Allot Communications Ltd. — FY2013 Form 20-F
Business context and reporting period. Allot provides deep-packet-inspection-based network traffic management, analytics, video optimization and related services to communications providers and enterprises. This is an audited annual report for the year ended December 31, 2013, prepared under U.S. GAAP—not a standalone 2013 fourth-quarter report. The filing does not provide a clear Q4-only set of financial results.
Key financial metrics
- Revenue: $96.5 million, down 7.8% from $104.8 million in 2012. Product revenue fell 14.0% to $66.3 million; services revenue rose 9.4% to $30.2 million.
- Profitability: Gross profit was $69.7 million and gross margin 72.2%, versus $57.8 million and 55.2% in 2012. The 2012 margin included a $15.9 million Office of the Chief Scientist (OCS) settlement charge; excluding it, 2012 gross margin was 70.4%. Operating loss narrowed to $7.1 million from $9.0 million. Net loss was $6.5 million, or $0.20 per share, versus a $6.7 million loss, or $0.21 per share.
- Expenses: Operating expenses increased 14.9% to $76.8 million. Net R&D expense rose to $27.0 million, sales and marketing to $39.8 million, while G&A declined to $10.0 million. Stock-based compensation rose to $7.7 million from $4.8 million.
- Cash flow: Operating activities used $19.3 million, compared with $8.7 million provided in 2012. Investing activities provided $11.1 million, and financing activities provided $0.9 million. Capital expenditures were $2.7 million.
- Liquidity and debt: Year-end cash and cash equivalents were $42.8 million, short-term bank deposits $38.0 million, and available-for-sale securities $40.8 million. Current assets were $160.5 million and current liabilities $26.6 million, implying working capital of $133.9 million; the selected financial data elsewhere in the filing reports a different working-capital figure ($139.9 million). The company reported no long-term borrowings.
- Balance sheet: Total assets were $199.3 million, total liabilities $29.3 million and shareholders’ equity $169.9 million. No goodwill impairment was recorded.
Material changes versus 2012
- Revenue declined as product sales weakened, particularly in Europe; services grew with the installed base and professional-services activity.
- Revenue mix shifted geographically: Europe revenue fell 45.1% to $21.8 million, while Asia and Oceania rose 36.2% to $29.9 million and Middle East and Africa rose 72.4% to $18.2 million. U.S. revenue declined 13.5% to $21.4 million.
- Three Tier 1 mobile and fixed operators generated 45% of 2013 revenue, compared with one customer group contributing 14% in 2012. The three 2013 customers contributed 17%, 17% and 11%, respectively.
- The $15.9 million OCS settlement liability recorded in 2012 was paid in 2013, ending royalty obligations on grants received through 2012. The payment materially contributed to 2013 operating cash outflow.
- Operating costs increased following the Ortiva and Oversi acquisitions, particularly R&D and sales and marketing. The acquisitions also increased amortization and the company’s employee base.
Outlook, risks and unusual items
- Management said existing cash and investments should fund working capital and capital expenditures for at least the next 12 months under its current plan. It expected 2014 capital expenditures of approximately $3.0 million, mainly for R&D lab equipment and customer-support/demo units. No specific revenue or earnings guidance was provided.
- Management expected absolute R&D and sales and marketing expenses to increase as it invests in product development and global sales. It noted that long sales and deployment cycles, especially with large service providers, can make order timing and results unpredictable.
- Key risks include customer concentration; competitive pressure and potential pricing/margin erosion; dependence on channel partners for about 40% of revenue; and reliance on a single subcontractor, Flextronics, for manufacturing and hardware warranty support. Some components also have limited suppliers.
- Other stated risks include weaker demand or delayed investment by service providers, evolving regulation of network traffic management, volatility in foreign exchange rates (the shekel appreciated approximately 7% against the U.S. dollar in 2013), and political or security conditions in Israel.
- The company had approximately $40 million of Israeli tax-loss carryforwards. Management believed it was not a PFIC for 2013, but cautioned that PFIC status is determined annually and is uncertain. The company had never paid cash dividends and did not anticipate doing so.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Reconcile the filing’s conflicting working-capital figures: $133.9 million based on audited current assets and liabilities versus $139.9 million in selected financial data.
- Assess whether the 45% revenue concentration among three Tier 1 operators is sustainable, and whether any future purchase orders are committed; the filing says sales are purchase-order based with no future-order commitments.
- Track product revenue, European demand and the company’s ability to convert growth in Asia and the Middle East/Africa into repeatable sales.
- Monitor operating cash flow, inventory growth and the effect of the completed OCS settlement, as well as the company’s stated 12-month liquidity assumption.
- Verify execution and customer demand for acquired video caching and optimization products, and the cost and delivery implications of dependence on Flextronics and limited-source components.