Allot Ltd.
Q2 2013 Earnings Call Transcript

Published: 7 Aug 2013

[Operator:]

Good day, and welcome to the Allot Communications Ltd. 2013 Q2 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Rami Rozen. Please go ahead, sir.

[Rami Rozen:]

Thank you very much, and thank you all for joining us on our second quarter 2013 conference call. My name is Rami Rozen, and 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 second quarter results is available on the Investor Relations section of our website at www.allot.com. All results and expectations we review on the call are on a non-GAAP basis unless otherwise described as GAAP. Non-GAAP net income and non-GAAP net income per share excludes stock-based compensation expense, revenue adjustments due to acquisitions, expenses related to M&A activity, deferred tax assets and amortization of certain intangibles. Please note that all earnings per share amounts are on a fully diluted basis. A reconciliation of each non-GAAP measure to its nearest GAAP equivalent is available in the press release containing our second quarter results. Before we begin, let me remind you that certain statements made on the call today may be considered forward-looking statements, which reflects management's best judgment based on currently available information. I refer specifically to the discussion of our expectations and beliefs regarding our pipeline and funnel of potential future business. Our actual results may differ materially from those projected in those forward-looking statements. I direct your attention to the risk factors contained in the annual report on Form 20-F filed by Allot with the U.S. Securities and Exchange Commission and those referenced in today's press release, both of which detail factors which could cause our actual results to be materially different from those projected in the forward-looking statements. With that, I would now like to turn the call over to Rami.

[Rami Hadar:]

Thank you, Rami, and thank you, all, for joining us today. Our second quarter revenue came in 11% below Q1 level. While we are disappointed with these results, we are pleased with our very high booking numbers. In fact, Q2 booking was an all-time record. Most of the second quarter revenue decrease is attributed to the slowdown in EMEA booking result we experienced in the second half of 2012. And in fact, this revenue recognition on the $1.5 million [ph] large expansion deal was pushed out from the second quarter. We expect that the booking results of the last 2 quarters will set a good foundation to resume growth in the following quarters. While we are not pleased with revenue performance and recent booking lumpiness, we attribute some of the effects of our strategy to penetrate very large Tier 1 mobile service providers as a big follow-up of the fluctuation we experienced recently. A big part of our growth in the last 5 years has come from large deals related to a small number of very large Tier 1 operators. Although we have increased the number of Tier 1 accounts beyond the initial wins we had in 2009, we need to further increase our penetration in these accounts in order to achieve better predictability of our revenue results. The good news this quarter is that positive business momentum we are currently experiencing through our booking-to-bill trajectory, not only book-to-bill ratio was once again over 1, but we also reached the record level of bookings during the quarter, a level which is 20% higher compared with 2Q -- with Q2 last year. We feel confident with all of our booking environment as we go into the second half of 2013 and we believe that revenues during the second half of the year will exceed those achieved during the first half. We will continue to monitor closely our operating expenses and take the necessary measures to increase our operating efficiency. Concurrently, we will continue to invest in our R&D team as we have quite exciting products in our lineup expected during the next 2 quarters that we believe will contribute to our product leadership and growth. We have to share with you more information of this during the second half of 2013. Let me share with you some information on our Value-Added Services sales performance. As you all know, we believe that VAS should play a key role in our future growth, and our VAS-related revenues has been growing steadily during the first half of 2013. And this analysis of the booking trends show that VAS booking here during the first half of 2013 were roughly 30% of our total bookings. The growing portion of VAS in our booking is a direct outcome of our DPI-enabled Service Gateway strategy. On one hand, the Service Gateway is the leading DPI product with best-in-class functionality for the policy and control market. On the other hand, with our ability to execute high-speed intelligence steering and load balancing of applications and users make it an optimal focus point to introduce new services into the network rapidly with improved performance and efficiency. Our lineup of VAS offerings is growing rapidly. On top of video caching and optimization we acquired last year, we now have [ph] service protection web page, quality of experience monitoring, network analytics and network-based parental control, which we introduced last quarter. We see enhanced demand for VAS that enables service providers to generate new revenue sources, improve quality of experience and create real customer differentiation. In several of our new deals, at least 1 or 2 value-added services are included in the initial rollout. Regarding our 2 recent video positions, from operational point of view, both companies are fully integrated into Allot. And on the products front, we expect that by the end of the year, as planned, they will be fully integrated with our Service Gateway platform. Video caching was roughly 5% of our Q2 booking and showing a growing funnel. Video optimization is undergoing several promising trials with 3 Tier 1 service providers. Allow me to review some of our quarterly achievements. During the quarter, we won a multi-million-dollar contract with a fixed Tier 1 customer in APAC. we would be helping this customer implement application-based charging strategy. The process was very competitive and we won against other pure-play DPI vendors. We know that the process we are receiving in multiple products -- this [ph] cause we are receiving products, rather, [ph] are often ahead of the pack, which is another testament to the high quality and performance of our products. During the quarter, we had made an important progress with AC [ph] installations, as we have secured all the 3 of the top 10 global telecom operators. While these orders coming from existing customers are incremental expansions, we view this as another step in the right direction for our Internet LTE space and that the LTE rollout will be a growth opportunity for Allot. During the quarter, we had 2 10% customers. In total, we have received large orders from 13 service providers, 3 of which were from new customers. 6 of these orders were from mobile operators and 2 of these represented a new mobile operators for Allot. With the new U.S.-based Tier 1 we added recently to our customer base, we are now selling to 5 out of the top 10 mobile providers worldwide ranked by revenue. In only Q2, Allot was awarded with a $9 million follow-on order from a U.S. Tier 1 service provider for value-added service offering. During the quarter, we also received another $1 million expansion order from that line, bringing the total deal sites to more than $10 million. This customer was extremely pleased with the fast delivery and rapid execution of this project and we view this as a good foundation to what's really incremental business with this client in the future. In summary, while we are disappointed by the sequential decline in revenues, we are pleased with our booking performance. We expect that the booking results of the last 2 quarters will set a good foundation to resume growth in the following quarters and we believe that revenues during the second half of 2013 will exceed those achieved during the first half. I'll now hand the call over to Nachum for a 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 exclude the impact of share-based compensation, revenue adjustment due to acquisition, expenses related to M&A activity, deferred tax assets and amortization of certain intangibles. 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 second quarter on a non-GAAP basis were $21.5 million, down 11% versus the first quarter of 2013. As a percentage of our revenues, sales in Americas accounted for 49%; EMEA, 38%; and Asia-Pacific, 13%. During the quarter, we had 2 10% customers. Out of total revenues during the quarter, products were 63% and services, 37%. The $1 million increase in services this quarter was mainly due to professional services we provided to some of our Tier 1 customers. Gross margin for the second quarter was 76.1%. Our operating expenses were $17.4 million, after $17.5 million in the first quarter and in line with our expectations. Our total headcount is now 444 employees. For the quarter, we reported loss per share of $0.03 and OpEx stayed flat versus the first quarter. The decline in revenues affected the bottom line, keeping the gross margin at the level of 76%. On the balance sheet side, cash balances were $135 million. We had a positive cash flow from operations during the quarter. Our DSO were 96 days, similar to the 95 days we had last quarter. Deferred revenues went down by $1 million, mainly due to recognition of prepaid support and maintenance, along with some product deal recognition. That concludes my remarks. And we will now open the call for questions.

