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Allot Ltd. (ALLT)

Q3 2019 Earnings Call· Tue, Nov 5, 2019

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Transcript

Operator

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Allot's Third Quarter 2019 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. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin.

Kenny Green

Analyst

Thank you, Operator. Welcome to Allot's Third Quarter 2019 Conference Call. I would like to welcome all of you to the conference call and thank a lot to the 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 to point out that this conference call may contain projections or other forward-looking statements regarding future events or the future performances coming. These statements are only predictions and Allot cannot guarantee that they will in fact occur. Allot does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including, as a result of changing market trends, reduced demand and the competitive nature of the security systems industry as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission. And with that, I would like to now hand over the call to Erez. Erez, please go ahead.

Erez Antebi

Analyst · Oppenheimer & Co. Please go ahead

Thank you. Welcome everyone to our conference call. And thank you for joining us today. I would like to start with some key financial parameters for the third quarter. The third quarter was another quarter of solid growth. Our revenues grew 14% year-over-year for the third quarter, and our gross profit grew 12% year-over-year for the third quarter. This is our seventh straight quarter of double digit revenue growth year-over-year. I am very pleased with the results we achieved during the third quarter and the main message is that we are on track and successfully executing on our plan. We see a growing number of opportunities. We are continuing to close new deals, winning against the competition, bringing more Tier 1 business and our revenues are growing. We expect this trend to continue through the remainder of 2019. We expect revenue growth to not only continue into 2020, but to accelerate. While our revenue growth in 2019 is on target, we are increasing our investments to capitalize on the significant number of opportunities we see. While Alberto will provide more details on our financials later, I did want to start with the financial highlights that demonstrate our growth. I would like to return out to a general discussion on our business. Overall, we are signing business at a growing rate. During the first nine months of 2019, our bookings were significantly higher than over the same period last year. During the quarter, we announced that we won a significant expansion with an existing EMEA customer worth 10s of millions of dollars. We also stated that this deal revenues will be recognized over several years. The combined bookings we won from all the deals including the significant one and the strong pipeline we have will enable us to enter next year…

Alberto Sessa

Analyst · Silk Investments. Please go ahead

Thank you, Erez. Before I begin reviewing the financial results for this quarter, I would like to inform everyone that on this call, unless otherwise noted, I will refer entirely to the non-GAAP financial measure when discussing operational results, which is what we use internally to judge the performance of our business. Non-GAAP financial measure differ in certain respect from the generally accepted accounting principles and exclude share based compensation expenses, expenses related to M&A activities, amortization of certain intangible assets, change in deferred tax and exchange rate differences related to revaluation of assets and liability denominated in non-dollar currencies. With regard to the financial results, revenue for the third quarter of 2019 was $27.6 million growing by 14%, compared with those of the third quarter of 2018. Regarding the details of the revenue breakdown and diversification, the geographic breakdown of revenues for the third quarter of 2019 was as follows, Americas with $3.1 million or 11% of revenues, EMEA with $9.9 million or 36% of revenue and Asia Pacific with $14.6 million or 53% of revenues. The breakdown of revenue by type were as follows, product revenue for the quarter accounted for $16.6 million or 60% of total revenues, compared to $13.8 million or 57% of total revenues in Q3 2018. Professional service revenues were $2.4 million or 9% of total revenues, compared to $1.6 million or 7% in Q3 2018. Support and maintenance revenue were $8.6 million or 31% of total revenues, compared to $8.8 million or 36% in Q3 2018. Communication service provider or CSP revenues were 82% in the third quarter of 2019, compared to 83% as reported in the third quarter of 2018. I want to note that revenue breakdown whether geographical or by product segments or other typically fluctuate from quarter-to-quarter depending on the…

Erez Antebi

Analyst · Oppenheimer & Co. Please go ahead

Yes, Alberto. I actually wanted to take this opportunity to say a few words of thanks to you. As we announced a couple of weeks ago, today will be your last day as CFO at Allot. We have worked together for the past three years and together we turned the company around. Allot returned to sustained growth and I believe is on a clear path to further growth and profitability. I wanted to take this opportunity to thank you for your dedication, for your professionalism and true partnership during these years. We could not have achieved what we did without you. I wish you the best of luck and lots of success in your next challenges. We will be welcoming Ziv Leitman who has taken over the CFO role and is joining us in the coming days. Ziv and I will be at the Needham Conference in New York next week. So you will have the opportunity to meet him either here in Israel or in New York.

