Allot Ltd.
Q3 2012 Earnings Call Transcript

Published: 30 Oct 2012

[Operator:]

Good day, and welcome to the Allot Communications, Ltd., 2012 Q3 Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Maya Lustig, Director of Corporate Communications. Please go ahead.

[Maya Lustig:]

Thank you very much. And thank you all for joining us today on our third quarter 2012 conference call. I will be replacing Jay on the call today and he is in New York with communication challenges. Joining me today are Allot’s President and CEO, Rami Hadar, as well as our Chief Financial Officer, Nachum Falek. The press release announcing our third 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 non-GAAP basis unless otherwise described as GAAP. Non-GAAP net income and non-GAAP net income per share excludes stock based compensation, expenses, as well as amortization of intangible assets, and certain onetime charges incurred related to M&A. Please note that all earnings per share amounts are on a fully diluted basis. Before we begin, let me – let me remind you that certain statements made on the call today may be considered forward-looking statements, which reflect management’s best judgments, based on currently available information. I direct your attention to the risk factors contained in today’s press release and in the Annual Report on Form 20-F, filed by Allot with the U.S. Securities and Exchange. With that, I would now like to turn the call over to Rami.

[Rami Hadar:]

Thank you, Maya and thank you all for joining us today. I’m pleased to report another strong quarter in which we recorded our 14 straight quarter of revenue growth. For the quarter, non-GAAP revenues grew 40% over last year, and 6% over the second quarter and reached $28 million. Non-GAAP net profit was $5.1 million or $0.15 per share for the quarter and cash flow remains positive. We achieved this while we began integrating Oversi in total with acquisition closing on September 4th. During the quarter we received large orders from 12 service providers, eight of these orders were from mobile operators, two of these represented new mobile customers’ volume. Here in the quarter we recognized revenue from the Tier 1 U.S. mobile carrier, as I expected earlier this year, and represents a greater than 10% customer for the quarter. This is our second large mobile carrier in the U.S. which we see as a market with potential upside in the mid-term. This is the first deployment for specific value-added service and we look to up the mobile related services over more territories going forward. I believe this also demonstrate that despite the advanced regulatory environment in the U.S., Allot now offers a long list of value-added services which are attractive to U.S. service providers and are consistent with the current regulatory rules. Large orders made up 40% of revenues during the quarter, demonstrating how we continue to penetrate deeper into our customers’ network and how we are increasingly being deployed by larger service providers worldwide. Book-to-bill ratio was below one for the quarter, but it was 20% higher than what it was in Q3 over last year, while we saw the effects of seasonality. That said, at this point the market fundamentals, primarily the growth in data traffic, remain strong and our funnel of growth opportunities throughout the globe remains healthy and it continues to grow both in wireless and wireline. Our post-merger integration program has been progressing steadily. We closed the Oversi acquisition in the beginning or last month and early out of the gate we are very pleased with the sales fund. We believe this is a very unique nature of video caching. While many balances optimization solutions basically shifts for optimization from one subscriber to another, based on previous settlement set of rules local cash and it’s really a win-win situation. While the subscriber feels an increase in his or her products of experience, the solution does not decrease bandwidth to a different user; rather it saves bandwidth by locally caching the in-demand most popular video. Here is the case of few games, no compromise resulting any single subscriber while the video-experience is improved. As we announced, we already received a larger order from this product from one of our current large fixed line DSL customer. This win is position of our addition of our service gateway strategy as well as our M&A strategy with cost selling additional important value-added services overall a large comp installed based. So, Ortiva co-promotion integration continued according to plan in deployment in new trials of progressing with same customers initials. We continue to believe this video would be one with more compelling value-added services going forward. Moreover, we are in a unique position in our market today with our combined offering of traffic management and video-related value-added services that are offered, to its ever increasing customers through a single vendor, single platform strategy. Beyond the growth of sheer value, if I look at the Ortiva market, our growth and success is being driven also by the dramatic rise in penetration of increasingly sophisticated mobile devices. New devices or internals according more sophisticated in values have been flat to all of the top data services and applications start with video application, social networks and interactive gaming, Voice over IP and GPS. This combination is the card service providers to become more intelligent in how these services are provided to subscribers and now we’re charging more than. As a result, Allot is becoming trusted partner with our service provider customers aided them in designing and implementing some of the more trends unique service platform. The value-added services portion of our operation continues to gain traction. During the quarter 18% of revenues came from these services and increased from around 10% during the previous quarter is up 3.4% while related to the new acquired video delivery solution. In summary, we’re pleased to report another strong growth quarter. We have clearly demonstrated that our portfolio of solutions over single platform is a major differentiator becoming bigger factor in our winning of new businesses. With the market fundamentals remaining strong, this funnel of opportunities continues to grow and with the new bigger delivery offering increasing substantially, our total addressable market we see we’re positioned to continue in our successful execution. I’ll now hand over the call to Nachum for short financial review. Nachum, please go ahead.