[Operator:]

[Operator Instructions] We will now take our first question from Mark Sue of RBC Capital Markets.

[Mark Sue:]

I guess, we had a good sense of your qualitative comments on the direction of bookings and recognizing that the business was quite lumpy. Other companies that have lumpy business trends also provide their backlog. Perhaps you could give us a sense of what that might be, or if you do it on an annual level, what that was at the end of last year? Just so that we could kind of formulate our thoughts of the direction, particularly in light of the deferred revenues, which are still declining, and also, the push out in revenue recognition.

[Rami Hadar:]

Our strategy, in terms of sharing out with the street, we've always said that we do not give specifics on bookings and that's same with the average outcome on backlog. We do share with the street the momentum, above 1 and below 1, and obviously, with this quarter being well above 1, you can assume that the backlog is growing, obviously. But not more than that.

[Mark Sue:]

Okay. If I look at from a -- I mean, you will have the quarterly fluctuation and if I look at it from a year-over-year comparison for the full year, should we plan, with the qualitative comments that you've provided, that your revenues may actually grow year-on-year on a full year basis? Or with the -- with what you just printed, we should kind of think about a decline, maybe below last year's level? And then, technically, on the revenue -- and then on the revenue recognition, for you, maybe if we could get a sense of what the -- is it really related to just VSOE, is it related to just customization or deliverables? What might be causing some of the delay in recognition for that European customer?

[Rami Hadar:]

So I'll answer the first part and Nachum, the second. On the first part, as you know, we do not provide a guidance. All I prefer to say at this time is what I said on the script and that is that I do feel that given the booking level in this quarter and that we should see revenues in second half of this year exceed those from the first half. How high and where would they fall compared to last year? Too early to say.

[Nachum Falek:]

And then, Mark, the question about the VSOEs, so I can just say that the terms weren't materialized during this quarter and therefore, we think that the recognition of this deal will probably be in the second half of this year. It was nothing to do with VSOE or any other accounting measurement, which is -- into this quarter.

