Allot Ltd. — FY2017 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing; separate Q4 results are not provided in the filing text. Financial amounts below are in U.S. dollars unless stated otherwise.
Business context
Allot is an Israel-based provider of network intelligence and security solutions for communications service providers and enterprises. Its offerings include network analytics, traffic management, policy control, and network-based security. The company reported one operating segment. At year-end it had 477 employees and 33,483,262 ordinary shares outstanding.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $82.0 million | $90.4 million |
| Product revenue | $48.7 million | $54.4 million |
| Service revenue | $33.3 million | $35.9 million |
| Gross profit / margin | $53.5 million / 65.2% | $62.5 million / 69.1% |
| Operating loss | $17.4 million | $6.8 million |
| Net loss / loss per share | $18.1 million / $0.54 | $8.0 million / $0.24 |
| Cash from operating activities | $(0.2) million | $(3.5) million |
| Cash and cash equivalents | $15.3 million | $23.3 million |
| Marketable securities | $63.2 million | $60.5 million |
| Short-term and restricted deposits | $31.5 million | $29.8 million |
| Working capital | $111.8 million | $124.0 million |
| Total assets / liabilities | $184.5 million / $41.4 million | $190.9 million / $33.6 million |
The company reported no long-term borrowings. It had $143.1 million in shareholders’ equity at year-end, down from $157.3 million. FY2017 investing cash outflow was $8.1 million and financing cash inflow was $0.4 million. Operating cash use improved from 2016, despite the larger net loss.
Material changes versus FY2016
- Revenue declined $8.4 million, or 9.3%; product revenue fell 10.5% and services revenue fell 7.2%. Management attributed the product decline to longer-than-expected sales cycles and low opening backlog.
- Gross margin decreased 3.9 percentage points, to 65.2%, reflecting a greater services mix and adverse currency effects, principally the U.S. dollar’s weakening against the shekel and euro. Services cost of revenue rose 24.0%.
- Operating loss widened by $10.6 million. Sales and marketing expense increased 8.5%, reflecting a 2017 sales reorganization and hiring of senior sales executives; research and development expense declined.
- Net loss more than doubled. Management cited lower revenue, $2.4 million of restructuring expenses, tax-related changes, and currency effects as contributors to the 2017 loss.
- Europe accounted for 49% of FY2017 revenue, compared with 38% in FY2016; Asia and Oceania fell to 17% from 31%. One Tier 1 operator represented 32% of 2017 revenue, compared with two operators totaling 42% in 2016.
Outlook, commentary, risks and unusual items
- Management said existing cash balances were expected to cover working capital and capital expenditures for at least the next 12 months, based on its current business plan. It expected approximately $2.8 million of 2018 capital expenditures, mainly for R&D lab equipment and leasehold improvements.
- Management expected gross margin to remain around the 2017 level. The filing gives no specific revenue or earnings forecast.
- Revenue concentration is significant: one Tier 1 customer accounted for 32% of 2017 revenue, and approximately 50% of revenue came through channel partners. The company noted that customer orders are not guaranteed and large-provider sales cycles can be lengthy.
- Other material risks include intense competition and industry consolidation; encryption potentially limiting DPI analytics; net-neutrality, privacy and GDPR-related changes; foreign-exchange exposure; dependence on a single subcontractor for Service Gateway Tera hardware; and reliance on limited-source components. The company reported $15.0 million of outstanding forward contracts at year-end.
- Allot disclosed a pending former-employee dismissal claim; counsel estimated any award would not exceed $190,000. It also had a $5.3 million contingent earn-out liability relating to the 2015 Optenet acquisition. No material off-balance-sheet arrangements were reported.
- In January 2018, after the reporting period, Allot acquired Netonomy, a connected-home cybersecurity developer, for approximately $3.2 million in cash plus performance-based consideration capped at approximately $1.1 million. The filing describes this as a subsequent event.
- From January 1, 2018, the new revenue standard was expected to reduce deferred revenue and opening accumulated deficit by $712,000 through earlier recognition of term-license revenue. The company believed it was not a PFIC for 2017, but stated that the IRS could challenge that conclusion.
- The company reported effective disclosure controls and internal control over financial reporting; its auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether revenue and order momentum improved after the reported sales-cycle delays and low opening backlog, especially for the largest Tier 1 customer.
- Whether the 2017 decline in gross margin and increase in operating loss persist, and whether the sales reorganization generates sufficient business to offset higher selling costs.
- How customer concentration and channel-partner dependence affect future revenue visibility and cash generation.
- Whether the liquidity outlook remains adequate given continuing losses, planned 2018 capital expenditures, and the timing and performance conditions of the Netonomy and Optenet earn-outs.
- The effects of currency movements, the 2018 revenue-accounting transition, tax assessments and the disclosed legal contingency on reported results and cash flows.