[Nachum Falek:]

Thanks, Rami, and welcome everyone. Let me take a few minutes to review the results we published earlier today. I will be discussing non-GAAP numbers, which excludes revenues, adjustment due to fair value of acquired deferred revenue, stock-based compensation, amortization expenses and certain expenses related to M&A activities and compliance matters. Full reconciliation of the pro forma results discussed on this call to GAAP results is currently available for review on our website and in the press release issued today. Now, let me walk you through the results for the quarter. Revenues for the third quarter on a non-GAAP basis increased to $28 million, up 40% over the third quarter of 2011 and 6% over the second quarter of 2012. The reason for the non-GAAP revenues is revenues adjusted for impact of the fair value adjustment to acquire deferred revenues related to purchase accounting. As a percentage of our revenues, sales in America accounted for 44%, EMEA 36%, and Asia-Pacific 20%. We had two 10% customer during the quarter, including the large U.S. operator which Rami mentioned. Out of total revenues during the quarter, products were 72% and services 28%. Gross margins for the third quarter were 72.3%, up by 50 basis point from the previous quarter. Our operating expenses increased to $15.5 million from $14.1 million and in line with our expectation. As we close the Ortiva acquisition on May 15 and Oversi on September 5th, this number include full contribution from Ortiva and one month contribution from Oversi. Both Ortiva and Oversi accounts for the most increase in OpEx. Our total head count is now 430 employees. For the quarter, we were happy to report earnings per share of $0.15, flagged with the second quarter, but again including the additional operating expenses from Ortiva and Oversi. On the balance sheet side, cash balance has declined from $160 million to $144 million, mainly due to the payment on the account of Oversi. During the third quarter, cash from operating activities was positive, but declined from the second quarter level. The decline reflects the working capital needs of Ortiva and Oversi. Our DSO went up to 71 days from DSO level of 60 days we had in the second quarter. Inventory declined slightly to $11.1 million. After adding Oversi inventory at quarter end, the decline was mostly due to deferred inventory that was recognized during the quarter. This is obviously the results of the decline in deferred revenues and as we discussed in the past, affect mainly our cash flow from operation. The decline in deferred revenues represent bill for which payment were received before the third quarter and recognition was during the quarter. That conclude my remarks and we will now open the call for questions. Operator?

[Operator:]

Thank you. Question-and-answer session will be conducted electronically. (Operator Instructions) We will now take our first question from Ittai Kidron of Oppenheimer. Please go ahead.

[Ittai Kidron:]

Thanks. Hi, guys. A quick question for you all. Nachum, can you tell me what was the – I didn’t get at the books-to-bill for the quarter?

[Nachum Falek:]

The book-to-bill, you asked Ittai? Okay. As Rami mentioned on this call, the book-to-bill was below 1, but we did mention, it was 20% more than the booking level we had a year ago in the third quarter of last year.

[Ittai Kidron:]

So, Rami, maybe you can give us a little bit more color on this, it seems like there is just a seasonal pattern developing here at the right at every September quarter, you have a book-to-bill below 1. So, is that right, I mean, do you think that going forward does that kind of makes sense given your exposure in Europe and that that would be the case and what’s your confidence level here going forward from a pipeline standpoint that momentum is that for last year?

[Rami Hadar:]

So, Ittai, one, the currencies are where we have to derive too much extrapolating a conclusion. We do know that typically Q3 is always the slowest quarter and referred to Q3 of last year where we had a book-to-bill lower than 1 is well for very long time and then in subsequent quarters we bounced back. So I certainly hope that this would be the case. Here we were certainly affected by seasonality. Also as you stated in the past and as we get into bigger, larger rate deals, our booking patterns tend to be lumpy. So, this is not a surprise. I do know that from a policy trained that the booking level was still higher by 20% compared to what it was in Q3 of 2011.

[Ittai Kidron:]

Okay. But your revenue level is higher by 40% right on a relative basis, is that good or bad?