Alberto Sessa

Analyst · Silk Investments. Please go ahead

Thank you. Thank you very much Erez. As announced today is my last day as the CFO of Allot. I would like to say few words in this regard. Today, I'm leaving Allot after almost three years. During this period, a lot went through many changes. During the three years, Allot obtained significant business achievement, management was almost completely changed. Business process were reviewed and announced, new significant customer was added and overall, we succeed to bring a lot back to our growth partner. I get the privilege of being part of all of this. I'm really proud of that. I'd like to conclude by wishing Allot and all the team success for the future. Now we would be happy to take your question. Operator?

Operator

Operator

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] Your first question is from George Iwanyc of Oppenheimer & Co. Please go ahead.

George Iwanyc

Analyst · Oppenheimer & Co. Please go ahead

Thank you for taking my question. And Alberto, best of luck with what's ahead. Erez, when you're looking at next year and potential for accelerating growth, is that including growth in both the visibility and the security segments or is it primarily the acceleration all related to the security deals?

Erez Antebi

Analyst · Oppenheimer & Co. Please go ahead

It's hard for me to answer that right now. We're in the midst of preparing our 2020 annual plan. I don't really have a good breakdown. But when I look at the overall picture, I feel fairly confident with accelerated revenue growth next year.

George Iwanyc

Analyst · Oppenheimer & Co. Please go ahead

Okay. And you had mentioned kind of the timing of deal flow in the pipeline. It sounds like the pipeline and the number of deals are very healthy, but is it taking longer to realize those deals? Is that changing substantially? And is that mostly related to macro or are there some other elements involved there?

Erez Antebi

Analyst · Oppenheimer & Co. Please go ahead

I assume you're referring to security OpEx deals?

George Iwanyc

Analyst · Oppenheimer & Co. Please go ahead

Yes.

Erez Antebi

Analyst · Oppenheimer & Co. Please go ahead

Okay. It's taking a lot. Yes. It's definitely taking longer to close these deals. I don't think it's a macro issue. I think honestly there's probably two elements to this, one, is the fact that operators are slow, notoriously slow, even they will – many of them will admit that. And the second I think, is that many operators have different things on their plate. They're transitioning to NFV. They're rolling out 5G. They've got agreements to add content and bundle that with their access, service and so on. And this is another piece of new business that they need to deal with. So while many of them understand the value, see the additional revenues and even decided to provide the security service at the end it takes them time and they're doing a few things in parallel. And I think both of these, their nature and the amount of things that are on their plate is causing an overall delay.

George Iwanyc

Analyst · Oppenheimer & Co. Please go ahead

Yeah, are there any competitive and developments or contributions to the longer sales cycles?

Erez Antebi

Analyst · Oppenheimer & Co. Please go ahead

We're seeing more competition. We're seeing more competition, I would say on the base – mainly from a competitors offering DNS security based services. We're seeing more of that. I don't think it's contributing to lengthening the sales cycle. I think it's equally long for everyone as far as I can judge. But yeah, we're seeing that DNS security is emerging as a more, I would say, a more prevailing competition that we're seeing. We're winning nicely, I think against them, but still it's out there.

George Iwanyc

Analyst · Oppenheimer & Co. Please go ahead

Okay, thank you very much.

Erez Antebi

Analyst · Oppenheimer & Co. Please go ahead

Thank you.

Operator

Operator

Your next question is from Alex Henderson of Needham & Co. Please go ahead.

Alex Henderson

Analyst · Needham & Co. Please go ahead

Thank you very much. By the commentary about 2020 profitability, I assume you're implying you will reach profitability at some point over the course of the year not for the full year. Is that correct?

Erez Antebi

Analyst · Needham & Co. Please go ahead

Again, I said – yes, it's correct and we will – that I expect to reach profitability at sometime during the course of the year. And more details, I really prefer to wait till we have our operating plan for 2020 and we'll give guidance for the full year, three months from now.

Alex Henderson

Analyst · Needham & Co. Please go ahead

Alright, in terms of the pipeline, while it may be taking a little longer for deals to mature into announceable events and revenues, are you seeing a much deeper ramp in the number of deals that are in the pipeline and the scale of those deals? And can you talk a little bit about the mix between the portion that is perpetual and the portion that would be OpEx related?