[Mark Sue:]

Okay. But was it more upgrades, customization for a particular customer or...

[Rami Hadar:]

Mark, it was an expansion project from an existing customer. So, feel safe to assume that this will materialize in the second half of the year.

[Operator:]

We will have the next question from Matthew Robison of Wunderlich Securities.

[Matthew S. Robison:]

And, Nachum, the $5 million that you didn't recognize or didn't really see any effect on deferred revenue unless there was some significant offsetting effect. Have you been able to invoice for that yet? Or is that also subject to performance-hitting milestones?

[Nachum Falek:]

I have to say, Matt, that the question is not whether you can invoice or not invoice the customer. I think, as Rami mentioned, we had the deal, we thought it would be part of the revenues in the second quarter. There wasn't any accounting issue in terms of VSOE or in terms of acceptance or anything like that. The deal was pushed out from the second quarter. At this point, we feel comfortable of saying that we probably are going to recognize most of the revenues during the second half. But it wasn't a question of whether we'd be able to invoice, yes or no, that wasn't the issue in this day.

[Matthew S. Robison:]

Nachum, you don't get where I was coming from. I wasn't asking you about accounting or anything like that. I was just interested in cash flow.

[Nachum Falek:]

Oh. So, I didn't get that, Matt. In terms of cash flow, we didn't got anything on that deal. This point, I think that cash flow for that specific deal will -- most of it will probably be between 30 to 60 days after recognition.

[Matthew S. Robison:]

Okay, good. And then, just -- it's not a big number but just kind of curious why the M&A piece went up slightly, or why it even continued to be a factor in non-GAAP?

[Nachum Falek:]

Why this number went up?

[Matthew S. Robison:]

Yes, I would have thought that you would have recognized the expenses...

[Nachum Falek:]

Yes, Matt. Some of it relates to the orders that we got before the M&A and some of it relates to the intangibles itself. And it's not necessarily going to be a linear depreciation.

[Operator:]

Our next question comes from Alex Henderson of Needham.

[Alexander B. Henderson:]

So, obviously, up sequentially from 1H to 2H is better than down. But it's almost damning with faint praise in the sense that your baseline for second quarter is so low. Can you give us a little bit more context around your sense of momentum, your -- the activity rates, is your deal book of activities stronger as you're going into the back half that would continue to give you visibility for book-to-bill running above 1 in the back half of the year? Can you give us slightly a sense of the size of the deals that you're chasing, or any of the other metrics around what it is that you're looking at in the headlights that might give you -- give us some confidence that we're not just struggling along to be down year-over-year and unimpressed upon the order rates?

[Rami Hadar:]

Yes. I'll try to give some color, obviously, but obviously, I will be somewhat cautious to do it. So if you look at the first half and the present, this quarter was extremely active and positive in terms of booking activities and, as I've said, it's now 20% above the previous same quarter last year, but it's actually an all-time record booking quarter for us. And we had some fairly high booking quarters last year as well. In terms of looking forward for the rest of the year, in terms of activities and trials and so on, it remains very healthy, as I said it in the task [ph]. But as I note, we are somewhat in a unique position. I mean, we are roughly a small company, $100 million of revenues, but taking a very great strategy of penetrating very large Tier 1 accounts. Now, these accounts sometimes, you get lucky, we can penetrate them 6 months and you recognize revenues in another 3. And sometimes, it's 2 years to achieve the same and this is why I'm very cautious. And a lot of activity and the trial remains healthy and high. We are -- look, we have the funnel to support the further growth in booking as well, not just in revenue. But again, I'm cautious, as I repeatedly warned in the top, we are in a lucky phase in our growth. What we need to do is, one, expand our portfolio of Tier 1 accounts. As I mentioned on my script, we have 5 out of the 10 top mobile operators in the world as customers. We need to increase -- say, we need to increase that list and we need to increase our penetration into these accounts. So obviously, expansion deals are more predictable.

[Alexander B. Henderson:]

Second question. When you're talking about the book-to-bill number being substantially greater than 2Q of last year, you are talking about the book-to-bill being greater than the bookings of last year, not the revenues of last year by over 20%, correct?

[Nachum Falek:]

That's correct.

[Rami Hadar:]

And, Alex, we did mention last year that book-to-bill ratio was above 1.

[Rami Hadar:]

[indiscernible] that 26.4 of revenues booking, well above that.

[Alexander B. Henderson:]

Right. So is it reasonable to think that you might be able to produce at least bookings rates similar to that in the back half of the year? Or is that too aggressive?

[Rami Hadar:]

Early to say, Alex. Again, we have the funnel. We have the activity. But, again, these large deals, totally [indiscernible] of macro environments with telcos and we're rushing to pull out the expenses and launch large deals. I want to be cautious in my prediction. We have the foundation, we have the coverage, we have this product to continue this momentum but I would not guarantee it at this time.

