Business Context and Reporting Period
Allot Communications Ltd. (Allot) is an Israeli company incorporated in 1996, providing intelligent IP service optimization solutions for broadband carriers and enterprises. The company utilizes deep packet inspection (DPI) technology to manage network traffic and deploy value-added services. This Form 20-F covers the fiscal year ended December 31, 2010. Allot's ordinary shares are listed on the NASDAQ Global Select Market and, since November 2010, on the Tel Aviv Stock Exchange.
Key Financial Metrics (Year Ended Dec 31, 2010)
| Metric | 2010 (in thousands USD) | 2009 (in thousands USD) |
|---|---|---|
| Total Revenues | $56,972 | $41,751 |
| Gross Profit | $40,987 | $29,916 |
| Gross Margin | 71.9% | 71.6% |
| Operating Income | $2,229 | $(5,298) |
| Net Loss | $(5,762) | $(7,672) |
| Diluted EPS | $(0.25) | $(0.35) |
| Cash and Cash Equivalents | $42,858 | $36,470 |
| Working Capital | $59,841 | $38,179 |
| Total Liabilities | $30,199 | $22,531 |
Revenue Composition: Product revenues were $40.9 million (71.7% of total), and service revenues were $16.1 million (28.3% of total).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 36% to $56.9 million, driven primarily by a 38% increase in product sales. This growth was largely attributable to orders from a single global Tier 1 mobile operator group, which accounted for 30% of total revenues in 2010 (up from 15% in 2009).
- Operating Profitability: The company returned to operating profitability with $2.2 million in operating income, compared to an operating loss of $5.3 million in 2009. This improvement was due to revenue growth outpacing the increase in operating expenses.
- Net Loss Reduction: Net loss decreased to $5.8 million from $7.7 million in 2009. However, the 2010 net loss included a significant non-operating charge of $7.7 million related to the sale of the company's entire portfolio of auction-rate securities (ARS).
- Liquidity: Cash and cash equivalents increased by $6.4 million to $42.9 million. Working capital improved significantly to $59.8 million.
Guidance, Outlook, Risks, and Unusual Items
Unusual Items: The primary unusual item in 2010 was the realization of losses on the sale of auction-rate securities (ARS). The company sold its entire ARS portfolio, reclassifying $5.5 million of previously recorded unrealized losses and recognizing an additional $2.2 million loss, totaling $7.7 million in financial expenses.
Outlook and Management Commentary: 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 to maintain technological leadership. Future profitability depends on generating sufficient revenues to offset operating expenses.
Key Risks:
- Customer Concentration: 30% of 2010 revenues came from one global Tier 1 mobile operator group. The loss of this customer would materially harm operations.
- Manufacturing Dependency: Allot relies on a single subcontractor, Flextronics (Israel) Ltd., for manufacturing. Disruptions at this facility could delay product delivery.
- Regulatory Environment: Network neutrality regulations in the U.S. and Europe could limit service providers' ability to manage traffic, potentially reducing demand for Allot's products.
- Geopolitical Risk: As an Israeli company, operations are subject to political, economic, and military conditions in the region, including potential military reserve duty for employees.
- Intellectual Property: The company has a limited patent portfolio (two issued U.S. patents as of Dec 31, 2010) and faces risks of infringement claims or failure to protect technology.
Important Facts for Investor Verification
- Customer Concentration: Verify the stability of the relationship with the single customer accounting for 30% of revenues and the terms of future purchase orders.
- ARS Loss Realization: Confirm that the $7.7 million loss related to auction-rate securities is a one-time event and that the portfolio has been fully liquidated.
- Government Grants: Review the terms of the royalty-bearing grants from the Israeli Office of the Chief Scientist, which offset R&D expenses but create contingent royalty obligations (approx. $11.7 million outstanding).
- Manufacturing Risk: Assess the contingency plans for the single-source manufacturing relationship with Flextronics (Israel) Ltd.
- Patent Portfolio: Evaluate the strength of the company's intellectual property protection given the limited number of issued patents relative to the competitive landscape.