Erez Antebi

Analyst · Needham & Co. Please go ahead

I don't know for seeing the ramp. We're increasing the number of deals that we're seeing. There's an increase in the pipeline? I don't know, to answer a question whether the ramp is getting steeper or not, but it's continuing to grow and continues to grow nicely. Most of the deals we're talking to CSPs about are either revenue share or OpEx type deals. There are some that are CapEx, but that's a smaller number of deals out of the mix.

Alex Henderson

Analyst · Needham & Co. Please go ahead

And relative to the penetration rates, it sounds like the penetration rates of deals that you've already done is higher, how would you expect the penetration rates of OpEx deals that were closed in '19 to look as we go through '20? Is it reasonable to think that you could add 10 percentage points of penetration in over what you had '19 on the '20, 100 million MAR target?

Erez Antebi

Analyst · Needham & Co. Please go ahead

It's a hard question to answer. As I told you, the variability and penetration rates for example, in Vodafone over 10 markets is anywhere from 15%, one five percent to 60%, six zero percent. So it's clear that there's a very, very large variability between different instances. Now, I think that the major reason for this variability is the go-to-market strategy of that specific operator and how he goes to the market? How does he advertise this? How does he push this to the customers? Does he offer – is it only to new customers or does he offer to the existing install base? How aggressively do they go about it, not in terms of pricing, but in terms of bringing it to the attention of consumers? And it's hard for me to comment on a specific number of penetration in a given year, when so much is dependent on the operator. I'm encouraged by the initial results we're seeing, and I think everybody has the same interests at heart, but still look at the variability in Vodafone. It's wide. I don't want to indicate that I really know what the penetration is going to be next year. I don't.

Alex Henderson

Analyst · Needham & Co. Please go ahead

And one last question, I'll see the floor. Is it reasonable to think that your MAR target for next year would be considerably higher than your MAR target? In terms of new deals closed in '19, is that target a rising bogey? Thank you.

Erez Antebi

Analyst · Needham & Co. Please go ahead

I'll put it this way, Alex. We don't have – again, we don't have our 2020 plan. And I don't want to bring a number that I'm not responsible, but it will not be a reduced number.

Alex Henderson

Analyst · Needham & Co. Please go ahead

Thank you very much.

Operator

Operator

Your next question is from Marc Silk of Silk Investments. Please go ahead.

Marc Silk

Analyst · Silk Investments. Please go ahead

Thanks for taking my questions. Alberto, good luck and hopefully you have a ton of a lot options and over the next few years can make you very wealthy.

Alberto Sessa

Analyst · Silk Investments. Please go ahead

Thank you.

Marc Silk

Analyst · Silk Investments. Please go ahead

My first question is on Hutchison Drei Austria. Basically you've said – you were to protect the company's mobile and home users against various cyber threats. Since that announcement, has that generated more interest in that product area for you guys.

Erez Antebi

Analyst · Silk Investments. Please go ahead

Well, as I said, I think the interest in what we're doing is growing generally around the world. I'm not sure I know how to specifically tie the announcement on Hutchison Drei to the growth and opportunities worldwide. I think it's part of the trend. I misunderstand the question.

Marc Silk

Analyst · Silk Investments. Please go ahead

No, you're fine. It sounds like you're in a bunch of CSPs as you mentioned, can you kind of let us know like when you – like the amount of competitors that are in the CSPs is like two tier, like it starts with 10 and then after they do an analysis, they break it down to two. It's just I want to kind of look at the competitive landscape, if you could make that all clearer?

Erez Antebi

Analyst · Silk Investments. Please go ahead

No, when they start to look at security options, providing security as a service to their mass – to the mass market. I would say that at most, the number of competitors is a handful. And then they typically would narrow it down to two or three, something like that. And then they take it from there.

Marc Silk

Analyst · Silk Investments. Please go ahead

I got yeah and I know in Telco it's not just a lot specific, they just – they take their time without a doubt. Then lastly and I brought this up in the last conference call where I love your cash balance and late September, your stock was 828 and then a dip to 721. Again, if you had a modest buy back in place, especially if you got to start turning profitable next year, retiring some stock in the low 7s if it ever gets back there. I always think that that's not the worst idea with a modest $5 million to $10 million buyback. But anyways, it sounds like you guys have a lot of irons in the fire and I'm looking forward to the next few years.