[Alexander B. Henderson:]

One last question and then I'll cede the floor. Do you think that the integration of the technologies that have acquired into your core products is having any impact on the ability to close transactions or recognize revenues on transactions? Is there any delays, as people say, "I'll wait until you integrate that. I like the concept of it integrated. You've got these new products coming in the back half, we're waiting for those," as opposed to acting today?

[Rami Hadar:]

No, not at all. There is already an element of integration existing today in the products and we have showed that with customers. We are already getting some joint winds, as I mentioned on the script. So that's not in any way related to the delays that we experience.

[Operator:]

Our next question today comes from Peter Misek of Jefferies.

[Peter Misek:]

Going to try this a little bit differently. I know you don't want to give guidance, but maybe you can give us some understanding of RFP, RFQ activity, how it looks, some sort of sense for what the potential deals are out in the market, how the competitive landscape has changed, if at all, and if we can think of, maybe a little bit longer term, how you feel that the current product portfolio stacks up versus the integrated and systems side of players?

[Rami Hadar:]

Okay. So in terms of deal activities in RFPs, I believe it would be meaningless to state a number. When you engage in a [indiscernible] process with telco, you could put anything that, it may be a small scale demo through testing [indiscernible] testing in the limited environments in the network, in our fee process integration testing with other vendors. These -- all of these could be attributed under the title of a trial on RFP activities. And to say that the number is a 10 to 20, I think would be -- it could be very easily misinterpreted and misleading. Therefore, this was one of the reasons I do not mention trial activity. All I can say, it's healthy and high, but, again, unpredictable and lumpy in nature. In terms of our competitive nature, as I've said it in the past, I'm looking here, not really in the last quarter but maybe I'm looking at up to the same time a year or so. On what we had experienced, the DPI space becoming more mature, more well known. It's no longer that we need to evangelize the technology and its merit. On the other hand, these 3 few plays are maturing as well and building better worldwide coverage. In the past, we used to run into each other unless the case is H1 was more concentrated on those geographies. Now, we do run into each other more often and do create a pricing pressure. But that's expected in a growing and maturing market. In terms of the product leadership, I believe that we have a very strong product in terms of scalability, on one hand and also in terms of the features, on the other hand, which each one relates to an advantage versus our 2 other competitors. On top of that, we are quite unique in our Value-Added Services offering, and that's the key differentiator and sometimes it makes the whole difference in winning. Our ability to maintain our very high gross margins actually this quarter, it went up by 1%, shows that we maintain our leadership and the value we present to the customer remains high. Obviously, I think that we'll be coming out with some very exciting product announcements in the next 2 quarters. And I believe that will help those furthering the distance. In terms of integrated competition, it's more or less the same there. We know [indiscernible] says DPI now. Many of them are being implemented with what we call thin layer DPI, which is more or less the environment for the past 1.5 years and the name of the game there is really state of execution. If we can convince the customer on the merits of standalone despite the need to introduce a new vendor and a new network element, we can win this deal. The product is, by far, light years ahead of the integrated solutions. But these integrated companies have a very strong positions and influence on certain named [ph] operators and sometimes can try to think outside of this part of a big and larger, rather [indiscernible] technology. So bottom line is that there is some changes in the fluctuations in the competitive environment, but not by much. I believe that we maintain our product and technology leadership.

[Peter Misek:]

Okay. I guess, the final comment I'll make and the reason why you're getting a lot of questions is, obviously, we think that there's a huge opportunity for technology. It seems to have a very quick payback. You seem to have a great portfolio and yet the growth just doesn't seem to be materializing yet. So that's where the level of frustration in the hope that we get some more clarity on the growth projections or the growth trajectory. And where the market or when the market gets its velocity, its takeoff philosophy -- velocity. So just to sort of give you that context, that's where we're coming from, we're trying to figure that out and right now, it seems very, very vague and difficult to do that.

[Rami Hadar:]

Peter, I acknowledge, and I do share your frustration. But again, this is actually the reason for my cautiousness. We are now playing in the big rules' game and the big guys' game. We are going up to [indiscernible] accounts, say, for any [indiscernible] price to, call it, price of the top 10 mobile operators and the world is our customers and very strategic points of the networks is a very major achievement but yet a very dangerous, say, point as these, again, are very, very lumpy in nature and very, very hard to predict the closure. I mean, had this $5 million deal been closed, we would've been having very different discussions right now and it's very close to happening.

[Operator:]

We will now take our next question from Kiera Kilkowski of Bank of America Merrill Lynch.

