would you like to make your concluding statement?

[Erez Antebi:]

Okay. I want to thank you -- thank everybody for listening in and joining us. And I look forward to seeing you in person, and if not, on our next conference call. Thank you very much.

[Operator:]

Thank you. This concludes the Allot First Quarter 2018 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.