Erez Antebi

Analyst · Silk Investments. Please go ahead

Thank you very much.

Alberto Sessa

Analyst · Silk Investments. Please go ahead

Thank you.

Operator

Operator

[Operator Instructions] Your next question is from Rory Wallace of Outerbridge Capital. Please go ahead.

Rory Wallace

Analyst · Outerbridge Capital. Please go ahead

Thanks for taking my question and nice to have Alberto and congratulations on the new opportunity. I want –

Erez Antebi

Analyst · Outerbridge Capital. Please go ahead

Rory?

Operator

Operator

Ladies and gentlemen, it seemed the question was disconnected, we will move on to the next question. The next question is from Shawn Boyd of Next Mark Capital. Please go ahead

Shawn Boyd

Analyst · Next Mark Capital. Please go ahead

Thanks for taking the question. And my apologies if I missed this, but I want to go back to the cash flow generation, very strong cash generation and you had the deferreds come up considerably. I think when you talk about that in script; you mentioned something on the deposit. So I'm sorry if you could just go back and just speak to this ramp up on the deferred a bit. Thank you.

Alberto Sessa

Analyst · Next Mark Capital. Please go ahead

Yes, maybe I will go again through what I described in the – during the script. I think that what I said is that our restricted cash and restricted deposit grow for activities that were related to deals that were closed lately, mainly, not only, but mainly this substantial deal that was announced back in August. So that's one of the reasons of the increasing cash and as a result of that also for the temporary revenues.

Shawn Boyd

Analyst · Next Mark Capital. Please go ahead

Okay. And so as these – as the OpEx deals layer on, should we should continue to see, I mean maybe not quite like this quarter, but we should continue to see the ramp up in deferreds, is that correct?

Alberto Sessa

Analyst · Next Mark Capital. Please go ahead

OpEx deal is booked and recognized at the same time. We're not booking and then recognize after that. So no, we are not expecting increase in deferred revenue because I mean at the same time, once a subscriber will use our services we will entitle actually to book and to recognize revenue at the same time. So no increase or no change in deferred revenue is expected as a result of the OpEx deals.

Shawn Boyd

Analyst · Next Mark Capital. Please go ahead

Got it, okay. Appreciate that clarification. And it's just one other thing is on the DSL, again, real time management on the balance sheet here. Is this anything kind of one off in the quarter that's bringing that down so much or is this sort of as the business is trending more toward OpEx deals, we should continue to see that content.

Alberto Sessa

Analyst · Next Mark Capital. Please go ahead

No, I think that we had quite a good the quarter in terms of collection revenues went up again, and this impact also the DSL, so altogether is normal course of business. There was no any major event, except for good execution.

Shawn Boyd

Analyst · Next Mark Capital. Please go ahead

Got it, okay. Great quarter, guys. Thank you.

Alberto Sessa

Analyst · Next Mark Capital. Please go ahead

Thank you.

Erez Antebi

Analyst · Next Mark Capital. Please go ahead

Thank you.

Operator

Operator

[Operator Instructions] The next question is from Jeffrey Bernstein of Cowen. Please go ahead.

Jeffrey Bernstein

Analyst · Cowen. Please go ahead

Hi guys, I'm glad to hear about the increased implementations of NFV. Are you actually seeing any competitors who have and NFV capability yet?

Erez Antebi

Analyst · Cowen. Please go ahead

We are seeing competitors within every capability. I mean the in the visibility and control domain, which is really most of where these implementations are. Obviously, the NFVs, the large equipment providers such as Ericsson, Huawei, which compete with us part of this market, they offer DPI capabilities, albeit significantly reduced to ours, but they offer some DPI capabilities as part of their packet gateway. And they of course, have NFV capabilities. From our main competitors, standalone competitor we're seeing, I think we're seeing more – we're hearing that they have it, but I don't see it happening yet, but I may have missed something.

Jeffrey Bernstein

Analyst · Cowen. Please go ahead

Got you, thanks.

Operator

Operator

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

Erez Antebi

Analyst · Oppenheimer & Co. Please go ahead

I'd like to thank everybody for participating on the call and thank you for your support. And I look forward to meeting you again on the next conference call a few months. Thank you very much.

Operator

Operator

Thank you. This concludes Allot's third quarter 2019 results conference call. Thank you for your participation. You may go ahead and disconnect.