Allot Communications Ltd. — FY2012 Form 20-F
Reporting period: Year ended December 31, 2012; filed March 21, 2013. This is an annual report, not a standalone Q4 filing. The provided filing text does not give a clear set of standalone fourth-quarter financial results. Amounts below are U.S. dollars unless noted.
Business context
Allot develops deep-packet-inspection-based traffic management, analytics, policy, security, and video caching and optimization products for broadband operators and enterprises. In 2012 it acquired video-optimization company Ortiva and content-caching company Oversi. Management cited mobile-market demand and orders from major operators as growth drivers.
Key financial metrics
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $104.8 million | $77.8 million |
| Product revenue | $77.1 million | $56.8 million |
| Service revenue | $27.6 million | $20.9 million |
| Gross profit / reported gross margin | $57.8 million / 55.2% | $55.6 million / 71.5% |
| Operating income (loss) | $(9.0) million | $8.3 million |
| Net income (loss) | $(6.7) million | $8.8 million |
| Basic / diluted EPS | $(0.21) / $(0.21) | $0.35 / $0.33 |
| Cash provided by operating activities | $8.7 million | $15.2 million |
Revenue rose 34.7% year over year. Product revenue grew 35.8% and services revenue 31.9%. Excluding the $15.9 million Office of the Chief Scientist (OCS) settlement charge, management reported FY2012 gross margin of 70.4%, compared with 71.4% in FY2011. Product gross margin was 65.2% versus 65.6%; service gross margin was 84.9% versus 87.4%.
At year-end, cash and cash equivalents were $50.0 million, short-term bank deposits $78.0 million, marketable securities $14.8 million, and restricted cash and deposits $0.1 million. Working capital was $131.6 million; total liabilities were $52.7 million. The company reported no long-term borrowings; it repaid a $2.0 million bank loan associated with Oversi during 2012.
Changes versus the prior comparable year
- Revenue increased, but profitability reversed: FY2011 net income of $8.8 million became a FY2012 net loss of $6.7 million.
- Reported cost of revenue included the $15.9 million OCS settlement, recorded as an expense and current liability, payable in 2013. The settlement is intended to eliminate future royalty obligations on covered grants.
- Operating expenses increased to $66.9 million from $47.2 million, reflecting higher R&D, sales and marketing, and administrative costs, including acquisition-related staffing and expenses.
- Cash and cash equivalents fell by $66.7 million, while short-term deposits increased by $54.0 million. Investing cash outflow was $79.3 million, including $24.9 million net cash paid for acquisitions and $54.0 million placed in short-term deposits.
- The Ortiva and Oversi acquisitions contributed $5.4 million of post-acquisition revenue in 2012, according to the acquisition notes. Combined consideration was estimated at $26.2 million, including contingent consideration.
Outlook, commentary, and risks
- Management said existing cash resources should cover working capital and capital expenditure needs for at least the next 12 months. It forecast approximately $3.0 million of capital expenditures in 2013, mainly for R&D lab equipment, support, and demonstration units. No specific revenue or earnings guidance is provided.
- Management expects R&D, sales and marketing, and general and administrative expenses to rise in absolute terms as the business expands. It cautioned that cost of revenue and gross margin may be affected by product mix and growth in higher-end deployments.
- Cash from operations declined despite positive operating cash flow. The FY2012 figure included the $15.9 million increase in the OCS settlement liability; working-capital movements included higher receivables and lower deferred revenue.
- Customer concentration remains relevant: one global Tier 1 mobile operator group accounted for 14% of 2012 revenue, versus 15% in 2011. The relationship was based on purchase orders, with no commitment for future orders. About one-third of revenue came through channel partners.
- Key operating risks include intense competition, lengthy service-provider sales cycles, uncertain demand for newer video services, dependence on one manufacturing subcontractor and limited-source components, and exposure to foreign-exchange movements. The filing also describes regulatory and geopolitical risks related to the company’s Israeli operations.
- In 2012, the company disclosed that a channel partner had sold certain enterprise products outside its authorized territory, including into a sanctioned country, and that the applicable contract-management protocol was not adequately followed in that instance. The filing warns of possible investigation, penalties, and reputational harm from trade-control or anti-corruption violations.
- A securities class-action settlement of $1.3 million was funded by insurance; the filing says the settlement and insurance recovery offset. The auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Confirm the OCS settlement’s 2013 cash payment, final accounting, and whether future royalty obligations were fully extinguished.
- Assess normalized profitability and gross margin excluding the one-time settlement, alongside rising operating costs and stock-based compensation of $4.8 million in 2012.
- Review operating cash-flow quality, especially the effects of receivables, deferred revenue, and the non-cash settlement-liability accrual.
- Track post-acquisition revenue, integration progress, contingent consideration, and the returns on Ortiva and Oversi goodwill and intangible assets.
- Monitor dependence on the Tier 1 customer, channel partners, and Flextronics, as well as compliance remediation related to the disclosed out-of-territory sale.