[Rami Hadar:]

Good.

[Ittai Kidron:]

Okay. Can you talk about then from a business activity standpoint, do you feel you know, we can deploy to what’s going on around us in the world, right. And I’m just trying to understand, clearly DPI is – there is a big need for it and carriers and are investing in it. I was just wondering though, probably your standpoint as you look at the environment right now, does it make carriers flow down on the purchasing decisions, are you seeing any slowdown in business activity. So it’s probably still high. That I’m just trying to get a sense of the – if there is a change in pace?

[Rami Hadar:]

Yeah, so right now in terms of fundamentals the customer behavior is in rate of the new projects. In a subjective manner, I do not see any behavior in parallel, it’s actually the amount of new projects, new RFPs, both mobile and fixed calling for a DPI profit share be it now. So, we’re participating video latest in RFP, which I don’t think they’re growing and stronger than ever. How we wanted it – we’ve been executing and showing growth quarter despite macro economy being charging for a quite couple of quarters there now. So I’m noting seeing any fundamental shift there right now.

[Ittai Kidron:]

Okay. Very good. And lastly regarding that U.S. Tier 1 carrier, congratulations on that. Could you give us a little bit more color though on the implementation, what’s the application that it’s being used for? And as you look forward what are the – what’s the likelihood you are attaching to kind of follow-on large orders from that customer?

[Rami Hadar:]

Yeah. I am afraid, Ittai, that we need to respect both the privacy of our customer and also their – definitely their business strategy. I did say that this was deployed for specific value-added service in our portfolio and that service definitely doesn’t read an any potentially our traffic with that network privacy. So if you may, we’ve been talking about the used markets for long time. As I promised that this year would be the year that we get some traction. We got it with the first wins on couple important goals. I expected to get a second wing recognition earlier this year and now I am happy to deliver with that. So that gives us gives us now two very large used mobile late SIM carriers. And our strategy is twofold, one, continue up-selling more value-added services that we now have in our quiver that don’t have any network policy issue. And second, obviously, this penetration is a very – to very large portion of this SIM carrier network and we expect to hope to get additionally orders are geographical in new market expansion, so both offsetting new value-added services and also expansion in geography.

[Ittai Kidron:]

Very good. Good luck guys.

[Rami Hadar:]

Thank you very much, Ittai.

[Operator:]

We will now take our next question from Matt Robison of Wunderlich Securities. Please go ahead.

[Matt Robison:]

Hi, good morning. Following on the last question, for your second 10% customer here was that your first or second U.S. operator that contributed that much?

[Rami Hadar:]

Hi, Matt. It was – I mean, the second 10% customer is our second large U.S. operator, yes.

[Matt Robison:]

And what region was the other 10% customer?

[Rami Hadar:]

If you want the first 10% customer, it’s not the first U.S. mobile carrier. One is EMEA-based and one is the U.S.-based, if you want.

[Matt Robison:]

Thank you. And – so you had obviously you had some nice bookings from a couple of U.S. customers and we’ve seen that you recognize revenue and they didn’t do as much booking with you perhaps in the third quarter, is that – can you give us the flavor that how we – became sort of deployment and when we might expect more bookings activity from these operators?

[Rami Hadar:]

Obviously, we don’t make any forward-looking additions or guidance. But that’s really having recognized revenues from this very large project means that we delivered this phase of this project very successfully and there because of that we are – we are hopeful that with execution on this part of the project, we can expect to again either penetrate new geographies to start like this with covers the whole network of this specific layers in many other geographies work. To expand – and also obviously with that means from this project, we hope but can’t predict also a deeper penetration with new barriers.

[Matt Robison:]

And now the DSO structure, how much of that we attribute to the staff accounting for Oversi versus back loaded of the core business.

[Rami Hadar:]

Yes. So obviously if you are looking at the balance of accounts receivable for the end of the quarter, part of it is relating to Oversi as we started the consolidation at the beginning of September. In general, Oversi has the same DSO level as a little bit 60 days to 70 days, that’s within the credit that we usually give our customers and it relates most of which specific deals we recognize during the quarter and exactly when and as you know exactly when we invoice. So, in general obviously DSO went up from 60 days to 70 days and I would say, part of it is Oversi, but also the quarter was a little bit more back ended for Allot as well.

[Matt Robison:]

And I didn’t catch the revenue attribute to Oversi and Ortiva in the quarter, how much was that?