[Kiera Kilkowski:]

I just have a few quick ones. First, some of the deals that you called out in your press release were from fixed-line operators and generally, you think of wireless as driving the growth. So I was wondering if you could provide some color, even qualitatively, on how much your revenues is fixed versus wireless versus other? Second, on EMEA. I was wondering if you could give us some additional color here. Do you think things have -- are bottoming out or are we going to see some stabilization over the next few quarters in this region? And then third, the 76% gross margin, it's the highest we've seen. I was wondering if you could maybe talk through some of the puts and takes in gross margin as we try and model that going forward.

[Rami Hadar:]

Okay. So our fixed versus mobile, if you'll include all of our customers, then this quarter, actually, fixed made a small comeback and it's more or less equal, if you analyze our bookings. But if you concentrate on our strategic end customers that obviously, it's very much biased towards the mobile. So the last hit is pretty stable. Although we are playing in the fixed market as well and it's an important part of our revenues, all of the accounts, strategic accounts, are mobile related -- mobile accounts. This is where we were able to penetrate and go up against the big guys and penetrate nicely into these very large networks. And as I said, most of our growth were fueled by the mobile space. In terms of EMEA. I would say, kind of start taking a step back, I'm not seeing any recovery side. I am seeing stability, so there's no further deterioration. The most positive note I can say is stable at these kind of levels. Again, EMEA can jump around sometimes. Obviously, and we have some -- and we have 2 very large customers there. So it's so important that we get a big lump of orders or revenues then they jump. If you noticed in this quarter because of the Tier 1 USA mobile customer we won and implemented, all of a sudden, America is now 49% of our revenue. So to answer your question, EMEA is now steady. It's the best I can manage. On gross margin, 76%. Obviously, we are happy that we are maintaining a very high gross margin numbers. The 1% up is nicer. In general, it continues to stay up. And we had these discussions in prior quarters. There are things that contribute to our gross margin like the fact that we are implementing [indiscernible] sales are based on licenses, which, obviously, have very large gross margin component, professional services. If we are -- in case we are needed -- our service and maintenance packages, all have good gross margins that top our average. We like expansion deals because this is an opportunity for us to get good gross margins on existing customers when the expansion deals tend to be less competitive. On the other hand, new deals, new customers penetrating new accounts, they're going through an RFP process or even an e-auction, are processed usually. These are one -- day one, much less than our usual growth margins. And then, we need to make up for it as we get into expansion to offset Value-Added Service. As, also, I mentioned, in the pure play front, in the past, none of these pure plays had good worldwide coverage yet each one of us kind of concentrated on the core areas. We are now more spread out in seeing more of each other and new deals?

[Operator:]

Our next question today comes from Catharine Trebnick bit of Northland Securities.

[Catharine Anne Trebnick:]

Three quick questions. Number one, just for clarity. The $5 million that didn't ship in Q2, was that in the Q2 booking number?

[Rami Hadar:]

Yes.

[Catharine Anne Trebnick:]

Good. Okay. Number two, the Asia-Pac win over a competitor. Is that -- obviously, is that a pretty big replacement opportunity, or could you give us some details or more around why they selected you over the competitors? Or is it a brand-new installation?

[Rami Hadar:]

First, it was a very tight competition against 2 other pure-play players. The win was a combination of the products [indiscernible] very thoroughly and gotten very high marks. The final decision, I guess, was a combination of both product performance and pricing. And finally, it's actually a replacement of an existing incumbent, roughly based on solutions that didn't scale a need or demand and they felt they want to go to a standalone solution.

[Catharine Anne Trebnick:]

Okay. And then the other thing is you did notice a new caching customer, and how many caching customers would you have now at this time, and how many have you added since the acquisition of Oversi?

[Rami Hadar:]

Okay. I don't have the number, but I'll try to give you ballpark on the slide here. I guess, Allot has roughly 5 caching customers from the date we outsourced. And in an OEM basis, our OEM solution and over 3 are brought to us in different shots -- in shapes, maybe 10 additional ones. Some of them, [indiscernible] the large ones in the [indiscernible] but overall, I would say we have 15, maybe 20 caching customers, some are using our caching as standalone and some of them are joined with our DPI solution.

[Catharine Anne Trebnick:]

Okay. Then just, you did notice that the VAS was 30%, I believe you said. Can you describe some -- is that mostly now, or will you expect that to be going forward, big data analytics and/or some parental guidance? And can you speak to some of the demands in Europe? I'm surprised that Europe is down because some of the rulings in the regulatory rulings coming out of the U.K. is really calling for more types of viewer-types of technology to help with parental controlling. Can you give me your perspective on that?

