Business Context and Reporting Period
Company: Allot Communications Ltd.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2007
Business Overview: Allot is an Israeli company providing intelligent IP service optimization solutions using Deep Packet Inspection (DPI) technology. Its primary products include the NetEnforcer traffic management system, NetXplorer network management suite, and the Service Gateway platform. The company sells primarily to service providers and enterprises through channel partners.
Key Financial Metrics (Year Ended Dec 31, 2007)
| Metric | 2007 (USD) | 2006 (USD) |
|---|---|---|
| Total Revenues | $32,502,000 | $34,144,000 |
| Gross Profit | $24,483,000 | $26,547,000 |
| Gross Margin | 75.3% | 77.8% |
| Operating Loss | $(8,565,000) | $97,000 (Income) |
| Net Loss | $(9,940,000) | $616,000 (Income) |
| Cash and Cash Equivalents | $28,101,000 | $7,117,000 |
| Working Capital | $37,225,000 | $75,182,000 |
| Total Assets | $94,655,000 | $99,506,000 |
| Total Liabilities | $17,470,000 | $15,319,000 |
Note: All figures in thousands of U.S. dollars unless otherwise noted.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by 4.8% to $32.5 million. Product revenues fell 13% to $25.1 million, primarily due to the completion of a major $6.9 million project with a single system integrator in the UK in 2006. Conversely, service revenues increased 37% to $7.4 million due to a larger installed base.
- Operating Loss: The company swung from a slight operating profit of $97,000 in 2006 to an operating loss of $8.6 million in 2007. This was driven by a 24.6% increase in net R&D expenses and a 16.9% increase in sales and marketing expenses.
- Investment Impairment: A significant non-cash impairment charge of $4.9 million was recorded against Auction-Rate Securities (ARS) due to liquidity failures in the credit markets. This charge was included in "Financial and other expenses, net."
- Currency Impact: The U.S. dollar depreciated 9.0% against the Israeli New Shekel (NIS) in 2007, negatively impacting profit margins as a significant portion of expenses (salaries) are NIS-denominated.
Guidance, Outlook, Risks, and Unusual Items
- Acquisition: On January 8, 2008, Allot acquired Esphion Limited for approximately $3.9 million in cash plus up to $2 million in performance-based earn-outs. This acquisition is expected to increase R&D expenses in 2008.
- Liquidity and ARS Risk: As of December 31, 2007, the company held $40.3 million in principal invested in Auction-Rate Securities (ARS). Due to failed auctions, these assets were reclassified as long-term. Management recorded a $4.9 million impairment in Q4 2007 and an additional $2.2 million in Q1 2008. Further impairments are possible if market conditions deteriorate.
- Legal Proceedings: The company is a defendant in a securities class action lawsuit filed in May 2007 regarding its November 2006 IPO. The company intends to vigorously defend the claims.
- Outlook: Management believes existing cash balances are sufficient to meet anticipated needs for at least the next twelve months. The company expects to continue investing in R&D and sales to target large service providers, which may result in longer sales cycles and revenue volatility.
- PFIC Status: There is a substantial risk that the company may be classified as a Passive Foreign Investment Company (PFIC) for the 2008 taxable year, which could have adverse tax consequences for U.S. shareholders.
Key Facts for Investor Verification
- ARS Liquidity: Verify the current status and fair value of the $40.3 million investment in Auction-Rate Securities and any additional impairment charges recorded in 2008.
- Customer Concentration: Confirm the status of large service provider contracts, as the loss of a single major project in the UK significantly impacted 2007 revenue.
- Legal Exposure: Monitor the progress and potential settlement costs of the securities class action lawsuit filed in the Southern District of New York.
- Currency Hedging: Assess the company's strategy to mitigate the impact of the strengthening Israeli Shekel against the U.S. dollar on operating margins.
- Integration of Esphion: Evaluate the financial impact and integration progress of the Esphion acquisition completed in January 2008.