[Rami Hadar:]

Matt, I mentioned that we analyze our value-added services for the quarter because of 18% of our revenues and 3.4%, just roughly $1 million what contributed from the video delivery solution, i.e., the Ortiva obviously solution. Having said that, just as an indicator and we’ve already said that we’ve received orders either from this product, said that all, but also and these products are line items and greater orders so that include a mixture of our equipment and licenses. So moving forward to be increasingly charging to our split them up – split them out and do them adjusted. But nevertheless for this quarter I think it was $1 million revenue contribution roughly.

[Matt Robison:]

Okay. So you figure that next quarter will be the last quarter where you are going to be giving us separate data?

[Rami Hadar:]

Well, probably yes.

[Nachum Falek:]

And, Matt, remember that as Rami mentioned we’ve already got bundled order so it’s already quite difficult to split between the different products.

[Matt Robison:]

Understood. Thanks.

[Rami Hadar:]

Thank you.

[Operator:]

We will now take our next question from Daniel Meron of RBC Capital Markets. Please go ahead.

[Daniel Meron:]

Thank you. Hi, Rami and Nachum. Congrats on the ongoing execution here, despite backdrop. A couple of questions on my end. First, can you provide us a little bit more regional color as far as the different geographies, obviously you had a really good U.S. swing, what’s a momentum that you see in this market? And then also some color for product category, if there was anything that you can add on that? Thank you.

[Rami Hadar:]

Yeah. So in terms of the geography, Nachum says the rates are obviously on the revenue side. The Americas establishing a very strong quarter mainly due to recognition of this very large mobile customer and accounts, but even without America came out fairly strongest this quarter. EMEA statement second for LTE, so I think if we continue our traction in the U.S., then we would probably fall into more healthy patterns of – still I expect EMEA to remain our strongest region so far this five period micro economies. U.S. to go into second place, where it used to be third in the back. And APEC should be third. So definitely, if we are able to execute and continue penetration we will see more in from the Americas. In terms of the product mix, seeing your first quarter again as I said it’s a value-added services are 18% of revenue that’s a record and seeing a strategy come together. Second note, 100% increase in our gross margin is mainly thanks to more in offsetting of licenses as a proportion of those number or fact is the subscribers and we’ve discussed that in the past. From that point of view, we are seeing more and more shift towards the larger product the – Allot Service Gateway, Sigma and Sigma E, and let say to the lower end product that’s less than 500, 1,400 and 3,000.

[Daniel Meron:]

Okay. That’s helpful. And then on the demand from both mobile carriers versus wireline carriers, any update on what you are hearing from the wireline carriers as far as their deployment plans given the rise in over the top content and related to debt, what’s your sense as far as prioritizing Deep Packet Inspection and Metro Traffic Management in general when it comes to carriers spending in this environment?

[Nachum Falek:]

So, again, in terms of the – in terms of spending, you know, obviously, macro economy is not in the right frame, the right shape, but we are fortunately – to see a very small portion of that in categories which usually made sense both in good times and in bad times, certainly in times where all the – over the top is consulting services (inaudible) either they find means to control them or they simply join them with advanced challenging techniques. So again, we would not be probably the right company to ask about macro economy in carrier spending particularly for now it is outside is probably small of the market spending and that is very – is very compelling. From the sales growth of mobile side, mobile data is very up strong as I mentioned the (inaudible) which was for mobile, so and obviously mobile is a big part of the quarter. Since as I expected – or predicted was sales rise we have seen some of them but not flood huge methodology of rise in sales. I could state that the video caching or for video we are now bringing to market and initially we will be more attracted to the fixed market rather than the mobile initially.

[Daniel Meron:]

Okay. Thank you good luck.

[Rami Hadar:]

Thank you, Daniel.

[Operator:]

We will now take our next question from Catharine Trebnick of Northland Securities. Please go ahead.

[Catharine Trebnick:]

Good morning and congratulations. Two quick questions, Rami, can you pretty much – can you split out the video caching is that a right now more regionally specific would you say stronger from Asia-Pac than perhaps Europe? And then the second thing, could you discuss some of the trends that Vodafone and how that might accelerate more DPI Technology I know that they are expected like somewhere over 2,000 gross rates in data? Thanks.