[Rami Hadar:]

Catharine, you're very much right. I would say the leading Value-Added Services product that contribute to the growth in our VAS numbers into the 30%, one of them actually, is parental control, which was a big contributor to our Q1 EMEA numbers with the win with the big mobile operator in Europe. I guess they kind of saw the announcement coming and got a heads up. So definitely, there is some correlation. And you're right, I hope that the new relation that came out, I think, 1 week or 2 ago, will make our parental control and our website products more in demand. Already, we are getting phone calls from some of our customers. The 2 others, as main contributors to VAS number is, obviously, caching; it's picking up and DDoS Protection is important. Of the 2 other elements that -- the main stars of our platform offering.

[Operator:]

Our next question comes from Sanjit Singh of Wedbush Securities.

[Sanjit Singh:]

Regarding the $5 million deal one more time. In the press release, you guys had mentioned that the deal has been delivered, the revenue recognition had been delayed. What, specifically, do you mean by the deal has been delivered? If you could be as specific as possible, that would be a help.

[Nachum Falek:]

So, again, Sanjit, without getting into too specifics, we can just say that in terms of the delivery, in terms of installation, it's already on the ground, we couldn't recognize revenues during the second quarter and we believe we will be able to recognize the majority during second half of this year.

[Sanjit Singh:]

Regarding the book-to-bill performance. Had the deal been recognized, would a book-to-bill still would have been above 1? I just wanted to get a sense of the health of the overall bookings.

[Nachum Falek:]

Yes, for sure. Because if you take the note that we mentioned about 20% more from booking level we had 1 year ago, so the revenue a year ago was 26.4. Book-to-bill back then at the second quarter of last year was above 1. So all in all, it's clear that even if you add $4 million, $5 million to the revenue level this quarter, still book-to-bill would be above 1.

[Rami Hadar:]

The answer is, yes, Sanjay.

[Sanjit Singh:]

And then finally, in terms of the competitive dynamic between the pure plays, you guys are not typically -- you don't give metrics on that. But is there any trends that you're seeing? Are you displacing more of your traditional pure-play competitors in select deals? You say you're bumping up against them more, I wanted to get a sense of, is your technology in the right use cases displacing of your pure play competitors?

[Rami Hadar:]

Yes. I would say that we do, here and there, end up displacing all installations of competition. But I would say it's fairly rare. Typically, a service provider that deploys any type of network equipment, assuming it performs within reason, keeps it there for 5 years. Ours is the incumbent and the longer player of the group. We have been installing 10-year-old installations, so some of it's very small. So here and there, someone might displace us because the customer has a new team on board that shows some results, but these are very, very minor. We end up then doing, on occasion, bases as well and we don't make a big deal out of them. I don't think these are substantial elements in the dynamics of this market. What was the second part of your question, again?

[Sanjit Singh:]

I think, actually, I said displacement, what I really meant was in terms of bake offs or win rates. Has there been any noticeable changes or trends? Or how would you characterize your win rate versus your pure-play competitors?

[Rami Hadar:]

I would say our win rate remains healthy. Obviously, we don't win all of the deals. We do know that it does happen, that the key, once or twice, and in fact [indiscernible] that our products are scored very high on the technically. Technically we got very good feedback as we scored #1 in some very strategic deal. But then when the pricing got too low for our plays, we walked away or refused to decline further. And a great testimonial of the strategy is our ability to keep our 76% or 75% on average in gross margin, which is a very high number for a product-based company. Although of our value-added software, we are a product and networking-based company. So yes, as coverage improves at all 3 pure plays, we turn to each other more. And as I stated, day 1, when there is competition and obviously, many technical customers are looking for ways to save CapEx, the deal goes through an RFP process and, occasionally, through an e-auction and therefore, day 1, we might need to compromise some on the gross margin in hope to catch our pay more. But overall, our win rate remains healthy. I wish we could win 100% of the deals, but that's not practical.

[Operator:]

We'll now go to the next question from of Ittai Kidron of Oppenheimer.

[Michael Saloio:]

This is actually Mike Saloio on for Ittai. Most of my questions I had have been answered, but are you willing to give us a sense of how much the 2 acquisitions added in revenue in the quarter? I know in the past, you've given some guidance there.

[Rami Hadar:]

Yes. We are now -- now that they are integrated, it gets a little bit more tricky since we are already seeing deals where there is a joint win. And part of the initial delivery is, right now, video caching. And then it's very artificial to differentiate, since we might give different discounts to different portions of the solution and the deal. But in order to give you some positive indication, I did say that at this quarter, 5% of booking was attributed to our video caching solution. None to a -- maybe very marginal to video optimization. There was some, but very marginal. And I did say that video optimization is now going through some -- through 3 Tier 1, [indiscernible], which I'm hoping, at least, 1 or 2 of them will become steady deals further down the road.

