Allot Ltd. — 2019 Form 20-F Summary
Period and context: This is an annual report for the fiscal year ended December 31, 2019, not a standalone Q4 filing. Allot, an Israeli provider of network intelligence and security solutions for communications service providers and enterprises, reports under U.S. GAAP. Amounts below are in U.S. dollars.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $110.1 million | $95.8 million |
| Product revenue | $67.4 million | $56.2 million |
| Service revenue | $42.7 million | $39.7 million |
| Gross profit / margin | $76.3 million / 69.3% | $66.5 million / 69.4% |
| Operating loss | $(9.0) million | $(10.2) million |
| Net loss | $(8.7) million | $(10.4) million |
| Net loss per share, basic and diluted | $(0.25) | $(0.31) |
| Cash from operating activities | $16.1 million | $1.0 million |
Revenue grew approximately 14.9%. Product revenue rose 20.1% and service revenue 7.5%. Gross margin was essentially flat. Operating expenses increased to $85.2 million from $76.7 million: higher R&D and sales and marketing costs were partly offset by lower general and administrative expense. G&A fell by $3.7 million, mainly due to remeasurement of acquisition earn-out provisions. Net loss improved, but the company remained loss-making.
Cash, liquidity and obligations
- At year-end, cash and cash equivalents were $16.9 million, available-for-sale securities $61.0 million, short-term bank deposits $5.6 million and current restricted deposits $23.2 million; another $10.9 million of restricted deposits was non-current.
- Working capital is reported as $79.9 million in the liquidity discussion, while selected financial data gives $79.4 million; the filing text does not provide a clear reconciliation.
- Net cash used in investing activities was $16.5 million, including purchases of securities, deposits and $3.7 million of property and equipment. Financing activities provided $1.0 million, mainly from stock option exercises.
- The company reported no long-term borrowings. Year-end operating lease liabilities were approximately $7.0 million. Total liabilities were $83.3 million, including deferred revenue and lease obligations.
- Management said existing cash balances should cover working capital and capital expenditure needs for at least the next 12 months. Expected 2020 capital expenditures were approximately $8.7 million.
Material changes and business developments
- Network intelligence solutions generated 76% of 2019 revenue; security solutions generated 24%. Revenue from two Tier 1 operator groups was 27% of total, compared with 22% in 2018 and 32% in 2017.
- Geographic revenue mix shifted notably: Asia and Oceania rose to $43.0 million from $22.0 million, while Europe declined to $36.2 million from $45.7 million. Europe represented 33% of 2019 revenue.
- Deferred revenue increased to $41.6 million from $18.1 million, including a $23.5 million increase in operating cash-flow contributions from deferred revenue.
- A September 2019 agreement with an existing EMEA customer covers a one-time AllotSmart project. The company expects to recognize most related revenue in 2020, subject to delivery and customer acceptance; it expects the project to represent a substantial portion of 2020 revenue. An advance was received. The agreement has no renewal provision.
Outlook, risks and unusual items
- Management expected gross margin percentage to remain at approximately the 2019 level in 2020. The filing does not provide a clear numerical revenue or earnings forecast.
- COVID-19 was identified as a significant uncertainty after year-end, with potential disruption to operations, suppliers, customers, sales channels and implementation of the large EMEA project. The company could not predict the duration or financial impact.
- Key risks include customer concentration and order timing, long service-provider sales and acceptance cycles, intense competition, increased traffic encryption that may impair DPI functionality, and the need to adapt to 5G network architecture. SD-WAN adoption may also reduce visibility into enterprise traffic.
- The company depends on channel partners for approximately 48% of revenue and a single subcontractor, Flex (Israel), for manufacturing and support of its Service Gateway Tera hardware. Supply-chain disruption or loss of that subcontractor could delay deliveries.
- Currency exposure is material: the Israeli shekel appreciated approximately 8.4% against the U.S. dollar in 2019. The company uses foreign-exchange derivatives; year-end disclosures include $42.1 million of outstanding forward contracts in one section and $36.1 million of net hedge transactions in another, figures that reflect differing descriptions and should be checked against the notes.
- Tax expense was $1.6 million despite a pre-tax loss, including a $1.5 million write-off of prepaid and withholding taxes. Israeli tax-loss carryforwards were approximately $62.1 million, with a valuation allowance against deferred tax assets.
- Restricted deposits increased substantially; the notes state that a major customer prepayment was restricted under contractual terms. The company also had approximately $26 million of bank guarantees relating to customer prepayments.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. No material off-balance-sheet arrangements were reported. No cash dividends have been paid, and none are anticipated.
Most important facts for investors to verify
- Whether the EMEA AllotSmart project is delivered and accepted on schedule, and how much 2020 revenue and cash it contributes.
- The working-capital difference ($79.9 million versus $79.4 million) and the differing foreign-exchange hedge amounts disclosed in the filing.
- Whether customer concentration, the sharp geographic mix shift and higher deferred revenue persist, and the quality and timing of related revenue recognition.
- The status and terms of restricted deposits, customer advances and bank guarantees, plus the company’s cash needs and 2020 capital spending.
- The actual effects of COVID-19, supplier continuity, and Allot’s ability to compete and adapt its products to encryption, SD-WAN and 5G network changes.