[Rami Hadar:]

Okay. So, on the video caching side Catherine, you are very much right, caching tends to be more popular and our line is more compelling in markets outside of the U.S and Western Europe. So, typically markets that are – and lot of the content is brought is from Oversi’s website and that’s long distance and inter-rate country, data traffic tends to be expenses. So, that will spread all over Asia-Pacific, Japan, India, West, Eastern Europe, Africa, Latin America these are the areas where we see more hasty demand for a video-caching not just of interest and activity that dealing Western Europe, but the most natural and easy business gets approval is copy it just diminishing. Regarding Vodafone, we’re not in habit of discussing by names our customers, so would you want to rephrase the question?

[Catharine Trebnick:]

Yes. My question then rephrased is with the LTE – number of LTE services providers coming on line with data and accelerated traffic form like tablets, like you had said earlier over-the-top services driving that. I mean is that still safe to say structurally things are very – are – people are still buying DT and value-added services from your type of firms? I mean those demands – are those demands still intact with this macro backdrop?

[Rami Hadar:]

Yes, absolutely. I cannot help to say that the first 10% customer that’s recognized this quarter is one of the more long-term growing Q1 mobile customer, which we had for the past three years. So demand there continues and remains very strong. In terms of fundamentals, one, there is its expansion, both scalability bandwidth number of subscribers and value-added services, this is why we generalize the multi-market versus fixed. All of the underlying reasons were mentioned and you repeated them as well. And on top of that, if these actually are in the category of geography and bandwidth expansion. We’re waiting at about several LTE deployments we see it as a nice uptick, as they go up and they’re lining up the (inaudible) present or exchange existing one. Our Sigma E platform is already LTE ready. Already taking on empty traffic and the nice element is for us the migration is really and for customers is seamless. The third Sigma E is taking second 3Gs traffic and now capacity and is ready to take on LTE traffic. So that LTE another growth driver in the midst of all terms.

[Catharine Trebnick:]

Thank you.

[Rami Hadar:]

Thank you, Catharine.

[Operator:]

We will now take our next question from Alex Henderson of Needham. Please go ahead.

[Alex Henderson:]

Thank you. I was wondering if you could just take a look at the two acquisitions and tell us if they had an impact on the book-to-bill ratio, would have been higher or lower without the acquisition?

[Rami Hadar:]

Well, it did support our bookings already this quarter, so obviously they had a positive contribution both on the bookings and on the revenue.

[Alex Henderson:]

Well, yeah, but the question was on the book-to-bill. Would this – was the book-to-bill higher on the acquisitions or lower on the acquisition?

[Nachum Falek:]

Alex, I mean I think that we pursue not to get into that detail and bear in mind that we did mentioned that the orders that we are getting are already for bundled solution and getting through a lot order for the acquisitions that we did. So first, it’s very difficult to split the order to begin with and therefore we’re now getting into specific of book-to-bill ratio, it will be much both difficult. And again the PMI plan that we’ve integrated into our loads and have one solution. So, I really don’t see and I would say for us we’re not analyzing the data.

[Alex Henderson:]

Thanks. Second question, when you look at the customer base that you’re currently selling into, how often are you the sole solution for DPI and if there are other players in there, how many players do you see in the footprint, any sense of how that penetrations look at those customers?

[Rami Hadar:]

Let’s see, in that majority of cases, usually a single DPI vendor is selected. It’s mainly very large carrier that is spread over multiple countries, you might see two DPI vendors. We’re experiencing sometimes when we are into a large mobile customer with multiple countries that sometimes southern countries will remain with an integrated DPI solution, and gradually they could grow to extend a loan, so that might constitute, a newer vendor or a transitioning period. Other than that let me say I mean, there are complications, but it’s fairly well that we would be a huge vendor in position.

[Alex Henderson:]

The last part of that question was penetration within those customers. What portion of their network needs do you think have been fulfilled?

[Rami Hadar:]

If we’re talking about a service provider that is operating in a single country, let’s talk about mobile for a second. So if we’re talking about certain a mobile service provider in a typical country, let’s say I’m in Frankfort in Europe, the country of that size then once you penetrate, you pretty much cover the whole country. Basically, as we said it in the past, for every GGSN or PGW in the network, there is one service gateway. In operators that operate in multiple countries or operators that operate in a very large country, you might see a partial deployment usually in the primary the market. So you might start with the 20 or 30% penetration, and then typically you grow eventually to full penetration. Does that answer your question?

[Alex Henderson:]

Yeah, thank you.

[Rami Hadar:]

Thank you very much Alex.