[Operator:]

Our next question comes from Dov Rosenberg of Clal.

[Dov Rozenberg:]

First, a general one on the market. And we sort of talked about this before. But with 26% of bookings of Value-Added Services and 2 of the big deals that you won were fixed line. In other words, few with mobile operators, though it was more Value-Added Services. I was wondering, any view on, let's say, core DPI and mobile DPI, if you see any change in the market or it's just lumpiness of one quarter with, one quarter without?

[Rami Hadar:]

Yes, no major change. You're not right that we got the 2 large deals in fixed lines side. One is the fact that we are able fix and the other is the one we discussed as a nice, competitive win. Most typically, the larger deals belong to the mobile but here, we see a practical example that in 1 quarter, 2 big deals, they shift results totally to the other side.

[Dov Rozenberg:]

Okay. Maybe also just on the market. It used to be -- or my impression was, it used to be that you would win a deal, let's say, based on DPI. And later on, maybe you'd add on Value-Added Services. Is that changing? Do you see orders typically going first to Value-Added Services, or together? Is there any change in that sense?

[Rami Hadar:]

Yes. As I mentioned on the script, now that we are gradually getting tighter integration with Value-Added Services, something with the 2 video acquisitions we made, we are able to offer some of these Value-Added Services immediately out of the gate on day 1. And that's kind of new for us. And another -- and we keep going back to these surveys and, obviously, are offering them existing and new Value-Added Services. It's interesting to know that different carriers, I believe, in different Value-Added Services. So starting with the last quarter, we got a order for parental controls. This same -- this quarter, it was for different Value-Added Services. So we're currently building the funnel and experience on how these VASs are being implemented.

[Dov Rozenberg:]

Okay. And then I was wondering if you can give us any color as to, let's say, what percentage of the revenue or the run rate is not related to big deals? In other words, if sort of there's a big -- does it somehow come along and you'll have some sort of base or maintenance or some sort of base that's ongoing?

[Rami Hadar:]

So first thing -- Nachum, feel free to jump in. We had 2 10% customers this quarter.

[Nachum Falek:]

I think that in general, the order, what you call the order revenues were kind of flat within previous quarters. The small deals, some of our enterprise businesses and Tier 2, Tier 3 are carriers.

[Rami Hadar:]

We can say that these 2 10% customers are [indiscernible] 10%. But it's not like they were 50% or even 40%. So they are a big part of our revenues, but it's not like we are extremely concentrated.

[Dov Rozenberg:]

Okay. And then on bookings. I was wondering maybe even excluding the $5 million pushed out deal, would you say it's spread over a long period of time? In other words, if typically, bookings would you expect to recognize them within, I don't know, 12 months or 9 months? Is it longer now, is there any change?

[Rami Hadar:]

No, 9 to 12 months is very typical. It's sometimes, you get lucky if the customer is under pressure and they go over bureaucracy and execute well on their side as they accept us. And you can achieve -- you can move from a booking to revenues in 3 to 6 months. But in more cases, it's more like 6 to 12 months.

[Dov Rozenberg:]

Okay. Last question for me, if I may. I was wondering, on operating expenses, if revenues do decline, and again, no guidance, but sort of if we're, let's say the growth is slower, et cetera, do you think you'll grow a bit more, you'll slow down the growth in expenses or you continue same as?

[Rami Hadar:]

It's certainly an option I would consider very seriously. If you note that in the 2 quarters, we maintained our operating expenses as flat versus the previous season quarters that as we grew, we always invested part of the growth back into the business, mainly R&D and sales. Right now, we've maintained our OpEx flat and are trying to maintain it this way until we resume growth. If, God forbid, we see further decline, obviously, taking some OpEx out of the business is a valid option.

[Operator:]

Our next question to take comes from Joseph Wolf of Barclays.

[Joseph Wolf:]

I guess, just as kind of a follow-on to the last question, if I look at the Value-Added Services and thanks for giving that bookings number of 26%, does that portion of your bookings have a different life cycle, or, I guess, vintage than the traditional or the core hardware product? And then, should we be thinking about that as your mix going forward in terms of overall sales? And then finally, as again, as I think about the Value-Added Services, is that a reason for the higher margins? And how much of the Value-Added Services is a lot product, and how much of it is -- are you OEMing from other providers?