[Operator:]

We will now take our next question from Sanjit Singh of Wedbush Securities. Please go ahead.

[Sanjit Singh:]

Thank you for taking my questions. I wanted an update on the competitive environment. I think F5 is coming out with their DPI platform next quarter, and Citrix looks to be ramping up Bytemobile. And then you have your traditional players, pure-play vendors as well as some of the integrated player. So, I guess, update on competitive environment, do see if there is anything changing, anything – anybody getting more aggressive?

[Rami Hadar:]

Yes. Thank you Sanjit, you mentioned – what was the first thing you mentioned?

[Sanjit Singh:]

F5. I think F5 is coming out with their platform in Q4?

[Rami Hadar:]

Right. So I think I asked and almost answered. If you ask me right now, I’m not seeing any drastic change compared to our previous quarters. Obviously, every vendor has their whims and would nots. As I said many times in the past this market is growing very rapidly and market always – a healthy market always constitutes several players. It seems to us based on revenues as we are the number one in platform and gaining market shares. We now started out, tried reducing some amount of DPI functions into their platform; we haven’t faced them too much. It doesn’t mean that maybe in some of their installed base, they offer that is an expansion or an upfill and got go away with it. But I do believe carefully that they have a lot of caching up to do to have a meaningful DPI and scalable functions that can compare to the incumbent players. So right now not – in the markets that I’ve not seen any meaningful signs from their side. If I – have been saying for a very long time that they want to come up with some DPI offering, we have yet to see that, and once we do we can evaluate further. Again, I point out that we have kind of changed the rule of the game and for our sake I don’t believe that our DPI engine was a part throughout the mission and coupled with proposition engine, charging engine and rapid engine are – is cutting edge and its barrier to entry is huge. You know I had – respect to the – gives them benefit of the doubt but we have to yet to see them step up and ensure product.

[Sanjit Singh:]

I appreciate your answer. I have two quick follow-ups. The first on the operating margin before the latest two acquisitions we saw nice trend upwards on operating margin. Now that we’ve had – now that you finish integrating these two acquisitions, how should we think about operating margin going forward? What’s your kind of overall strategy or policy as it relates to expenses in growing margins? Then secondly on the Oversi and Ortiva overall combined contribution. I think you guys have talked about 3 million to 5 million for Ortiva in the second half and 2 million in Oversi in Q4, are we still on track for that overall combined contribution?

[Rami Hadar:]

Yes. So again, getting into the margin we did mentioned that looking into the fourth quarter are both acquisition actually will breakeven and start contribute to our margin. Thinking about next year as you know, we are not giving any guidance, but they should be hopefully part of their lot experience, the growth that we experienced in the past.

[Nachum Falek:]

On the two companies I would say as I alluded in my talk, Oversi is probably doing – probably do in Q4 above $2 million expectation while Ortiva would probably be closer to the lower end of the range but this is again just based on track record and what’s informal and when it’s going to get recognize, so little bit of it financing surprise with the Oversi and a bit flow with Ortiva.

[Sanjit Singh:]

Got it. Thank you very much.

[Rami Hadar:]

Thank you.

[Operator:]

We will now take our next question Doug Rosenberg of KEL. Please go ahead.

[Doug Rosenberg:]

Hi, thank you, congratulations. First question is a follow-up on the competitive environment, are you seeing any difference in how the markets splits between the pure plays and the integrated or let’s say more demand for high-end versus low-level DPI?

[Rami Hadar:]

Yeah. So I’d – we’re happy to answer but just to quantify my answer, integrated deployments is something that we don’t have full visibility. I mean, if a large system integrator offers DPI as part of a large indeed and that business doesn’t go to separate fields. If the customer doesn’t take out meeting it might happen without us even knowing about it. So it’s hard for us to exactly quantifying what exactly is the integrated part of the house. What we do know obviously is that we aggressively and also, from our conversation of gradually converting another mobile operator from either doing nothing or doing limited DPI integrated into doing the standalone solution I have not heard anyone who went standalone then went back to integrated. Also, kind of account being without getting to name now but I’m sure you can do the math, but if you look at this reflection of ourselves and I’m very focusing on mobile and complimented with the achievements of our competitor, you could see that we expanded all it gradually gaining through maybe I’ll take China out of the equation, but outside China the spend is all its gaining continuous attraction and winning over the mobile space with standalone solution.