[Nachum Falek:]

Okay. This is a 4-part question. The life cycle tends to be on the longer side because it is, I already said, to service providers. And in most cases, it's to large service providers, but not exclusive. So these VAS deliveries do go through acceptance process and so process and so on. So yes, they do tend to be on the longer end from orders to revenue. VAS, on the other hand, our Value Added Services do tend to be with high gross margins. Maybe not to say [indiscernible] that are sold with the initial aim of delivery. But in most cases, we sell them as an expansion to existing customers and there, we get good gross margins. Also, in many cases, we sell them as the license and, therefore, obviously, it's 100% gross sales, or near 100% gross sale margins. In terms of the source of the technology, it's a combination of homegrown name solutions, for example, like WebSafe. It's a combination of acquisitions like video caching and video optimization. And also, we are very much open in technology partnerships. For example, with parental control, it's based on the partnership with a company that specializes in these kind of solutions, where we integrated their product. We are the focal point to redirect relevant traffic and relevant active subscribers to that service. And we acted as the system integrator as well.

[Joseph Wolf:]

Okay. And, I guess, just the array right now of Value-Added Services, you mentioned 5% on the video caching. Are there other ones that are that big or is it a pretty -- or is there a variety right now within the package that you're offering?

[Rami Hadar:]

Beyond that, parental controlling is, obviously, had a big quarter of array last quarter. And analytics is growing and it's a big part of Value-Added Services as well. Caching is growing. So it's a healthy combination of these full topping offerings. On a quarter-to-quarter basis, it might be that we land a big deal around a certain named VAS and therefore, in that quarter, it's biased towards the one versus the other.

[Operator:]

The next question comes from Alex Henderson of Needham.

[Alexander B. Henderson:]

I was wondering if we could cut at this a little bit differently. You talked about Value-Added Services but actually, a lot of the Value-Added Services are actually related to what I would describe as network optimization as opposed to revenue-generating part of their management decision. When you look at the mix for your business in terms of orders over the last 6 months, what portion of your revenues are generated as a result of optimizing the network for the service provider as opposed to revenues generating, or sales that are generating new revenue opportunities for your customers. Can you break it out along those lines, please?

[Nachum Falek:]

I don't have quantitative numbers off my head, but let's have a qualitative discussion for a second. There is elements that are clearly on an optimization side. For example, we are doing traffic shaping of and privatization of various types of traffic, preventing peer-to-peer and to take a disproportionate amount of [indiscernible] and reduced quality of experience. Obviously, it's more about optimization and CapEx savings. On the other hand, things which are similar and related very much to DPI like application-based SIM-charging, which is based on our DPI technology and application awareness SIM function, we still -- we don't count that as the Value-Added Service because it's so much part of the PCC world, policy and control and more related to the core DPI function, although, obviously, application-based charging is directly related to revenue generation. On the Value-Added Service side, there is mix again. Parental control, obviously, is a revenue-generating function. Now the customer we sold to last quarter is charging anything between EUR 1 to EUR 3 per month on customers who opt in into the service. On the other hand, video caching and video optimization can sometimes go both ways. Obviously, there is a saving element in these 2 technologies but then, we are hoping to see some of our customers use these technologies as a quality of experience differentiator and offer our video services as the premium experience in a premium price. So there's cost-over functions as well. Same for analytics. Analytics could be used for networking information to be aware of what's going on, on your network, to optimize the network and whatnot. But it could also go towards the marketing campaigns and insights into advertising statistics and whatnot as well, which is more revenue-generating. So the line is not very clear. I hope I gave you some clarity.

[Alexander B. Henderson:]

Okay. So one last question, maybe, if I could. So as you're looking at the position of the company, the amount of activity you're chasing, the deal sizes you're looking at, the customers that you've penetrated, as you move from 2Q '13 into the back half of '13 and then to '14, and you were to compare that to where you were in 2Q of 2012, are you more or less optimistic about the trajectory of the company's bookings and revenues now than you were last year? Or how would you describe that?

[Rami Hadar:]

It's very hard to quantify as in a kind of a direct yes or no answer. But again, if we hold a small qualitative discussions contributing factors to, let's say, improvements in the second part of 2013 versus the second part of 2012, is the fact that we added 1 major mobile operator to our growing base of Tier 1 operators. And as I said it in the script, that's key for us to achieve revenue growth and predictability in our business. So that's certainly our processes. Europe is stabilizing. Not improving yet, but stabilizing, so we will probably see, more or less, what we're seeing in Europe versus last year. APAC is showing signs of improvements and higher deal funnels than it was last year. And Americas, I hope will enjoy the fact that they've won this very large Tier 1 operator, and we'll manage -- the team there will manage pull off more expansion in deals that are being discussed. Also, finally, now, 1 year later, we have the 2 new video acquisitions tucked in. Caching is starting to help and I hope that optimization will come in as well. So these 2 video products, I hope, will be positive contributors versus last year.

[Operator:]

That would conclude the Q&A session. I would now like to turn the call back to the speakers for any additional or closing remarks.

[Rami Hadar:]

Thank you very much, all, for joining us today. We look forward to meeting you in person soon. Thank you.

[Operator:]

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.