[Doug Rosenberg:]

Great. Thanks. That’s helpful. CMG is graphically, you guys – you mentioned growing and expanding Internet geographies, would that mean increase in sales and marketing let’s say as a percentage of revenues are r faster than the revenues?

[Nachum Falek:]

We are – I would think with the small position, the main contribution in operating expenses was through the R&D. We are leveraging on install base of – existing basis of sales and pre-sales in channels. So except for it may be getting a little bit deeper into the territory, I do not expect large increases in sales and marketing. We have a good sales force. There is more, it could be leverage there. Certainly now its two new products in the portfolio throughout the sales, but actually I expect greater efficiency from our sales and marketing team and we also said that expenses, however, may not totally flat, but I really expect greater efficiency and average sales prepared to increase. R&D now remains – has increased again mainly due to the top position and also as continuing through events and using our revenue strategy of using part of the new proceeds from growth investing back into the business primarily in R&D.

[Doug Rosenberg:]

Okay. Thanks. I was wondering two questions on general based, how are you impacted from operator consolidation I mean for example, if you are in the certain operator and easy their merger bought out would that how would that affect you guys?

[Rami Hadar:]

So I’ll start getting into mains obviously when it comes to mobile, it goes through merger a process, definitely near-term, it’s a negative usually no new buying decisions are made. Mid to long-term, it’s really role of the dice it could either end up with the larger and stronger and healthier customer or you could – you could lose a penny on which side of the coin you fall. The short-term definitely slows down decision making, long-term it will be an asset.

[Doug Rosenberg:]

Okay. Thank you, that’s helpful. The last question, what kind of revenue patterns do you expect from the new Tier 1 operator. Is that a onetime revenue or is it sort of an ongoing growth or should I expect them to – can we expect them to be 10% also going forward or it’s in...

[Rami Hadar:]

So, I would use the word expect but I did say though our strategy which worked very nicely with our other prior very large Tier 1 mobile customers we won in EMEA and that is that once we are in. We worked very hard to offset our other new value added services and we definitely has a lot to offer and second, we’re wider with new geographies, that’s the strategy and we will hopefully see the results in coming quarters.

[Doug Rosenberg:]

Okay. Thank you very much.

[Rami Hadar:]

Thank you.

[Operator:]

(Operator Instructions). We will now take our next question from Matt Robison of Wunderlich Securities. Please go ahead.

[Matt Robison:]

Yeah, Rami. I have noticed that in some of the standard documentation coming out of 3GPPP there’s a new function called a traffic detection function which looks like it’s something you guys might have been involved with. I was wondering if how long that’s been part of the narrative for the infrastructure standards and if you have seen any influence from that activity on operators, presumably I guess it would be mostly overseas operators but, if that’s in – if data process is indicative of why are constituency for using a services gateway?

[Rami Hadar:]

Yes, Matt. Very impressive way on how you follow standard developments in our market. Indeed, a TDF function is a fairly new function that came out with the latest release set of 3GPPP. Allot has a very strong representation and these committees are backed by some of our larger and mobile customers and you operate in the new business model by 3GPP. The new is called TDS which is primarily in charge of detecting and recognizing applications i.e. the underlying technology is – will be DPI also around that when you – the amateur interphase was in fact called SD interface. So standard operating is that the CDM will talk to an SD interphase to the PCRA or the PCM. Obviously we are not going to be proactive, but we have implemented the functionality of these new features and are in the process of early deployment.

[Matt Robison:]

So would you, do you think that this is – are you starting to see some of the adjacent companies like the growth function companies adopting the standards and are you, what’s the cycle plan for this to get implemented in networks?

[Rami Hadar:]

So it’s early days, knowing the mobile space for quite many years, there is no doubt that mobile customers will adapt the 3GPP reference, they are very straight and very hard to beat the networks and with performance, so I have no doubt they will incorporate the video function in certain ways of presence in the network is already doing some of that. But it’s early days. We are already seeing it in some of our season. I expect that down the road it would come as the mandatory requirement and I am not hearing anywhere any noise around it. I think we have early movers around this year.

[Matt Robison:]

Thank you.

[Operator:]

As there are no further questions, I would like to hand back the call over to the speakers for any additional or closing remarks.

[Maya Lustig:]

Thank you very much everyone for joining us today and those of you on the East Coast we wish you lots of health and stay safe and dry. Thank you very much.

[Operator:]

That will conclude today’s conference call. Ladies and gentlemen, thank you for your participation. You may now disconnect.